Question

Loans to shareholders may be viewed as disguised dividends unless the shareholders can prove that the loans are bona fide. What are the factors of incentive to pay?

A. Interest rate charged
B. Repayment terms
C. Collateral provided
D. All of the above
E. A and B only

Answer 1

The factors of incentive to pay when evaluating loans to shareholders include the interest rate charged, repayment terms, and collateral provided.

Step-by-step explanation:

The factors of incentive to pay when evaluating loans to shareholders include:

• Interest rate charged: A higher interest rate charged on the loan would make the loan less attractive, while a lower interest rate would make it more appealing.
• Repayment terms: Favorable repayment terms, such as longer repayment periods or flexible repayment schedules, would increase the incentive to pay.
• Collateral provided: Providing collateral to secure the loan reduces the lender's risk and increases the borrower's commitment to repay.

Therefore, the correct answer is D. All of the above, as all the factors mentioned contribute to the borrower's incentive to repay the loan.