CFA Level I · CFA Level I Exam · Investors and Other Stakeholders
A highly leveraged company announces a special dividend funded by selling most of its liquid assets. Existing bondholders are most likely to be concerned because the payout:
Bondholders are most concerned that the special dividend reduces the assets available to repay creditors. The payout moves value to shareholders while debt claims stay fixed, increasing default risk, which is a shareholder-creditor conflict.
- Areduces assets available to repay creditorsCorrect
- Bincreases the firm's tax shield on debt
- Clowers the agency costs of free cash flow
Explanation
A large dividend transfers value from creditors to shareholders by removing assets that back the debt, raising default risk. Bondholders' claims are fixed, so they gain nothing from the payout. The other options are not bondholder concerns about the dividend.
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