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.

---

Definitions:

Owners' Equity

The amount of the business that belongs to the owners after all debts and liabilities have been subtracted from total assets.

Investment

An investment is the allocation of resources, such as time, money, or effort, in expectation of generating an income or profit.

Net Income

The total earnings of a company after subtracting all expenses, including taxes and operating costs, from its total revenue.

Owners' Equity

The residual interest in the assets of an entity after deducting liabilities, representing the ownership interest of shareholders or owners.