Assume a risky firm has both bondholders and stockholders. If the firm obtains a government loan...

Assume a risky firm has both bondholders and stockholders. If the firm obtains a government loan guarantee on its existing debt, who will gain from this guarantee?

A.future stockholders only

B.both existing bondholders and stockholders in proportion to the firm’s debt-equity ratio

C.existing bondholders and stockholders on an equal basis

D.existing stockholders only

E.existing bondholders only

Solutions

Expert Solution

ANSWER

Option B is correct i.e. both existing bondholders and stockholders will gain in proportion to the firms debt equity ratio

Reason.

As firm is on high risk , if government offers guarantee on debt then liquidity of firm will increase and will reduce risk and will increase profit.On other hand bondholders will get assurance from government therefore reducing their risk.

jeff jeffy answered 2 years ago

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