Equity Characteristics | CFA® Level 1 Exam

Characteristics of Equity

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Question

Which of the following is considered a characteristic of equity?

Answers

A. None of these answers.

B. All forms of equity must ultimately be repaid by a business.

C. Compensation to the holders of equity takes precedence over that required to the holders of liabilities.

D. Equity represents the residual ownership of a business.

E. Equity represents a claim against a business that is senior to liabilities.

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Explanations

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A. B. C. D. E.

Equity refers to the claims of the owners of a business. Equity investors expose themselves to greater risk than the holders of liability claims because owner's claims are junior to liability instruments. Equity claims against income and assets are last in line; thus, they are residual.

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