Debt Financing Flashcards
What is debt financing?
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
What are convertible bonds?
Bond that under certain conditions can be converted into another financial title, usually common stock
What is face value?
The par value of a bond
What is the coupon rate?
The interest rate paid on a bond
What are bonds?
Tradable debt notes issues by a company or other borrower
What is time to maturity?
The time when bonds are paid back
What is subordinate debt?
Debt that only has a claim on the firm’s assets when senior debt has been compensated
What is Mezzanine Finance?
Financial sources with characteristics of both equity and debt
What is mortgage?
Loan secured by collateral
What are provisions?
Debt of uncertain timing and amount
Name the non-current liabilities:
- Common private loan
- Mortgage
- Subordinate debt
- Bonds
- Provision
What is common private loan?
Basic loan with one investor
What is subordinate debt?
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
What are bonds?
Loan cut into smaller pieces
What are provisions?
Debts with uncertain timing and amount. Refers to future obligations like legal claims & warranty claims
Name the current-liabilities:
- Accounts payable
- Accrued liabilities
- Deferred revenues
- Short-term private loan
What are accounts payable?
Transaction made on credit
What are accrued liabilities?
Expenses that have occurred in but not have been paid in the previous accounting period
What are deferred revenues?
Cash is paid before delivery of product
What are short-term private loan?
A basic short term loan with 1 investor
What are the advantages of debt financing?
- Stockholders maintain control
- The impact on earnings can be positive
- Interest expense is tax deductible
What are the disadvantages of debt financing?
- Risk of bankruptcy
2. Negative impact on cash flows
What are common bonds?
Public loan, loan divided into pieces. Unlike stock, bonds have a present maturity date. The interest rate on a bond is the coupon rate
How to calculate the value of a bond?
The coupon rate of the nominal value/market interest. For the final transaction you also take into account the redemption payment
