6. We discussed the conflicts that arise between existing and new stockholders when management wishes to undertake new projects financed by equity. Now consider the following scenario: The management of the firm has no other means of financing a new risky project but to sell bonds. If bondholders knew of the project’s riskiness (which might be greater that they would be willing to bear), they would outright refuse to provide the funds. Explain the outcome of such behavior by the bondholders. Do we have an instance of market failure?• What if the bondholders did not know of the project’s risk? What impact would that have on the bondholders’

wealth (relative to that of the stockholders)?