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When a borrower's net worth is high: a
When a borrower's net worth is high:
a. the cost of its internal funds will be high.
b. information costs are less likely to constrain capital spending.
c. the cost of its internal funds will be low.
d. the cost of its external funds will be high.
Expert Solution
Option c. the cost of its internal funds will be low.
The net worth of the borrower is the total of the net assets held by the person after deducting the payments that have to be made by him. If the net worth of the borrower is sound it means that the person is financially stable to pay the money that he owes to outsiders and still be left with assets in hand. In such a situation it is rational and advisable to invest the extra fund. This type of funding is known as internal borrowing. The cost of such borrowing will be low since the borrower will be using the ideal cash.
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