BU127 Study Guide - Income Tax, Private Placement, Capital Structure
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BU127 Full Course Notes
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Characteristics of bond payables: advantages of bonds: principal: shareholders maintain control because bonds are debt, not equity, cash payments to the debt holders are limited to the scheduled payments of interest and, interest expense is tax deductible, impact on earnings is positive (positive financial leverage) because money can often be borrowed at a low interest rate and invested at a higher interest rate disadvantages of bonds, risk of bankruptcy exists because the interest and debt are legal obligations and must be paid back as scheduled or creditors will force legal action, a single large payment is required at the maturity date, negative impact on cash flows exists because interest and principal must be repaid in the is the use of borrowed funds to increase the rate of return on owner"s equity, it occurs when the interest rate on debts is lower than the rate of return on total assets future.
