Question

The management of an airline suffering from financial distress decides to put off its plans to remodel some of its planesʹ interiors in order to attract more business clientele since the additional expected cash flow generated would only go to pay off its bondholders. Instead, management uses the funds to repurchase some of its outstanding shares. This problem is know as Group of answer choices

failure to maintain

reluctance to liquidate

underinvestment

stakeholder holdup

Answer 1

Reluctance to liquidate is a situation when managers continue to operate even when liquidation must have occurred. Form should liquidate when the value of future cash flows are lesser than liquidation value of the firms asset so in this case there is a reluctance to liquidate.

Failure to maintain is related with divorce contract and underinvestment and stockholder hold ups are complete different concepts which are not applicable in this case.

Here the managers are using the funds to repurchase some of the outstanding share and helping the equity shareholders, so it is a problem of reluctance to liquidate.

Correct option is option(B) reluctance to liquidate.