What is the main idea behind debt serving as a signalling mechanism?

Debt funding

Debt financing is essentiallyMultiple Choiceborrowing money.selling ownership.borrowing ownership.selling money.the same as stock.

A debt contract is incentive compatibleA) if the borrower has the incentive to behave in the way that the lender expects and desires,since doing otherwise jeopardizes the borrower's net worth in the business.B) if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard issignificantly reduced.C) if the debt contract is treated like an equity.D) if the lender has the incentive to behave in the way that the borrower expects and desires.

Debt instruments

Analyse one benefit to a business of debt factoring as a suitable form of finance.