Question

LIST AT least 5 factors to be examined in determining whether a particular financial instrument is...

LIST AT least 5 factors to be examined in determining whether a particular financial instrument is debt or equity. For EACH FACTOR THAT YOU LIST EXPLAIN HOW THE FACTOR IS USED TO INDICATE A DETERMINATION OF EITHER DEBT OF EQUITY.

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Answer #1

Five factors to examine when classifying a financial instrument into debt or equity include :

- Return on investment : fixed in the case of debt and uncertain in the case of equity

- Extent of involvement : Debt holder is not entitled to take part in business decision making while equity shareholder is.

- Nature of relationship : Debt holder can also be called a creditor of the company while a shareholder is an owner

- Payment order in case of liquidation : Debt holders are paid off along with creditors (i.e among the first few to be paid) while shareholders are paid last from whatever is left after paying all creditors

- Entitlement to profit share : Debt holders are not entitled to receive any share of profit, while shareholders are entitled to

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