Consider the following statements about managing the debt of a business:
(A) Borrowing makes the most sense when a business needs to bolster cash flow or finance growth or expansion.
(B) The smaller the volatility in an industry, the less debt a business can afford.
(C) Some financial institutions are overzealous lenders, particularly when trying to lure or hold on to weak business customers.
(D) A bank may look more at collateral than at whether the earnings of a business will justify the debt service.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A) and (D) only
(A) Borrowing makes the most sense when a business needs to bolster cash flow or finance growth or expansion. — Correct. Debt gives a business the money to strengthen its cash flow or to grow.
(B) The smaller the volatility in an industry, the less debt a business can afford. — Incorrect. Volatility means how much the business conditions of an industry swing up and down. When it is smaller, earnings are steadier, so a business can afford more debt. Higher volatility calls for less debt.
(C) Some financial institutions are overzealous lenders, particularly when trying to lure or hold on to weak business customers. — Incorrect. Lenders become overzealous, or too eager, when they want to win or keep promising business customers. A strong customer is the one a lender is keen to hold on to.
(D) A bank may look more at collateral than at whether the earnings of a business will justify the debt service. — Correct. Collateral is the security offered against a loan. A bank may lend because the security is good, even if the earnings may not cover the interest and repayment. So a ready loan does not prove that the debt position is strong.
NCERT (2026-27 Edition):
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