CFA Level I · CFA Level I Exam · Investors and Other Stakeholders
A manufacturer's board proposes a large debt-financed special dividend. Which statement best describes the most likely conflict this creates between shareholders and creditors?
Shareholders receive cash while creditors bear higher default risk. A debt-financed special dividend increases leverage and sends assets out to owners, so existing creditors' claims become riskier, which creates a classic conflict of interest between the two groups.
- ACreditors gain because the firm retains more cash for operations
- BShareholders receive cash while creditors bear higher default riskCorrect
- CBoth groups benefit equally because firm value rises
Explanation
A debt-funded dividend moves value to shareholders and raises leverage. Creditors' claims become riskier because assets are unchanged while debt rises. The cash is paid out rather than retained, so the first option is wrong, and the benefits are not equal.
Did you get it right without looking?
One question tells you little. A timed set on Investors and Other Stakeholders shows your real accuracy, how long you take and where you lose marks.
More Investors and Other Stakeholders questions
- 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 …
- A company has a dual-class share structure in which founders hold shares with ten votes each and public investors hold shares with one vote …
- A controlling family holds 60% of a company's voting shares through a dual-class structure but only 20% of its economic interest. The family…
- An external investor is concerned that a firm's manager, who owns little stock, consumes excessive perquisites such as private jets. Which m…
- Which group of corporate stakeholders is most likely to have a residual claim on a company's assets and cash flows after all other obligatio…
- A founding family holds 55% of the voting shares of a listed company through a dual-class structure while owning 20% of total equity. It app…