Which of the following statements about the characteristics of debt and equity is true?

• A. Equity holders receive fixed interest payments regardless of company performance.
• B. Equity holders have no voting rights in the company.
• C. Debt financing does not require repayment of principal or interest.
• D. Debt holders have a fixed claim on assets and are paid before equity holders in the event of liquidation.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the difference between debt and equity. Debt represents borrowed funds that must be repaid with interest, while equity represents ownership in the company, typically through shares.
2. Step 2: Analyze the characteristics of equity holders. Equity holders generally do not receive fixed payments; instead, they may receive dividends based on company performance. Additionally, equity holders often have voting rights in the company.
3. Step 3: Examine the characteristics of debt financing. Debt financing requires repayment of principal and interest, making the statement 'Debt financing does not require repayment of principal or interest' incorrect.
4. Step 4: Consider the priority of claims in the event of liquidation. Debt holders have a fixed claim on the company's assets and are paid before equity holders during liquidation, which aligns with the correct answer provided.
5. Step 5: Conclude that the correct statement is: 'Debt holders have a fixed claim on assets and are paid before equity holders in the event of liquidation,' based on the characteristics of debt and equity.