Other Sources of Long-Term Financing Flashcards

1
Q

What is a lease?

Other source of long-term financing

A

A lease is a long-term, contractual agreement in which the owner of property (the lessor) allows another party (the lessee) the right to use the property for a stated period in exchange for a stated payment

Leases are a well-structured and widely used tool for obtaining the use of long-lived assets without tying up the large amounts of capital that would be needed for an outright purchase (U.S. airlines routinely lease anywhere from one-quarter to one-half of their passenger jets)

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2
Q

What type of leases can be used by a firm as a source of long-term financing?

A

A lease can be a purchase-and-financing arrangement (a capital lease) or merely a long-term rental contract (an operating lease). The annual cash outflow is the same, but there is a significantly advantage to the lessee in structuring the lease as an operating lease:

The total liability for the entire term of the lease need NOT be reported as a liability on the balance sheet

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3
Q

What are Convertible securities?

Other source of long-term financing

A

Convertible securities are debt or preferred stock securities that contain a provision allowing the holder to convert the securities into some specified number of common shares after a specified time has elapsed

The conversion feature is an enticement to potential investors that allows the corporation to raise capital at a cost lower than a straight new common equity issue

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4
Q

What are Stock purchase warrants?

Other source of long-term financing

A

A stock purchase warrant is (in effect) a call option on the corporation’s common stock. After a specified time has elapsed, the holder of the warrant can exchange the warrant plus a specified amount of cash for some number of shares of common stock

Attaching warrants to a debtor or preferred stock issue can make the securities more attractive to investors

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5
Q

What is Retained earnings?

Other source of long-term financing

A

Retained earnings is the cumulative accrual-basis income of the corporation minus amounts paid out in cash dividends minus amounts reclassified as additional paid-in capital from stock dividends

Retained earnings are the lowest-cost form of capital (all internally generated, no issue costs)

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