A Less-Established Company, or a Company with a High Debt

question 153

Multiple Choice

A less-established company, or a company with a high debt to equity ratio, would be considered a riskier investment to the lender. Which of the following principles attests to this axiom?

• A) Direct relationship principle
• B) Compensating balance concept
• C) Risk/return trade-off
• D) Cost-benefit analysis

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Definitions:

Disclosure Costs

Expenses associated with the preparation and sharing of information to meet regulatory requirements or inform stakeholders.

Pricing Strategies

Approaches and methodologies businesses use to set the prices of their products or services based on costs, market demand, competitor prices, and other factors.

Loan Covenant

A condition in a commercial loan agreement that requires the borrower to fulfill certain conditions, or restricts certain activities, to protect the lender's interests.

Accounting Measure

A quantifiable financial metric used to assess a company's performance or financial health, based on accounting records.