A Firm Can Become Insolvent with a Small Decrease in Its

question 106

Multiple Choice

A firm can become insolvent with a small decrease in its asset value if it has:

• A) more assets.
• B) a high collateral-to-debt ratio.
• C) a high leverage ratio.
• D) more equity.

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Definitions:

Opportunity Cost

The value of the next best alternative that is foregone as a result of making a decision to pursue a particular action.

Holding Money

The act of keeping money in cash or in accounts as savings rather than investing it.

Interest Rate

The interest rate is the cost of borrowing money or the return on investment for savings, expressed as a percentage of the principal amount per period of time.

Large Denomination Time Deposits

Savings accounts or Certificates of Deposit (CDs) with high minimum deposit requirements, typically offering better interest rates but less liquidity.