Question

Which of the following statements is CORRECT?

a. One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than are partners.

b. Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.

c. There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of assets in which it invests.

d. Relative to proprietorships, corporations generally face fewer regulations, and they also find it easier to raise capital.

e. Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.

Answer 1

Answer:- Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.

( Explanation- Bondholders prefer that the company should invest in safe projects or the projects with low variance rather than in risky projects because they are not concerned about how much surplus the company will have above its debt because that amount will be distributed to shareholders in case of insolvency. So, they prefer companies to invest in safe projects in order to have their debt covered by the assets of the company. But contrary to that stockholders are of the believe that company should invest in risky projects as this will have the chance to create surplus assets of the firm which they will get in case of insolvency and if deficit is there then they are indifferent about it as it all belong to the creditors of the company.)