Business Finance - Level 2 Quiz

Financing in the form of borrowing from banks and other lending institutions

• Debt Financing

• Equity Financing

Debt financing creates a contractual _________ for the borrower to pay the interest and principal.

• obligation

• asset

• risk

If managed properly and if taken in reasonable amounts, debt financing can help a company grow.

• True

• False

Which of the following is an advantage of debt financing?

• Debt financing does not dilute the interest of the controlling stockholders.

• Manager's executive time is spent on how to fix the debt problem.

• Company is exposed to bankruptcy risk.

Which of the following is a disadvantage of debt financing?

• Creditors do not intervene in the decisions of the management.

• The company is not required to pay dividends.

• Late payments lead to penalties and higher interest.

Through this financing, companies issue shares of stocks.

• Debt Financing

• Equity Financing

In equity financing, corporations are required to pay dividends.

• True

• False

Equity financing provides financial flexibility, i.e., if the leverage ratio of a company is low, it will be more

attractive to creditors.

• True

• False

Which of the following is an advantage of equity financing?

• Controlling stockholders define the direction of a company.

• Offering new shares dilute the ownership stake of existing stockholders.

• If a company does not perform, stockholders absorb the losses.

These are funds used to finance the day-to-day operations of the company.

• Short-term funds

• Long-term funds