Ch. 14 Flashcards
1
Q
3 Ways to Finance a Business
A
1) Debt Financing
2) Earnings
3) Equity
2
Q
Borrower Risk
A
- Default on the loan, not make scheduled payments
- Once borrower defaults, the borrower has less access to capital
3
Q
Investor Risk
A
- Default, Company does not payoff its debts
4
Q
Financial Leverage
A
- Borrower’s reward from debt financing
- Created when a company can generate a return that is greater than the cost of borrow funds
5
Q
Debt to Equity Ratio
A
- Total Debt/Total Equity
- As the debt to equity ratio increases, the risk associated with the business increases (default risk, bankruptcy risk)
6
Q
Note
A
- Written promise to payoff a liability
7
Q
NoteMAKER
A
- The person or business entity borrowing resources
8
Q
Covenants
A
- Restrictions placed on the borrower
9
Q
Cash Proceeds
A
- The amount of money received by the borrower
10
Q
Market Rate of Interest
A
- The current market rate demanded by the market place (set by the market place)
11
Q
Face Rate
A
- Interest rate printed on the face of the note or bond
12
Q
Sources of Debt financing
A
- Nonpublic Sources - A business borrows from individuals or from institutions (insurance companies)
- Public Sources - A business borrows by issuing debt to the public
13
Q
Types of Notes and Bonds
A
- Installment Notes
- Lump-Sum Note
- Bonds Payable
- Periodic Payment
14
Q
Installment Notes
A
- Series of Equal Repayments
- Each payment includes interest and principal
- Ex - Car payments & House payments
15
Q
Lump-Son Note
A
- Only one interest rate used
- One repayment at the end of life of the note
- Repayment includes a return pf principal and interest
- The difference between the cash received and the final one payment will represent interest expense
