Which one of these best describes the relationship between bondholders and stockholders at a time when it appears the firm may be facing increased financial distress?
Both parties tend to work together for the common good of the firm.
Bond holders will tend to lower their required rate of interest so the firm can afford additional financing until its financial status improves.
Both bond holders and stockholders will encourage the firm to take on new high risk projects.
Stock holders have an incentive to underinvest in new projects to the detriment of bondholders.
Bond holders tend to milk the property at the expense of stockholders.