Question

Frank wanted to open a coffee shop. In order to get started, Frank borrowed $40,000 from his grandmother to start his business. Frank promised his grandmother that she would be a partner in the business and would be entitled to a 40% of profits from the business at the end of the year. This is an example of

Multiple Choice

• bootlegging.

• bartering.

• initial public offering.

• equity financing.

• franchising.

Answer 1

Answer - Equity financing.

Reason - Equity financing is the method of raising capital, In return for the investment, the Investors receive ownership interests in the company. In this case Frank had borrowed money from his grandmother to start his business & if Frank would had promised his grandmother to return her $40,000 (With or without interest) it would had then callled Debt Financing. However, Frank offered his grandmother 40% profits from the business & this makes his grandmother receive the ownership of 40% interest in the company (With the Investment of $40,000) i.e. $40,000 is his grandmother's Investment & In return for the investment his grandmother receive the ownership of 40% in the company. Hence this makes this kind of Financing as Equity Financing.