Certified Energy Manager Practice Exam

What characterizes equity financing?

1. It requires repayment of borrowed funds

2. The lender acquires an ownership position in the borrower’s organization

3. It involves tax-sheltered deductions

4. It is a form of debt with fixed interest rates

The correct answer is: The lender acquires an ownership position in the borrower’s organization

Equity financing is characterized by the acquisition of an ownership position in the borrower's organization. When investors or entities provide capital in exchange for shares, they are essentially buying a stake in the company. This means they participate in the potential profits and growth of the business, as well as having a say in governance, depending on the type of shares they hold. Unlike debt financing, which requires repayment and incurs interest obligations, equity financing does not necessitate a fixed return to investors and instead aligns their rewards with the company's performance. This arrangement can be beneficial for businesses seeking to avoid immediate cash outflows, as equity investors typically gain returns through dividends and capital appreciation rather than fixed interest payments.