CFA Level I · CFA Level I Exam · Investors and Other Stakeholders
A highly leveraged firm's shareholders approve a plan to replace a stable business line with a high-risk venture offering a small chance of very large payoffs. The conflict this most likely creates is between:
The conflict is between shareholders and creditors. In a leveraged firm, shifting to riskier projects lets shareholders capture large upside while creditors, with fixed claims, bear much of the added default risk, so value moves from creditors to shareholders.
- Ashareholders and creditorsCorrect
- Bemployees and customers
- Cmanagers and directors
Explanation
Shareholders have limited liability and keep the upside, while creditors bear much of the downside and have fixed claims. Higher risk therefore transfers value from creditors to shareholders. The other pairs are not the central parties here.
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