Question

As a result of the Revised Model Business Corporation Act, it may be fair to state that:

Multiple Choice

• the book value of owners’ equity may not give an accurate picture of potentially legal distributions.

• the book value of assets gives an accurate picture of potentially legal distributions.

• the book value of owners’ equity never gives an accurate picture of potentially legal distributions.

• the book value of owners’ equity gives an accurate picture of potentially legal distributions.

Answer 1

Answer is (c)

Reason:Because the book value of owner equity never givedls an accurate picture of potential legal distribution as per definition of revised model bussiness corporation act

Financing comes from three sources, internal funds, debt and new equity. Companies prioritize their sources of financing, first preferring internal financing, and then debt, lastly raising equity as a "last resort". Hence: internal financing is used first; when that is depleted, then debt is issued; and when it is no longer sensible to issue any more debt, equity is issued. This theory maintains that businesses adhere to a hierarchy of financing sources and prefer internal financing when available, and debt is preferred over equity if external financing is required (equity would mean issuing shares which meant 'bringing external ownership' into the company). Thus, the form of debt a firm chooses can act as a signal of its need for external finance. So on this basis bookvbook of equity not given a true picture so after distribution of all amount than remaining amount is for equity. And thats why equity fair value give true picture