If an Investor Buys a Portion (X)of an Unlevered Firm's

question 37

Multiple Choice

If an investor buys a portion (X) of an unlevered firm's equity, then his/her payoff is

• A)(X)× (profits).
• B)(X)× (interest).
• C)(X)× (profits − interest).
• D)(1/X)× (profits).

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Definitions:

Corporate Formation

Corporate formation refers to the legal process involved in creating a corporate entity or company, which includes filing the necessary documents with state authorities and fulfilling all legal requirements to start business operations.

Taxable Gain

The profit that is subject to taxation, realized from the sale of assets or investments.

FMV

Fair Market Value; an estimate of the market value of an asset, based on what a willing buyer would pay to a willing seller.

Subchapter S Corporation

A type of corporation that meets specific Internal Revenue Code requirements, offering the benefits of limited liability of a corporation but is taxed as a pass-through entity.