Question

If a firm has a lot of debt, managers may have incentive to take large risks...

If a firm has a lot of debt, managers may have incentive to take large risks or under invest, such strategies

  • a - hurt shareholders' benefit

  • b - hurt debtholders' benefit

  • c - benefit debtholders' benefit

A , B, or C?

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Answer #1

When the firm will be having a large amount of debt capital, then the manager may have incentive to take a large risk, but they will be under investing and it will be hurting the overall shareholders benefit because when the firm will be underinvesting, it will be leading to lower rate of return for the shareholder.

Hence, these will be leading to hurt the benefit of the shareholder because the manager will either take high risk or under invest.

Correct answer will be option (A )hurt shareholders benefit.

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