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ACCA Strategic Professional · Advanced Financial Management · The role and responsibility of senior financial executive/advisor

A listed multinational's board is considering a large share buyback funded by new debt. Shareholders favour it, but the company's bondholders object because it raises gearing and may reduce the value of their existing bonds. Which description best captures the conflict between these two stakeholder groups?

Bondholders have a fixed claim and prefer lower risk, whereas shareholders are residual claimants who may favour riskier, higher-return strategies. A debt-funded buyback increases gearing and risk for bondholders while potentially raising shareholder returns, which creates the conflict.

  1. ABondholders have a fixed claim and want lower risk, while shareholders hold a residual claim and may favour higher-risk, higher-return decisionsCorrect
  2. BBondholders want the company to maximise share price, while shareholders want the company to maximise interest cover
  3. CBoth groups share identical objectives, so the objection is only a matter of timing
  4. DBondholders hold voting control and shareholders hold the security over assets

Explanation

Debt holders receive fixed interest and principal and gain nothing from upside, so they dislike increased gearing. Shareholders are residual claimants and may accept more risk for higher returns. The second option reverses the incentives, and the others misstate the legal position.

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