Source of Capital: Debt and Owner's Equity

Question 1

Current Liabilities = ?

Answer 1

Operating Liabilities + Short Term Debt

Question 2

Debt Ratio = ?

Answer 2

Total Liabilities / Stakeholders’ equity
OR
Long Term Liabilities / Stakeholders’ equity

Question 3

What does the debt ratio show?

Answer 3

It shows how managers decided to balance risk and cost of capital

Question 4

Coverage Ratio = ?

Answer 4

Earnings Before Interests and Taxes / Financial Interests

Question 5

What is the rating?

Answer 5

It is an indicator that tells the risky class which a firm belongs to

Question 6

What are long term debts used to?

Answer 6

They are used to finance the purchase of fixed assets

Question 7

Which are the most used types of long term debt?

Answer 7

Loans and Bonds

Question 8

How is a Loan repaid?

Answer 8

It is repaid according to a several years plan with costant import payments

Question 9

How is a Bond repaid?

Answer 9

It is given back at the expiry date of the bond. Every year interests are paid according to an established and costant gain through the coupon of the bond. Its price is a percentage of the par value

Question 10

Price of Bond = ?

Answer 10

Par value * (Prize/100)
The par value it’s what is given back by the company, the price is the price at which it is bought, wether the prize is a percentage of the par value

Question 11

Make examples of Owners’equity

Answer 11

Shareholders’equity and Capital in excess of par value (that is the capital paid by investors in excess of the capital used for bonds)

Question 12

How are preferred stocks divided?

Answer 12

They are divided into cumulative preferred stocks and non cumulative preferred stocks

Question 13

What is the difference between preferred stocks and common stocks?

Answer 13

Preferred stocks have privileged rights on the company’s assets and are paid before common stocks dividend. Common stocks are attractive though if the fim is prosperous and no issue on distributing dividends occurs, for this reason they are riskier.

Question 14

Wha are treasury stocks?

Answer 14

They are stocks that are reacquired by the company, resulting in a lower share capital, meaning it’ll have to distribute less dividends to outside investors.

Question 15

What are treasury stocks usually used for?

Answer 15

They are usually distirbuted as bonus for executives or to widespread ownership among employees

Question 16

What is said to use a firm with high percentage of financial debt to stakeholders’ equity?

Answer 16

It is said to use the financial leverage

Question 17

What does the debt ratio indicate?

Answer 17

It indicates the risks linked to repaying creditors and the cost of equity