Which of the Following Does Not Represent a Major Difference

question 38

Multiple Choice

Which of the following does not represent a major difference between debt and equity?

• A) Creditors do not have voting power as stockholders do.
• B) Payment on interest on debt in considered an expense, while payment of dividends is not.
• C) Unpaid debt is a liability of the firm, and if not paid, can result in liquidation of the firm. Unpaid dividends cannot.
• D) One of the costs of issuing equity is the possibility of financial distress, while no financial distress is associated with debt.

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Definitions:

Constant-growth Dividend-discount Model

A method for valuing a stock by assuming that dividends grow at a constant rate indefinitely, used to estimate the stock's price based on future dividend payments.

Multifactor CAPM

Generalization of the basic CAPM that accounts for extra-market hedging demands.

APT

The Arbitrage Pricing Theory, a multifactor model used to determine asset returns based on the relationship between a financial asset's expected return and its risks.

Hedge Portfolios

Investment portfolios designed to reduce the risk of adverse price movements in an asset, often by using derivatives such as options and futures.