6. Owners Equity

Question 1

what is owner’s equity?

Answer 1

• ownership claim on the assets of the entity
• what is left to shareholders after paying the liabilities (residual claim)
• part of the company that goes to the shareholders

Question 2

what are the sources of financing in firms?

Answer 2

• equity investors (stockholders)
• creditors (lenders

Question 3

what does the decision concerning capital structure of the firm depend?

Answer 3

• the type of assets the firm wants to finance
• the financial markets

Question 4

what is a bond?

Answer 4

type of financial instrument where an investor loans money to a borrower (usually corporation or government) for a fixer period in exchange for regular interest payments and the return of the original loan amount when the bond matures
- lower level of risk to the investor, lower return

Question 5

what is a stock?

Answer 5

ownership in a company and constitutes a claim on part of the company’s assests and earnings
- higher level of risk to the investor, higher return

Question 6

what are the differences between investment and financing decision?

Answer 6

investment decision:
- long-term investments
- short-term investments
- cash

financing decision:
- owner’s equity
- long-term liabilities
- short-term liabilities

Question 7

what happens if you have a long-term investments with short-term liabilities?

Answer 7

you struggle to get the money

you don’t have a due date to pay owner’s equity (permanent financing → it is gonna be there forever)

Question 8

what are the owner’s equity items?

Answer 8

• Share capital
• Treasury stock (negative)
• Share premium
• Retained earnings & Reserves
• Revaluation surpluses
• Other changes in owners’ equity
• Net income