Consider a Firm with Risky Debt Outstanding Which Requires a Repayment

Multiple Choice

Consider a firm with risky debt outstanding which requires a repayment one period hence.There are no taxes and the firm has a risky project that can be financed using retained earnings.Assume that the firm's manager acts in the best interest of the shareholders.In this scenario, moral hazard exists if

A) the project has a positive net present value and is undertaken so as to maximize the firm's total value
B) the project has a positive net present value and is undertaken to maximize the shareholders' wealth
C) the project has a negative net present value and is undertaken to maximize the shareholders' wealth
D) the project has a zero net present value and is undertaken
E) moral hazard never exists