Tom Borrows $100,000 from His Local Bank to Purchase Inventory

question 25

Multiple Choice

Tom borrows $100,000 from his local bank to purchase inventory for his store for the upcoming holiday season.Tom's neighbor tells him about a get-rich-quick scheme that can take this $100,000 and triple it in a month.Tom decides to buy into this scheme figuring he can repay the bank and still have plenty left for inventory.This is an example of:

• A)Adverse selection
• B)Sound risk analysis on Tom's part
• C)Diversification
• D)Moral hazard

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Definitions:

Present Value

The present value of a future amount of money or series of cash flows, discounted at a certain rate of return.

Cash Flows

The total amount of money being transferred into and out of a business, particularly in the context of operating, investing, and financing activities.

Discounted

A reduced price from the standard cost of goods or services, often used as a sales promotion.

Rate of Return

The gain or loss on an investment over a specified period, expressed as a percentage of the investment's initial cost.