Chapter 7
Debt and Equity Financing
Quiz Questions
Multiple Choice
1. In order for investors to purchase stock in a company, they will require a return of at
least a certain amount. The amount investors require depends on which of the
following?
a. Production opportunities
b. Time preferences for consumption
c. Risk
d. Inflation
e. All of the above
2. Which of the following is added to the risk-free rate to reflect the likelihood that the
issuer will default?
a. Inflation risk premium
b. Default risk premium
c. Liquidity premium
d. Maturity risk premium
e. None of the above
3. Of the following, which is NOT a form of equity financing?
a. A loan
b. Retained earnings
c. Government funding
d. Gifts
e. Donations
4. What percentage of businesses have equity ownership?
a. 5%
b. 25%
c. 50%
d. 75%
e. 100%
5. Which league prohibits the publicly traded ownership model?
a. NBA
b. MLB
c. NFL
d. MLS
e. NHL
6. The __________ of a bond is the face value, or amount of principal that the bond is
worth when the principal amount is due.
a. Coupon rate
b. Par value
c. Maturity
d. Current yield
e. Yield to maturity
7. Which of the following is the amount earned annually from the interest payment
compared with the price of the bond reflected as a percentage return?
a. Coupon rate
b. Par value
c. Maturity
d. Current yield
e. Yield to maturity
8. Of the following, which is an indirect source of public financing?
a. Sales tax revenue
b. Sin tax revenue
c. Tourism tax revenue
d. Lottery proceeds
e. Tax abatements
True/False
1. T or F The four factors that influence the required rate of return are production
opportunities, investment total, risk, and inflation.
2. T or F A market expectation of lower interest rates in the future that outweigh the
maturity risk premium leads to an inverted yield curve.
3. T or F Companies issue dividends in exchange for money to finance a large project.
4. T or F The provision of land for a sports stadium is an example of direct financing.
5. T or F Donations to 501(c)(3) organizations are tax deductible.
6. T or F Companies that pay a consistent dividend each year reduce the financial risk of
stock ownership in the company.
7. T or F A call premium is often equal to one year’s interest payments, if the call occurs
during the first year, and it declines each year thereafter.
8. T or F Trade credits are often granted by the retailer to a manufacturer.
9. T or F In the priority of claims on the assets of a company in liquidation, the trustee’s
costs are prioritized above the federal, state, and local taxes.
10. T or F An advantage of publicly traded equity financing is that it is easier for owners to
have an exit strategy.
Answers to Quiz Questions
Multiple Choice
True/False