Question

In: Finance

1) The main difference between a spot market transaction and a future market transaction is related to the:

a. Maturity of the Financial Instrument.

b. Priority in the Capital Stack.

c. Timing of Cash Flows.

d. Cost of Capital.

2) Which of the following statements is true?

a. Since Debt has priority in terms of payments from earning, it has a higher return.

b. Since Equity has priority in terms of payments from earning, it has a higher return.

c. Equity has ownership rights in the firm and thus automatically has a higher return.

d. Based on the risk associated with the priority in terms of payment, equity should have a higher return.

3) An important advantage of switching from a Sole Proprietorship to a LLC is that

a. you are subject to less taxation.

b. you can now get funding from venture capitalists.

c. you have less personal liability.

d. you are subject to GAAP accounting rules.

Expert Solution

1) the main difference between a spot market transaction and a future market transaction is simply the timing of cash flows since in a pot market transaction you have to pay for the security at the time of transaction , while in a future market transaction , the security will be delivered on a specific date at a pre-set price that you will have to pay in future at the specific date of its delivery

hence the correct option is c.) timing of cash flows

2) in finance , the CAPM( capital asset pricing model) says that , the higher the risk , higher should be the return to justify that risk

since equity is more risky in terms of the priority of payment, because equity shareholders do not have priority in terms of payment from earnings, equity should have a higher return

hence option d) Based on the risk associated with the priority in terms of payment, equity should have a higher return. is TRUE

3) since in a sole proprietorship the liability of the owner of the firm is unlimited and in a LLC ( Limited Liability Company) the Liability of the owners is limited to the company's assets

Option c) you have less personal liability. is TRUE

jeff jeffy answered 2 years ago

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