Equity Contracts Account for a Small Fraction of External Funds

question 63

Multiple Choice

Equity contracts account for a small fraction of external funds raised by American businesses because

• A)costly state verification makes the equity contract less desirable than the debt contract.
• B)of the reduced scope for moral hazard problems under equity contracts,as compared to debt contracts.
• C)equity contracts do not permit borrowing firms to raise additional funds by issuing debt.
• D)there is no moral hazard problem when using a debt contract.

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Definitions:

Growth Opportunities

Potential scenarios or projects that can increase the profitability and size of a business.

Earnings Yields

The inverse of the price-to-earnings ratio, representing the earnings generated by a company per share relative to its share price, often used to compare the profitability of investments.

Treasury Yields

The returns on government securities that are considered risk-free; they serve as a benchmark for other interest rates.

Market-to-Book Ratio

A financial ratio that compares a company's market value (price of its stock) to its book value (total assets minus liabilities), used to evaluate whether a stock is under or overvalued.