Class 9 - Debt and Equity Financing

Question 1

Debt Financing occurs when?

Answer 1

companies borrow capital from other entities via formal borrowing arrangements

Question 2

Equity Financing occurs when?

Answer 2

companies obtain capital from other entities and in exchange give those entities ownership rights in the company

Question 3

What are the two broad categories of debt financing?

Answer 3

1 -Promissory notes (private entity)

2 - Notes and Bonds (public placement)

Question 4

Notes -

Answer 4

refer to debt contracts that mature in the short to intermediate term (10 years)

Question 5

Bonds -

Answer 5

refer to debt contracts that mature in the long term (greater than 10 years)

Question 6

Secured Loans

Answer 6

Loans where borrowers provide collateral; an asset of the borrower that the debtholder has the right to if the borrower defaults.

Question 7

Debt Covenants

Answer 7

clauses contained in the debt contract designed to decrease the lenders risk. It limits the types of investments the borrower can make.

Question 8

Implicit Interest Costs

Answer 8

represents the amount needed to compensate debt holders for the difference between the coupon rate and the effective rate

Question 9

How does a company report its debt financing?

Answer 9

Under either current or non-current liabilities. It generally records interest payments as an “operating interest expense”. The value reported on the balance sheet is the NPV of all future cash flows (inc principal) discounted using the effective rate (market interest rate) as of the balance sheet date.

Question 10

Typical conditions of Covenants?

Answer 10

Examples (highlevel) - Current Ratio

Question 11

Is Interest Payments and Interest Expenses equal to one another?

Answer 11

No - they should not be treated as the same.

Question 12

What part of the Cashflow Statement should Interest Paid be recorded?

Answer 12

Operating Cashflows records interest payments.

Question 13

What part of the Cashflow Statement records loans receivable?

Answer 13

Financing Cashflows

Question 14

3 types of Debt Contracts?

Answer 14

Instalment Debt Contract (typ PrivatE)
Interest-Only Loans (balloon loans)
Zero-Coupon Debt

Question 15

Instalment Debt Contract

Answer 15

A series of period payments over the life of the loa. A portion of the payment is considered interested and the remaining proportion is considered tp pay down principle

Question 16

Interest Only loans (Balloon Loans)

Answer 16

Two distinct payment types: interest payments over the life of the loan and payment on the maturity date for the principal.

Question 17

Zero-Coupon deb

Answer 17

Only one payment at the maturity of the loan.

Question 18

Total Interest Cost for a debt contract is defined as?

Answer 18

Total Payments Specified in Debt Contract - Loan Proceeds

Question 19

For Bonds; what represents the time value of money?

Answer 19

Total Payments (unfactored value) - Gross Payment

This is also known as the total interest over the life of the loan.

Question 20

What is the value of interest payments when the coupon rate is equal to the effective interest rate?

Answer 20

The difference is the unfactored difference in repayments - the time value of the payments do not change due to CR = R

Question 21

What is time value of money from an accounting point of view?

Answer 21

The interest costs

Question 22

Criteria of a bond issue at a Discount?

Answer 22

Proceeds

Question 23

How is the difference between cash received for borrowing, and future payments of long-term debt?

Answer 23

It is balanced by a contra-liability account that offers the face value of the future liability payment.

Question 24

What is Explicit Interest?

Answer 24

The sum of the interest payment

Question 25

What is Implicit Interest?

Answer 25

Interest Cost - Interest Payments

Question 26

What is the Implicit Interest for (REVISE)

Answer 26

Zero