Suppose your firm, Pier 10 Inc., is in financial distress. Which one of the following best describes the relationship between bondholders and shareholders of Pier 10?

Multiple Choice

• Both bondholders and shareholders tend to work together for the common good of the firm.

• Bondholders reduce their required rate of interest so the firm can obtain additional financing until its financial status improves.

• Both bondholders and shareholders will encourage the firm to take on new high risk projects.

• Bondholders tend to milk the property at the expense of stockholders.

• Shareholders have an incentive to underinvest in positive NPV projects to the detriment of bondholders.