COMMERCE 1BA3 Lecture Notes - Leveraged Buyout, Current Liability, Refinancing

• School: McMaster University
• Department: Commerce
• Course: COMMERCE 1BA3
• Professor: Aadil Merali Juma

Document Summary

Financing the business: businesses finance the acquisition of assets by: Bank pulls back loan if covenant not met. Companies are biased toward reporting st and lt debt; high current ratio by classifying lt debt as st: debt financing is cheaper but riskier than equity because interest payments are legal obligations and creditors can force bankruptcy. Debt financing has the advantage of financial leverage owners can potentially increase the return on their investments when they finance new projects with debt. Wealth transfer transactions that create value to shareholders at the expense of creditors (eg/ leveraged buyouts, or lbo) Return on investment = ni / amount of equity owners put in amount of income that investment generated. Shares get dividends; shares gain value; capital gain = amount share appreciated by. Eg/ financial leverage as of 1/1/2008, abc inc. had total assets of million, and total se of million.