ECON101 Lecture 18: ECONOMICS 101: Lecture 18 - Methods of Corporate Financing

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mauvesquirrel844

15 Oct 2018

School

University of Alberta

Department

Economics

Course

ECON101

Professor

Gordon Lee

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ECON101 Lecture Notes - Lecture 17: Sole Proprietorship, Flat Tax, Double Taxation

ECON101 Lecture 18: ECONOMICS 101: Lecture 18 - Methods of Corporate Financing

ECON101 Lecture 19: Economics 101: Lecture 19 - Production Theory

Document Summary

Economics 101 lecture 18: methods of corporate financing. Thus, in ge(cid:374)eral, they (cid:449)ill ha(cid:448)e (cid:374)o say i(cid:374) the (cid:272)orporatio(cid:374)"s operatio(cid:374)s: bonds usually have a maturity date at which time the bondholders are repaid face value of the bond plus any remaining interest. Carry no fixed interest payments, only a principal value and redemption date. Interest arises because the borrower sells the bills at a price below the redemption value: for example: a firm may sell a bill/note fo4 , implying an interest rate of 5. 26% Bills are negotiable, which means they can be bought and sold on the open market: bonds and debentures: legal claim against the company. Fixed redemption date and obligation to the make periodic interest payments. Low risk because the only way you can lose a bond is if the company goes bankrupt (2) stocks (equity financing: a stock is also called a share.

Related Questions

Moral hazard is not eliminated in debt financing because

A) borrowers have an incentive to assume greater risk than is in the interest of the lender.

B) firms with a great deal of debt often go bankrupt.

C) principal-agent problems are greater with debt financing than with equity financing.

D) the use of restrictive covenants tends to increase moral hazard.

Why are corporations more likely to raise funds externally by debt instead of equity?

A) moral hazard is less of a problem with debt contracts

B) transactions costs tend to be higher in the stock market than bond market

C) to avoid paying dividends

D) interest rates tend to be lower than dividend rates

Which of the following is NOT a bank liability?

A) checkable deposits

B) CDs

C) mortgage loans

D) borrowings from the Federal Reserve

Banks use repurchase agreements to

A) ensure that payments on consumer loans are made on time.

B) borrow funds from business firms or other banks.

C) guard against price fluctuations on long-term bonds.

D) ensure that they always have enough funds on hand to meet their federal tax liabilities.

If a bank has a leverage ratio of 0.1 and a return on capital of 2%, what is its return on equity?

A) 0.2%

B) 2.1%

C) 5%

D) 20%

Which of the following statements about checking deposits is true?

A) It is a liability for both households and banks.

B) It is an asset for both households and banks.

C) It is an asset for households but a liability for a bank.

D) It is a liability for households but an asset for a bank.

brownherring865

6. If there is a shortage of loanable funds, then

a.	the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
b.	the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
c.	the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
d.	the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

7. We associate the term debt finance with

a.	the bond market and we associate the term equity finance with the stock market.
b.	the stock market and we associate the term equity finance with the bond market.
c.	financial intermediaries and we associate the term equity finance with financial markets.
d.	financial markets and we associate the term equity finance with financial intermediaries.

8. If the demand for loanable funds shifts to the right, then the equilibrium interest rate

a.	and the quantity of loanable funds rises.
b.	and the quantity of loanable funds falls.
c.	rises and the quantity of loanable funds falls.
d.	falls and the quantity of loanable funds rises.

9. Long-term bonds are

a.	riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
b.	riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
c.	less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
d.	less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

10. Compared to bondholders, stockholders

a.	face higher risk and have the potential for higher returns.
b.	face higher risk but receive a fixed payment.
c.	face lower risk and have the potential for higher returns.
d.	face lower risk but receive a fixed payment.

11. The old adage, 'don't put all your eggs in one basket', is very similar to a modern bit of advice concerning financial matters:

a.	Buy low-risk bonds.
b.	Use a medium of exchange.
c.	Diversify.
d.	Intermediate.

12. A budget surplus is created if

a.	the government sells more bonds than it buys back.
b.	the government spends more than it receives in tax revenue.
c.	private saving is greater than zero.
d.	None of the above is correct.

greenwildebeest673

The United States territory of Puerto Rico was effectively downgraded to non-investment grade on February 4, 2014 by Standard & Poorâs when it downgraded Puerto Ricoâs general obligation debt from BBB- status to BB+, on level below investment grade. Moodyâs and Fitch Ratings quickly followed and within a matter of 10 days all three ratings agencies had downgraded Puerto Ricoâs debt.

Each of these downgrades triggered several covenants, or acceleration clauses, which forced Puerto Rico to repay certain debt instruments within months rather than years. Also resulting from the downgrades was an increase in Puerto Ricoâs cost of capital. Unlike a corporation, municipalities such as cities, states, and territories are 100% debt financed. Thus, a drop in credit rating to junk bond status requires Puerto Rico to offer investors a higher rate of interest on new debt issues and will reduce the market value of existing bonds. Therefore, improving the situation by restructuring existing bonds and issuing new bonds becomes an extremely difficult task. While municipal financing differs from corporate financing, the prescription for lowering the cost of borrowing is similar for both: increase revenues and/or cut costs. Puerto Rico currently states that it is unable to maintain its current operations unless it takes drastic measures that may lead to civil unrest. This includes cutting payments to government pensioners and slashing health care funding. There have already been protests over the austerity measures.

The devastation caused by Hurricane Irma (and now potentially Hurricane Maria) is likely to worsen the situation as previously allocated municipal funds will need to be diverted for the relief effort. If you were tasked with proposing a solution to the situation, which must address the rising cost of capital, how would you approach the issue?

ECON101 Lecture 18: ECONOMICS 101: Lecture 18 - Methods of Corporate Financing

ECON101 Lecture Notes - Lecture 17: Sole Proprietorship, Flat Tax, Double Taxation

ECON101 Lecture 18: ECONOMICS 101: Lecture 18 - Methods of Corporate Financing

ECON101 Lecture 19: Economics 101: Lecture 19 - Production Theory

Document Summary

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