Beruflich Dokumente
Kultur Dokumente
8
Sources of Capital: Debt
McGraw-Hill/Irwin
Liability
Definition
Obligation to an outside party. Arises from a transaction or an event that has already happened.
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Contingency
Uncertainty as to possible gain or loss that will ultimately be resolved by some future event.
Gain contingencies usually not reported (conservatism).
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Loss Contingency
Potential future payment from existing conditions. Uncertainty about amount. Outcome will be resolved by future events.
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Levels of likelihood/GAAP
Probable
Reasonably estimated/Accrue. Not reasonably estimated/Disclose
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Sources of funds
Debt capital.
Company pays for use of capital that others furnish.
Equity capital.
Obtained from shareholders.
Direct contribution (paid-in capital). Indirect contribution (retained earnings).
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Debt Capital
Debt instruments.
Term loans.
Repayable according to a specified schedule usually with equal installments of principal and interest.
Bond.
Certificate promising to pay its holder:
Specified sum of money at a stated date and Interest at a stated rate until maturity.
Bonds
Interest rate usually constant through life, could be variable (variable-rate bonds). Bond indenture
Contains covenants which are requirements such as maintaining certain minimum financial ratios.
If covenants are not met, then loan is technically in default; creditors can demand immediate payment or changes to be made by management.
Mortgage bond is secured by pledged assets. Debenture bond is not secured by specific assets.
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Bond redemption
Payment of principal at maturity of bonds.
Thus, cancellation (under some circumstances earlier than maturity).
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Convertible.
Bondholder has the right to exchange bond for specified # of shares of stock.
Subordinated.
Claims are inferior to claims of general or secured creditors but take precedence over claims of shareholders.
Terms
Par value = face value = principal value = maturity value. Coupon rate = stated interest rate. Interest payments = face value * stated interest rate. Issuance costs: investment banking, accounting, legal and printing fees.
Deferred charges amortized over life of bonds using SL method.
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Book value
Net book value = principal plus unamortized premium or less unamortized discount. Net carrying amount = book value less unamortized deferred charges (issuance costs).
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Interest expense.
Beginning book value * effective interest rate.
Interest paid.
Face amount * stated interest rate.
Discount amortization.
Interest expense - interest paid.
Retirement of Bonds
Bonds may be callable. A call premium may be required. Bonds could be purchased in the market and retired. Gain (loss) = reacquisition price net carrying amount
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Leased Assets
Operating leases:
Rent or leases in which payments are expensed.
Lease is effectively an installment purchase or a financing tool. Treated as a purchase of an asset and creation of a liability.
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Bond Ratings
Indicates probability of going into default (not paying interest or principal as due). Uses ratios such as debt-equity and other information. Bond rating agencies include:
Standard & Poors. Moodys.
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Discussion Questions
What has more risk: debt or equity capital?
From company point of view? From investor point of view?
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