Chapter 2 - Debt

Question 1

What are the considerations of debt financing? (TIcs)

Answer 1

Tax deductible: interest payments can be deducted

Interest payments: Interest is paid regardless of profit and prior to dividends

Security: assets(fixed or float) which debts are leveraged against

Covenants: constraints directors in regards to gearing, dividend, and financial ratios

Question 2

What are the sources of debt financing?

Answer 2

Banks: Highstreet and merchant banks with make up the primary source of financing

Traded Investments: Traded debt instruments are sold by the company, through a broker to investors

Question 3

Name the class condition of debt instruments?

Answer 3

Redeemable: the principal amount must be paid @ some point in the future

Irredeemable: the principal amount never needs to be repaid

Convertible: the debt can be exchanged for shares.