Question

Nina wants to buy and operate an ice-cream truck but does not have the financial resources to start the business. She borrows $5,000 from Max to whom she promises to pay an interest rate of 7%, and gets another $10,000 from David to whom she promises a third of her profits. What best describes the situation?

Answer 1

David is a stockholder and Max is a bondholder.

Step-by-step explanation:

Since David will share the net profit as for 1/3 rd share, he will be deemed as a shareholder as there is no promise to pay back the amount he lend although there is share in profits.

Also in case of Max he had paid $5,000, on which interest will be paid, basically interest is treated as an expense and a compulsion to incur even in case of loss.

Accordingly Max posses to hold a bond with interest of 7% on face value of $5,000. On the other hand David holds equity share worth of $10,000 and the share is 1/3 rd in profits.