When the Lender and the Borrower Have Different Amounts of Information

question 8

Multiple Choice

When the lender and the borrower have different amounts of information regarding a transaction,________ is said to exist.

• A) asymmetric information
• B) adverse selection
• C) moral hazard
• D) fraud

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Definitions:

Tax-Deductibility

Pertains to expenses that can be subtracted from gross income to reduce the total taxable income, thereby lowering the amount of tax owed.

Financial Leverage

Engaging borrowed assets to increase the anticipated yield from an investment.

Operating Leverage

The degree to which a company uses fixed operating costs, where a higher degree indicates that a small change in sales will have a larger impact on operating income.

Capital Structure

The mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity, which is a significant factor in determining a company's financial health and risk level.