Creditors lend funds to the firm at rates that are based on:

Question

Quizplus · Accepted Answer

Creditors consider all three factors - riskiness of the firm's existing assets, expectations concerning the riskiness of future asset additions, and the firm's existing capital structure - while setting the interest rate they charge for lending funds to the firm. The riskier the existing assets, the higher the interest rate will be; the higher the perceived risk of future assets, the higher the interest rate will be; and the higher the leverage in the existing capital structure, the higher the interest rate will be. Therefore, all of the above options are correct.

Creditors Lend Funds to the Firm at Rates That Are