The Problem of 'Underinvestment' Occurs When the Entity Faces Financial

Multiple Choice

The problem of 'underinvestment' occurs when the entity faces financial difficulty and managers are reluctant to undertaken projects with positive net present value because:

A) managers prefer less risk than do lenders.
B) the projects lead to increased funds available to lenders rather than shareholders.
C) the projects would adversely affect managers' bonus payments.
D) managers prefer to maintain a greater level of funds within the entity.