Question

Which one of these statements most applies to a firm that is suffering from financial distress?...

Which one of these statements most applies to a firm that is suffering from financial distress?

A. Bondholders will desire high risk projects in order to protect their investment.

B. Stockholders will increase their investment in the firm to protect their current investment.

C. Stockholders will generally prefer low-risk over high-risk projects.

D. Managers will tend to lower dividends in an effort to protect shareholder value.

E. Stockholders will bear the cost of selfish investment strategies through higher interest payments.

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Answer #1

Financial distress:---

A situation where a firm’s operating cash flows are not sufficient to satisfy current obligations and the firm is forced to take corrective action.

Financial distress may lead a firm to default on a contract, and it may involve financial restructuring between the firm, its creditors, and its equity investors.

In the above options the option A only most suffers from financial distress, that is Bond holders will desire high risk projects in order to protect their investment. Except A all the other options are may not lead to default of company . So the most appropriate answer is option A.

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