Homework Answers
ANSWER : C: THERE MAY BE CONFLICT BETWEEN THE INTEREST OF BONDHOLDERS AND SHAREHOLDERS
Mergers are done for the better value creation for shareholders. But The effect of merger may be positive or negative for bond holders.
secondly, it is also wrong to believe that it will not benefit or it will not affect bondholders. it depends on situation.
But, yes there are conflicts between these 2 groups, while selecting risky projects.
When the firm is in bad shape, shareholders willing to take risky projects, the basic idea behind that is that if project is successful, they will get out of the bad situation.
Now bond holders are against this, because if project is not successful, they will not get the desired return as project has been failure.
So the conflicting decisions are there, when firm is passing through bad days, so shareholders want to take a chance but that chance may prove risky to debt holders. [Thumbs up please]
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