quiz 5 (chpt 10 & 11)

Question 1

Bonds Payable

Answer 1

Bond Contract–> promise btwn 2 parties that you will recieve an amount of money in a certain number of years, plus the intrest that the bond recieves
-Bonds Payable=Long term vs Notes Payable=Short Term

Question 2

Bonds

Answer 2

Issuing bonds is a way for a company to fiance money and get cash right away
-buyer would want to buy a bond bc they are guarenteed to get money back and they will get intrest back on it
-less risky than stocks(bc stocks flucuate)
-can trade bonds before muturity date
-biggest risk for a bond holder is what if business goes under/out of business then bond holders wont get paid back

Question 3

Market Intrest rate

Answer 3

the intrest rate in the market right now!

Question 4

When our intrest rate if lower thann the market intrest rate

Answer 4

-will sell our bonds at a discount
Cash XX
Discount of Bonds Payable XX
Bonds Payable XX

Question 5

when our intrest rate is higher than the market rate

Answer 5

-we will seel the bonds at a premium
Cash XX
Bonds Payable XX
Premium on Bonds Payable XX

Question 6

When intrest rate is the same as the market intrest rate

Answer 6

-sell the bonds at face value/par value
Cash XX
Bonds Payable XX

Question 7

Callable Bonds

Answer 7

can buy back the bonds before mutarity date, you can buy back for less intrest (to save $ for company)
original issue price<original issue price for noncallable bonds (cheaper)

Question 8

Non-callable bonds

Answer 8

Can’t buy back before mutarity date, these bonds are more expensive

Question 9

secure bonds

Answer 9

-Backed up by collatoral (assets that the company has)
-if the company goes bankrupt they will try to sell off assets to repay your bond
-more expensive to buy

Question 10

Unsecure Bonds

Answer 10

-no collatoral attached
-less expensive bc more risky

Question 11

Zero-coupon bond

Answer 11

must sell bonds at discount bc your not providing any intrest on the bond–> you are compensating the buyer at the beginning

Question 12

Convertible bonds

Answer 12

-you can convert your bonds into the companies stocks at the end of the maturity date
-bond holder has the choice to reiceve the money at the end of the maturity date or you can convert the bonds into companies stock

Question 13

Debt Ratio

Answer 13

Debt Ratio= Total Liabilities/Total Assets
-this is your leverage ratio
-represents how much of creditors money your using to run your business
-if high debt ratio means your relying a lot on investors and borrowed money (however its not necessarily bad to use other ppl’s money as not as your not using too much)

Question 14

Time Intrest Earned

Answer 14

Time Intrest Earned =
Income from operation/Intrest Expense
-if this number is >1 this means your business earnings can cover your businesses intrest expense, want this to be high!

Question 15

Debt Financing

Answer 15

-have to pay the money back
-have to pay intrest expense
-not diluting ownership of company
-intrest expense (which is tax deductible)

Question 16

Equity Financing

Answer 16

-Issuing ownership to others by issuing stocks
-decreased ownership
-dont neeed to pay off anything and no intrest to pay off, but sometimes pay back dividends but you dont have to

Question 17

Par value for stocks

Answer 17

-represents the value that your net assets should not fall below, and a compnay should not sell stocks if your assets are below this par value
-provides a little protetiction to original stockholders.

Question 18

Common Stock

Answer 18

represents ownership, voting rights and rights to purchase additional shares (all corportation must isssue some common stock)

Question 19

Preferred Stocks

Answer 19

-usually gives up voting rights in exchange for some other prefrences
-prefence to dividends, most time guaranteed, but limited to a fixed cash dividend
-preferencr as to assets liquidation (get priority over common stock holders in assets liquidation)
-not very popular

Question 20

Treasury Stock

Answer 20

When a company buys back their own stocks
-this could happen when the stock prices are low and they they are undervalued and hope that they can resell them again at a higher price
-may wany more of control/ownership over thier company again
-a company must announce that they are going to buy back their shares ahead of time
-treasury stock is a contra equity account (when doind journal entries)

Question 21

stated value

Answer 21

-No obligation to keep assets above par value

Question 22

Dividends

Answer 22

what stockholders pay their shareholders (they dont have to give out dividends tho)
-they must make a public announcement known as the
a)Date of Declaration where a J/E is required
b)Date of Records: if you want to get piad by dividends then you need to registar and buy copmany stock by this date (a J/E is not required for this)
c) Payment Date –> dividends are given out a J/E is required

Question 23

EPS (Earning per Share)

Answer 23

Earning per Share=
Net Income- Dividends for perferred stocks/
total # of shares of outstanding Common Stock
-A higher EPS means more profit investors are getting (must also depdns on # of shares on demoniator)

Question 24

P/E ratio (Price to Earning Ratio)

Answer 24

P/E Ratio= Market Price/EPS
-higher P/E is more risky to invest in by it also tells you the confidence of a business as a shareholder
P/E ratio represents “for $1 earning how much you’ll have to pay for that stock” or that your will pay (P/E ratio) for $1 of earnings