Question

Which of the following statements is incorrect?

-A stakeholder is someone other than an owner who has a claim on the cash flows of the firm.

-The mismanagement of working capital can cause a firm to default on its debt and go into bankruptcy, even though, over the long term, the firm may be profitable.

-Regardless of the type of asset, the firm tries to select assets that will generate the greatest cash flows for the firm's owners.

-All the answers are correct except one.

-Debt financing does not create a contractual obligation and it must not be paid regardless of the firm's operating cash flow, even if the firm suffers a financial loss.

Answer 1

Solution

Answer-Debt financing does not create a contractual obligation and it must not be paid regardless of the firm's operating cash flow, even if the firm suffers a financial loss

Debt financing has a contractual obligation to pay the debt according to terms of the contract even in case of a loss.On the other hand equity financing has no such obligation

A stakeholder is someone other than an owner who has a claim on the cash flows of the firm.-This is true any person other than owner/shareholder who has a claim on cashflow is a stake holder

-The mismanagement of working capital can cause a firm to default on its debt and go into bankruptcy, even though, over the long term, the firm may be profitable.-This is true ,if the firm is profitable but cashflow management is not proper,it can lead to failure to meet the financial obligations leading to bankruptcy

Regardless of the type of asset, the firm tries to select assets that will generate the greatest cash flows for the firm's owners.-This is consistent with maximization of shareholders wealth

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