Assignment
1) The main difference between a spot market transaction and a future market transaction is related to the:
A. Maturity of the Financial Instrument.
B. Priority in the Capital Stack.
C. Timing of Cash Flows.
D. Cost of Capital.
2) Which of the following statements is true?
A. Since Debt has priority in terms of payments from earning, it has a higher return.
B. Since Equity has priority in terms of payments from earning, it has a higher return.
C. Equity has ownership rights in the firm and thus automatically has a higher return.
D. Based on the risk associated with the priority in terms of payment, equity should have a higher return.
3) An important advantage of switching from a Sole Proprietorship to a LLC is that
A. you are subject to less taxation.
B. you can now get funding from venture capitalists.
C. you have less personal liability.
D. you are subject to GAAP accounting rules.
4) At the end of the Start-up Phase you
A. will have access to debt financing.
B. are ready for your IPO.
C. can stop paying dividends.
D. need to seek venture capital.
5) When you go through an IPO you
A. raise capital from venture capitalists.
B. raise debt from a bank.
C. sell shares to the general public.
D. issue preferred stock.
6) In the Principal/Agent relationship the Agent has
A. superior knowledge.
B. the right to dismiss the Principal.
C. no fiduciary responsibility towards the Principal.
D. inferior skills.
7) Which of the following is not an example of a Principal/Agent relationship?
A. Student/Professor.
B. Debt Holder/Equity Holder.
C. Equity Holder/Management.
D. Management/Debt Holder.
8) The amount of debt that a firm can take on is affected by
A. the Principal/Agent relationship between debt and equity investors.
B. covenants in the debt instruments.
C. market risk.
D. all of the above.
9) The tax deductibility of interest results in a higher cost of capital for the firm.
True/False
10) Firms in the Death Stage will typically reduce their debt load.
True/False.