Question

PLEASE ANSWER THE FOLLOWING 7 QUESTIONS:

4) At the end of the Start-up Phase you

a. will have access to debt financing.

b. are ready for your IPO.

c. can stop paying dividends.

d. need to seek venture capital.

5) When you go through an IPO you

a. raise capital from venture capitalists.

b. raise debt from a bank.

c. sell shares to the general public.

d. issue preferred stock.

6) In the Principal/Agent relationship the Agent has

a. superior knowledge.

b. the right to dismiss the Principal.

c. no fiduciary responsibility towards the Principal.

d. inferior skills.

7) Which of the following is not an example of a Principal/Agent relationship?

a. Student/Professor.

b. Debt Holder/Equity Holder.

c. Equity Holder/Management.

d. Management/Debt Holder.

8) The amount of debt that a firm can take on is affected by

a. the Principal/Agent relationship between debt and equity investors.

b. covenants in the debt instruments.

c. market risk.

d. all of the above.

9) The tax deductibility of interest results in a higher cost of capital for the firm.

a. True

b. False

10) Firms in the Death Stage will typically reduce their debt load.

a. True

b. False

Answer 1

-At the end of start up phase, you

a) Will have access to debt financing

The venture capital is suited for the small companies which are beyond the start up phase and already generating revenues. The company after start up phase may not be paying dividends obviously. The debt financing is considered as cheaper. And lastly, the firm should be ready for an IPO.

-When you go through an IPO

c) sells shares to general public.

Capital is raised by offering shares to the general public. It helps the firms to have large bundle of money.

-In the Principal/Agent Relationship, the agent has

a) the superior knowledge.

The agent agrees to work for the principal in return of some incentives.The principal gives legal authority to the agents to perform certain actions on their behalf. The agent performs the acts because of the superior knowledge and has fiduciary responsibility towards the principal. The agent does not carry any authority to dismiss the principal.

-Which of the following is not an example of Principal/Agent relationship

b)Debt holder/ Equity holder

Here, both the parties are the principal and no other party acts on anyone’s behalf. Both the equity holders and debt holder appoint the managers/agents on their behalf to perform certain functions.Also, the professor is the principal whereas the student acts as an agent.

- The amount of debt that a firm can take on is affected by

b) Covenants in debt instruments

The covenants are the agreements which state the limits of borrowers for further lending. Also, there are restrictions on issuer’s ability to further take the additional debt.

The market risk affects mainly equity financing.

-The tax deductibility of interest expense result in higher cost of capital for the firm

b) False

The interest expenses are tax deductible which means that the no taxes are paid in the interest on debt financing. It is tax efficient which is not in case of dividends.

-Firms in the death stage will typically reduce their debt load

a) True

As the firms move towards the maturity life cycle stage and the death stage, it keeps on reducing the debt financing and relies mainly on internal sources of financing.