B. Plump, Inc. has a $20 million loan due at the end of the year and its assets will have a market value of only $15 million when the loan comes due. At the end of the year, Plump will have $2 million in cash and consider two possible alternative uses for this cash. One possibility is to pay the $2 million out to shareholders in the form of a special dividend. The second possibility is to invest the $2 million in a project that offers a net present value of $4 million at that time.

(i)Under each of the two alternatives, which one would equity holders prefer? Which one would debt holders prefer?

(ii)What is the economic terminology that describes the situation as in (i) and explain whether the situation in (i) is consistent with the shareholder theory or the stakeholder theory?