If a Firm Borrows a Large Sum of Money, It

question 12

Multiple Choice

If a firm borrows a large sum of money, it may engage in particularly risky investments knowing that if the investments succeed, the firm will make lots of money, while if the investments fail, the firm can declare bankruptcy. This is an example of:

• A) risk taking.
• B) adverse selection.
• C) poor decision making.
• D) Ricardian equivalency.
• E) moral hazard.

---

Definitions:

Nominal Exchange Rate

The price at which one currency can be exchanged for another currency, without adjustment for inflation.

Pesos

Pesos are the unit of currency in several countries, including Mexico and the Philippines.

Purchasing-Power Parity

An economic principle positing that currency exchange rates reach equilibrium when the purchasing power in both countries involved is equal.

Depreciated

The decrease in value of an asset over time, often due to wear and tear or obsolescence.