Which One of the Following Serves to Differentiate Debt from Equity

question 51

Multiple Choice

Which one of the following serves to differentiate debt from equity?

• A)Interest on debt may be deferred, but dividends are a legal liability and must be paid every year.
• B)Interest on debt is tax deductible while dividends to equity investors are not.
• C)Debt has a maturity date which is much shorter than the maturity period of equity.
• D)Debt holders are appointed while the board of directors elects equity holders.

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Definitions:

Stockholders' Equity

The residual interest in the assets of a company that remains after deducting its liabilities, representing ownership interest.

Total Liabilities

The sum of all financial obligations (debts) owed by a company to external entities or individuals.

Bond Interest

The regular payments made to bondholders as compensation for the investment, typically expressed as a percentage of the principal.

Dividends

Disbursements issued to shareholders by a company, typically sourced from the firm's earnings.