When the Borrower Has an Incentive to Use the Proceeds

question 69

Multiple Choice

When the borrower has an incentive to use the proceeds of a loan for a more risky venture after the loan is funded, lenders are faced with a/an

• A)adverse selection problem.
• B)asymmetric information problem.
• C)moral hazard problem.
• D)None of the above are correct.

---

Definitions:

Capital Investment Project

A project requiring significant amounts of capital for the purchase, improvement, or maintenance of long-term assets to generate future benefits.

Cash Flows

The sum total of currency transactions inbound and outbound in a firm, markedly affecting its cash-on-hand.

Present Values

The today's value of a sum of money or cash flows expected in the future, calculated using a designated return rate.

Payback Period

The payback period is the length of time required to recover the cost of an investment.