- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 6. Capital Structure
- Subject 3. Modigliani-Miller Capital Structure Propositions
CFA Practice Question
Financial distress arises when the financial obligations of a firm affect the firm's operations. What are some of the possible consequences of financial distress?
B. Equity investors would like the company to cut its dividend payments to conserve cash.
C. Equity investors would like the firm to shift toward riskier lines of business.
D. Equity investors would like the firm to settle up with creditors as fast as possible.
A. Debt holders, who face the prospect of getting only part of their money back, are likely to want the company to take additional risks.
B. Equity investors would like the company to cut its dividend payments to conserve cash.
C. Equity investors would like the firm to shift toward riskier lines of business.
D. Equity investors would like the firm to settle up with creditors as fast as possible.
Correct Answer: C
User Contributed Comments 8
| User | Comment |
|---|---|
| kalps | Surely this is wrong, unless of course the shareholders are those of Enron or Worldcom even |
| tinku | This is correct. Share holders have residual claim. Given the chance the company may go bankrupt they would encourage the management to gamble ie take riskier projects. |
| rockeR | tinku is right. manager will be gambler and sharholders will agree with this. worst case is losing creditors money only |
| setmefree | agency problem, shareholder v.s debtholder |
| johnmullrooney | stocks turn into call options at this point |
| endurance | another one from kalps.......... |
| fanDango | Uh... kalps, this is a very basic question. You should go back to the agency problem that setmefree referenced. |
| birdperson | equity is a call option... equity holders would push for more risk in the face of bankruptcy as getting something is better than nothing! this is of course not at all what the debt holders want... |