When capital can be used as a signal of project quality, a good borrower is charged a low interest rate.The reason that a high risk borrower is unwilling to put up more equity despite this low rate is...
A)low rate induces the high risk borrower to take on less risky project
B)the high risk borrower is more interested in getting debt tax shield, and therefore would like as large a loan as possible
C)the high risk borrower can lose most of its capital when a low rate is charged
D)all of the above
E)a and c only

Question

Quizplus · Accepted Answer

The high risk borrower is more interested in getting debt tax shield, and therefore would like as large a loan as possible

When Capital Can Be Used as a Signal of Project