Economists have found that the greater is a borrower's net worth compared to the borrower's desired level of capital investment
A)the larger is the gap between the cost of external and internal financing.
B)the smaller is the gap between the cost of external and internal financing.
C)the larger is the borrower's tax liability.
D)the smaller is the borrower's tax liability.

Question

Quizplus · Accepted Answer

As the borrower's net worth increases compared to their desired capital investment, they become less risky to lenders and are therefore more likely to receive lower interest rates on external financing. This reduces the gap between the cost of external (higher interest rates) and internal financing (lower interest rates from using their own savings), resulting in a smaller difference between the two costs.

Economists Have Found That the Greater Is a Borrower's Net