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:

Tax Rate

The specific ratio of income that must be given to the government as tax by both people and companies.

Budgeting Process

A systematic approach where businesses estimate their future income, expenditures, and capital needs to achieve their financial goals.

Selling Price

The amount of money for which a product is sold to the customer, not necessarily reflecting its cost or intrinsic value.

Department Spend

Relates to the total amount of money allocated and spent by a specific department within an organization.