Respuesta :
The answer is risky; the shareholders have little to lose and might win if successful. They prefer to go to high risk projects financed with debt because the bondholders are more pertinent to suffer any economic losses incurred should the project fail. The additional debt a company gets, the more it risks being not capable to meet its economic obligations to creditors. A highly leveraged firm is more susceptible to a decline in profitability. Therefore, a highly levered firm has a higher risk of bankruptcy. Investors and/or owners would prefer the company to go ahead with the risky investment. If the company foregoes the investment, owners don’t benefit. If the company does go for the risky investment, owners have at least some upside gain potential.
The owners of a firm facing a high probability of bankruptcy prefer to invest in [tex]\fbox{risky}[/tex] projects because [tex]\fbox{the shareholders have little to lose and might win if successful}.[/tex]
Further Explanation:
Bankruptcy: Bankruptcy refers to the legal process where the person or company seeks relief from the court because they are not able to pay their debt. The company and debtor both can file for bankruptcy in the court.
If the firm is facing bankruptcy, it means that it is heavily laden with debt. The profitability of the firm is very low since it is not able to pay its debts. If the firm goes for bankruptcy, the shareholder will receive a cents for a dollar. But if the firm accepts the risky project and successfully implement it, then it will improve the condition of the firm. The firm might be able to pay its debts.
Therefore, the firm that is facing a high chance of bankruptcy prefers to invest in risky projects because the shareholders might receive their money back if the project is successful.
Learn more:
1. Learn more about the value of the investment
https://brainly.com/question/5959656
2. Learn more about the value of the bond
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3. Learn more about the present value of the investment
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Answer details:
Grade: Senior School
Subject: Business Studies
Chapter: Financing decisions
Keywords: Owners of a firm, high probability of bankruptcy, risky projects, investment, bankruptcy, the shareholders, have, little too, lose, profit, loss, creditors, bank loan.
