Theron Is Starting a New Business After Graduating from University

question 7

Multiple Choice

Theron is starting a new business after graduating from university.In order to secure a loan of $100 000,he gets his father,who holds a diversified portfolio worth $1 million,to guarantee the loan and secure it with the portfolio.The guarantee is for "all obligations" of his son.After one year,before the loan is paid back,Theron decides to expand the business and increase the size of the loan to $200 000.Which of the following is true?

• A)Based on the agreement,Theron's father has guaranteed the new terms of the loan too.
• B)The new terms are not enforceable because they weren't in writing.
• C)Theron's father's liability is limited to the original agreement.
• D)The guarantee was never enforceable because the collateral was not equivalent to the loan.
• E)The guarantee is not enforceable if Theron's father does not allow the bank to explain the extent of the guarantee to him.

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Definitions:

Common Stock

Equity securities that represent ownership in a corporation, providing voting rights and potential dividends to shareholders.

Retained Earnings

The accumulated portion of profits that a company decides to keep and reinvest in the business, after dividends are paid out to shareholders.

Faithful Representation

A characteristic of financial reports that pertains to information accurately reflecting an entity’s economic activity or condition.

Financial Reports

Documents that contain detailed information regarding a company's financial status, performance, and cash flows during a specific period.