Question

Shareholders would want management to invest in a negative NPV project only when

Group of answer choices

A) The project is low risk and the company has substantial debt in its capital structure.

B) The project is low risk and the company has no debt in its capital structure.

C) The project is high risk and the company has substantial debt in its capital structure.

D) The project is high risk and the company has no debt in its capital structure.

Shareholders would want management to forego (not invest in) a positive NPV project only when

Group of answer choices

A) The project is low risk and the company has no debt in its capital structure.

B) The project is high risk and the company has substantial debt in its capital structure.

C) The project is high risk and the company has no debt in its capital structure.

D) The project is low risk and the company has substantial debt in its capital structure.

Because human capital cannot be diversified, managers may have an incentive to

Group of answer choices

A) Do neither of the two action provided in your answer choices.

B) Acquire diverse businesses even when the acquisition has a negative NPV.

C) Do both of the two actions provided in your answer choices.

D) Take low risk projects even when the NPV of the project is negative.

Bond covenants

Group of answer choices

A) Provide benefits to both bondholders and shareholders.

B) Provide benefits to shareholders but do not provide benefits to bondholders.

C) Do not provide benefits to either bondholders or shareholders.

D) Provide benefits to bondholders but do not provide benefits to shareholders.

Answer 1

1. Shareholders would only want management to invest into a net negative present value project if the project is having a low risk and it is also having no substantial effect on the profitability of the overall company.

To accept a net negative net present value project, company should have the minimum amount of debt so liquidity does not become the problem.

Rest of the options are FALSE as company cannot have high debt or high risk for acceptance of the negative NPV project.

Show the correct answer would be option (B)