Equity and Debt Financing: Master the Art of Capital Raising

Question 1

Which of the following is not typically a characteristic of equity financing?

Accepted Answer

Fixed return for investors

Answer

Ownership interest for investors

Answer

Potential for capital gains

Answer

Dilution of existing ownership

Question 2

A company issues shares with a par value of £1. If the shares are sold at £2, what is the share premium?

Accepted Answer

£1

Answer

£0

Answer

£2

Answer

£3

Question 3

What is the key difference between a loan note and a bond?

Accepted Answer

Loan notes are unsecured, while bonds are secured

Answer

Bonds are usually issued by governments, while loan notes are issued by companies

Answer

Loan notes have a shorter maturity than bonds

Answer

Loan notes are more flexible than bonds

Question 4

What is the essential purpose of a prospectus in debt financing?

Accepted Answer

To provide potential investors with comprehensive information about the bond issue

Answer

To secure the loan against specific assets

Answer

To establish the loan agreement's terms and conditions

Answer

To guarantee repayment of the principal amount

Question 5

Which instrument combines characteristics of both equity and debt, making it a hybrid instrument?

Accepted Answer

Convertible bond

Answer

Letter of credit

Answer

Overdraft facility

Answer

Loan note

Question 6

When comparing debt and equity financing, what is a primary advantage of using debt financing?

Accepted Answer

Potential tax savings on interest payments

Answer

Preservation of ownership control

Answer

Higher risk to investors

Answer

Unlimited fundraising capacity

Question 7

What is the primary objective of a loan agreement in debt financing?

Accepted Answer

To outline the terms and conditions of the loan

Answer

To secure the debt against specific assets

Answer

To provide additional protection to investors

Answer

To facilitate the sale of debt securities

Question 8

The primary goal of equity financing is to:

Accepted Answer

Raise capital by issuing and selling shares in the company

Answer

Obtain loans from investors

Answer

Improve the company's credit rating

Answer

Restructure the company's existing debt

Question 9

What is the primary purpose of a convertible bond?

Accepted Answer

To provide investors with the option to convert the bond into equity

Answer

To reduce the risk of default for the issuer

Answer

To increase the flexibility of the issuer's financing

Answer

To provide a tax advantage for the investor

Question 10

Which of the following is a type of debt instrument that is secured by a specific asset or property?

Accepted Answer

Mortgage

Answer

Debenture

Answer

Promissory note

Answer

Lease

Question 11

Identify the disadvantage associated with equity financing:

Accepted Answer

Dilution of ownership

Answer

Provides permanent capital

Answer

Increased borrowing capacity

Answer

No interest payments required

Question 12

What distinguishes secured debt from unsecured debt?

Accepted Answer

Presence of collateral

Answer

Interest rate charged

Answer

Maturity date

Answer

Tax treatment

Question 13

What is the primary purpose of a prospectus in a public offering of securities?

Accepted Answer

Provide key information to investors

Answer

Secure regulatory approval

Answer

Generate media attention

Answer

Guarantee investor returns

Question 14

What is the key difference between a convertible bond and a straight bond?

Accepted Answer

Equity conversion feature

Answer

Credit rating

Answer

Interest rate

Answer

Maturity date

Question 15

Which of the following is not a type of equity security?

Accepted Answer

Bonds

Answer

Common stock

Answer

Preferred stock

Answer

Warrants

Question 16

What is the purpose of a sinking fund in corporate debt financing?

Accepted Answer

Gradually retire debt over time

Answer

Provide a reserve for unexpected expenses

Answer

Improve the creditworthiness of the issuer

Answer

Lower the interest rate on the debt

Question 17

Which factor is usually not considered when determining a company's optimal capital structure?

Accepted Answer

CEO's personal preferences

Answer

Industry norms

Answer

Tax implications

Answer

Regulatory requirements

Question 18

A company wishes to raise capital for expansion by selling new shares to the public. This method of financing is known as:

Accepted Answer

Equity financing

Answer

Debt financing

Answer

Angel investment

Answer

Venture capital

Question 19

Which of the following is NOT a characteristic of debt financing?

Accepted Answer

Ownership stake in the company

Answer

Interest payments

Answer

Fixed repayment schedule

Answer

Maturity date

Question 20

A company issues bonds with a 5% coupon rate. This means:

Accepted Answer

The bondholders will receive an annual interest payment equal to 5% of the bond's face value.

Answer

The company will repay the principal amount in 5 installments.

Answer

The bond will mature in 5 years.

Question 21

Which of the following is generally considered a disadvantage of equity financing?

Accepted Answer

Dilution of existing ownership

Answer

Lower cost of capital compared to debt

Answer

Flexibility in repayment

Answer

No maturity date

Question 22

A company issues convertible bonds. This means:

Accepted Answer

The bondholders have the option to convert their bonds into shares of the company at a specified price.

Answer

The bondholders have voting rights in the company, similar to equity holders.

Answer

The company is required to repay the bonds in installments.

Question 23

A company with a high debt-to-equity ratio is likely to:

Accepted Answer

Face a higher risk of financial distress due to increased debt obligations.

Answer

Be considered a safer investment due to the high debt level.

Answer

Be more profitable because of the increased leverage.

Answer

Have lower interest expenses.

Question 24

Venture capital firms typically invest in:

Accepted Answer

Early-stage companies with high growth potential and innovative ideas.

Answer

Government-owned enterprises.

Answer

Established companies seeking to refinance debt.

Answer

Non-profit organizations.

Question 25

Which of the following is NOT a factor that typically influences a company's choice of financing method?

Accepted Answer

Weather patterns

Answer

Current market conditions (e.g., interest rates, investor appetite)

Answer

The company's stage of development (e.g., start-up, mature)

Question 26

A company issues preferred stock. This type of equity financing:

Accepted Answer

Provides fixed dividends that are paid before common stock dividends, offering a more predictable return to investors.

Answer

Provides a claim to the company's assets before bondholders, making it a riskier investment.

Answer

Grants voting rights to the holders, allowing them to actively participate in company decisions.

Question 27

A company considering issuing debt to finance a new project should prioritize which factor before making the decision?

Accepted Answer

The company's ability to meet the debt repayment obligations, including interest payments and principal, based on its cash flow and financial projections.

Answer

The color of the company's logo, as it is irrelevant to financial decisions.

Answer

The number of employees in the company, as a large workforce could indicate financial strength.