When a firm's investment decisions have different consequences for the value of equity and the value of debt, managers may take actions ________.
A) to increase debt values
B) to decrease costs of distress
C) that benefit shareholders at the expense of debt holders
D) to reduce fixed costs

Question

Quizplus · Accepted Answer

When investment decisions have different consequences for the value of equity and debt, managers may take actions that benefit shareholders at the expense of debt holders. This is known as the agency problem, where managers prioritize the interests of shareholders over bondholders since shareholders have more control over the firm. This behavior can lead to conflicts between equity and debt holders and potentially increase the firm's cost of capital.

When a Firm's Investment Decisions Have Different Consequences for the Value