Debt Financing

Question 1

What is debt financing?

Answer 1

With debt financing, the lenders have nothing to say over the company compared to equity financing. Debt financing does increase the chances of going bankrupt

Question 2

What are convertible bonds?

Answer 2

Bond that under certain conditions can be converted into another financial title, usually common stock

Question 3

What is face value?

Answer 3

The par value of a bond

Question 4

What is the coupon rate?

Answer 4

The interest rate paid on a bond

Question 5

What are bonds?

Answer 5

Tradable debt notes issues by a company or other borrower

Question 6

What is time to maturity?

Answer 6

The time when bonds are paid back

Question 7

What is subordinate debt?

Answer 7

Debt that only has a claim on the firm’s assets when senior debt has been compensated

Question 8

What is Mezzanine Finance?

Answer 8

Financial sources with characteristics of both equity and debt

Question 9

What is mortgage?

Answer 9

Loan secured by collateral

Question 10

What are provisions?

Answer 10

Debt of uncertain timing and amount

Question 11

Name the non-current liabilities:

Answer 11

1. Common private loan
2. Mortgage
3. Subordinate debt
4. Bonds
5. Provision

Question 12

What is common private loan?

Answer 12

Basic loan with one investor

Question 13

What is subordinate debt?

Answer 13

In case of bankruptcy, the subordinate debtors are compensated after the common creditors have been fully paid. The lender has a higher risk so gets more compensation for this

Question 14

What are bonds?

Answer 14

Loan cut into smaller pieces

Question 15

What are provisions?

Answer 15

Debts with uncertain timing and amount. Refers to future obligations like legal claims & warranty claims

Question 16

Name the current-liabilities:

Answer 16

1. Accounts payable
2. Accrued liabilities
3. Deferred revenues
4. Short-term private loan

Question 17

What are accounts payable?

Answer 17

Transaction made on credit

Question 18

What are accrued liabilities?

Answer 18

Expenses that have occurred in but not have been paid in the previous accounting period

Question 19

What are deferred revenues?

Answer 19

Cash is paid before delivery of product

Question 20

What are short-term private loan?

Answer 20

A basic short term loan with 1 investor

Question 21

What are the advantages of debt financing?

Answer 21

1. Stockholders maintain control
2. The impact on earnings can be positive
3. Interest expense is tax deductible

Question 22

What are the disadvantages of debt financing?

Answer 22

1. Risk of bankruptcy

2. Negative impact on cash flows

Question 23

What are common bonds?

Answer 23

Public loan, loan divided into pieces. Unlike stock, bonds have a present maturity date. The interest rate on a bond is the coupon rate

Question 24

How to calculate the value of a bond?

Answer 24

The coupon rate of the nominal value/market interest. For the final transaction you also take into account the redemption payment