Questions
COMM_V 298 101 102 103 2025W1 Class 1 and 2 Practice Quiz
Multiple dropdown selections
For each of the characteristics, determine whether they are characteristics of debt financing or equity financing. Company has a legal obligation to pay back the investors: [ Select ] Debt Equity Investors can expect to receive a steady stream of cash flows: [ Select ] Equity Debt The cash flows received may be of varying values: [ Select ] Debt Equity These investors have control over company decisions: [ Select ] Debt Equity These investors are the residual claimants: [ Select ] Debt Equity From the company's perspective, this type of financing is preferred when the company is financially successful: [ Select ] Debt Equity From the investor's perspective, this type of financing is preferred when the company is financially successful: [ Select ] Equity Debt
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Step-by-Step Analysis
The task asks us to categorize each statement as debt or equity financing, based on the typical characteristics of each funding type. Below, I analyze each item in turn, explaining why the label is debt or equity and clarifying common misconceptions.
1) Company has a legal obligation to pay back the investors: Debt
- Why this is debt: Debt financing entails a contractual obligation to repay the principal and to make interest payments. The key feature is the legal obligation to repay, which creates a fixed liability for the company. Investors in debt do not typically have ownership or voting rights, but they do have a claim that must be serviced regardless of profits.
- Why not equity: Equity investors are owners and are not guaranteed repayment of their initial investment; they are paid after debt obligations, ......Login to view full explanationLog in for full answers
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