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"Acting on behalf of its stockholders, a firm with a lot of risky debt in its...

"Acting on behalf of its stockholders, a firm with a lot of risky debt in its capital structure may refuse to take certain positive NPV projects that makes the firm safer."

True or False

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Answer #1

This Statement is False.
Risky debt means company take a lots of debt if company stock price is fall sharply ata a certain level the company will not be able to pay the interest of debenture holders.
If Stockholders believes that taking a debt will increase the Wealth of a firm by POsitive NPV projects the company has to take a debt to make firm more safer .
Debt is cheaper as compared to Cost of equity.

I hope this clear your doubt.

Feel free to comment if you still have any query or need something else. I'll help asap.

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