Question

When faced with financial distress,managers of firms acting on behalf of their shareholders' interests will tend to:

I)issue large quantities of low-quality debt versus low quantities of high-quality debt;
II)favor paying high dividends to shareholders;
III)delay the onset of bankruptcy as long as they can
A) I only
B) II only
C) III only
D) I,II,and III

Answer 1

Answer: D) I,II,and III

Step-by-step explanation:

When facing financial distress, managers of firms will most likely act in a manner that will make it look as though the company is surviving in the short run so that the distress will not lead to bankruptcy.

They will issue large quantities of low quality debt so that they will gain access to funds to keep the company running. They will pay high dividends to shareholders to ensure that the shareholders do not get worried about the state of affairs and in general, they will engage in whatever they can to delay the onset of bankruptcy for as long as they can.