MGAB02H3 Chapter Notes - Chapter 8: Financial Statement, Callable Bond, Convertible Bond
10 May 2018
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Chapter 10 Notes
Pages: 547 -
Exercises:
Non-Current Liabilities: All of the entity's obligations not classified as current liabilities
Examples: Long term notes, bonds payable etc.
Capital Structure: The mix of debt and equity that is used to finance a company's growth
Bonds are security issued by corporations and the government to provide large amounts of
money
Advantage for creditors •
Provides liquidity â—¦
Investments into cash â—¦
Advantage to corporations •
More liquid â—¦
Less long-term borrowing â—¦
Characteristics of Long-Term Notes and Bonds Payable
Shareholders Maintain Control 1.
Does not dilute ownership and control A.
Debt holders are not in management or operations B.
Interest Expense is Tax Deductible 2.
Interest for tax reduces the net cost of borrowing A.
Advantages over dividends which are issued in shares B.
Impact on Earnings is POSITIVE 3.
Borrowed at low rate, invested at a higher rate A.
Risk of bankruptcy 1.
Interest payments to the debt holders must be made each period whether the A.
corporation generates net earnings or incurs a loss
Negative impact on sales 2.
Debt must be paid at a specific times in the future. Management must generate A.
sufficient cash to repay the debt or refinance it
Corporations can raise long-term debt directly from a number of financial services
Financial service organizations •
Banks â—¦
Insurance companies â—¦
Pension fund companies â—¦
These are private placements given usually in notes payables (a written promise) and given •
back at the maturity date(s) that were negotiated
Document Summary
Non-current liabilities: all of the entity"s obligations not classified as current liabilities. Capital structure: the mix of debt and equity that is used to finance a company"s growth. Bonds are security issued by corporations and the government to provide large amounts of money. Debt holders are not in management or operations. Interest for tax reduces the net cost of borrowing. Advantages over dividends which are issued in shares. Borrowed at low rate, invested at a higher rate. Interest payments to the debt holders must be made each period whether the corporation generates net earnings or incurs a loss. Debt must be paid at a specific times in the future. Management must generate sufficient cash to repay the debt or refinance it. Corporations can raise long-term debt directly from a number of financial services. These are private placements given usually in notes payables (a written promise) and given back at the maturity date(s) that were negotiated.
