What two components make up a borrower’s equity?

The concept of a borrower's equity is fundamentally about understanding what a borrower owns versus what they owe. The correct choice defines equity as the difference between the total value of assets owned and the total liabilities owed by the borrower.

This means that equity represents the net worth of a borrower — it shows how much of the assets is actually owned free and clear of any debts. For example, if a borrower has assets valued at $500,000 and liabilities totaling $300,000, their equity would be $200,000 ($500,000 - $300,000). This difference is crucial for lenders, as it indicates the value that can theoretically serve as security for a loan. High equity often reflects a lower risk from the lender's perspective.

The other choices focus on different financial metrics that do not directly correspond to the definition of equity. For instance, total assets divided by total debt doesn't provide a straightforward measure of a borrower's equity, as it results in a ratio rather than a monetary value of ownership. Income minus expenses refers to cash flow rather than equity, while gross revenue minus operating costs pertains to business profitability, not the financial position of assets and liabilities. Understanding equity is vital for assessing a borrower's financial health and making lending decisions.