Eve is an entrepreneur. she wants to expand her business but needs funding. She asked her friend Christina to invest in the business and become a silent shareholder. Christina borrows from the bank to do this. Christina ends up owning 70% of the business.

Which of the following is true regarding this arrangement?

i. Eve has an obligation to pay Christina regularly so that Christina can service her loan.

ii. Between Eve and Christina, there exists a risk of equity contract moral hazard.

iii. Between Eve and Christina, there exists a risk of debt contract moral hazard.

IV. Eve may suffer adverse selection if Christina did not do sufficient research about the business.

Answers;

A. ii and iii only

B. ii only

C. i, ii and iii only.

D. i and iii only.