QUESTION 1 Which of the following statements is false: Capital is money that is loaned to, or invested in, a business. The weighted average cost of capital (WACC) takes into account the mix of debt and equity financing and the tax effect. When raising capital, managers should minimize the amount of debt they can borrow and maximize the amount of equity. The amortization rate is the number of years on which the debt service payment calculation is based. QUESTION 2 Which of the following statements is false: A personal guarantee is a written promise that if your business fails to make regular debt service payments, the signatory agrees to use his or her personal funds to make the debt service payments. A prepayment penalty requires the borrower to pay the total amount of interest that would be owed to the lender for the full term of the loan, even if the loan is paid off early. A mezzanine loan is a second layer of debt that fills the gap between the total project cost, the amount of the first mortgage loan, and the equity capital to be invested. In a timeshare development each hotel room is sold as an investment rather than a right to use. QUESTION 3 Which of the following statements is false: Individuals, insurance companies, and pension funds are all good sources of equity. The three different types of FlElTs are equity, mortgage, and hybrid. During the Golden Age of Hotel Financing loans were based on a percentage of value, determined by an appraisal with little consideration of cost. The cost of equity is lower than the cost of debt