BU127 Chapter Notes - Chapter 11: Debenture, Interest Expense, Premium Bond
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BU127 Full Course Notes
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Document Summary
Bu127 chap 11 reporting and interpreting non-current liabilities. Shareholders maintain control because bonds are debt not equity. 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. Cash payments to the debt holders are limited to the scheduled payments of interest and principal. 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 future. The impact on earnings is positive because money can often be borrowed at a low interest rate and invested at a higher interest rate. Financial leverage: 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 rate of return on total assets. Basically investment interest earns more than debt interest takes out.
