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.

Which of the following is NOT one of the qualities which makes debt attractive to firms?Select one:a. The required return on debt is lower because, from the lender's point of view, debt is less risky than equity.b. It reduces the amount of corporate tax payable by firms by reducing the amount of taxable profit.c. Debt interest only gets paid when the company is making a profit.d. The cost of debt is generally less than the cost of share capital and hence can lower the overall cost of capital for a firm.

Advantages of debt financing over equity financing are that:Multiple Choicerepayment of debt principal is optional.interest payments on debt are not tax deductible.control is not diluted.more money is available.

Which of the following factors influence how much debt a firm should take on?1 pointIndustry normsThe nature of the firm’s assetsFinancial slackThe overall level of interest ratesAll of the above

What is a primary characteristic of debt financing?Answer areaa) Transfer of ownership rightsd) Sharing of profits with investorsb) No obligation to repay principalc) Fixed repayment schedule

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