A borrower's capital is an important factor in credit analysis because...
A)higher amount of capital mitigates moral hazard problems
B)higher amount of capital signals the borrower's confidence about its future cash flows
C)the greater is the amount of capital, the greater is the borrower's loss if it decides to take on riskier projects
D)all of the above
E)b and c only

Question

Quizplus · Accepted Answer

All of the given options play a role in why a borrower's capital is an important factor in credit analysis. Higher capital levels can mitigate moral hazard problems by reducing the borrower's incentive to take on excessive risk. It also signals the borrower's confidence in its future cash flows, which can increase its ability to meet its debt obligations. Furthermore, a higher amount of capital means that the borrower has more to lose if it decides to take on riskier projects, thus reducing the likelihood of default.

A Borrower's Capital Is an Important Factor in Credit Analysis