- Debt financing: borrowing money from creditors (liabilities). Equity financing: obtaining money from stockholders
The mixture of liabilities and stockholders’ equity a business uses is called its capital structure.
Interest expenses incurred when borrowing money is tax-deductible, whereas dividends paid to stockholders are not tax-deductible
Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance.
An amortization schedule provides a table format detailing the cash payment each period, the portions of each cash payment that represent interest and
the change in carrying value.
- Lease: is a contractual agreement by which the lessor provides the lessee the right to use an asset for specified period of time. Why leasing better than
buy:
1. Reduces the upfront cash needed to use an asset
2. Lease payments often are lower than installment payments
3. Leasing offers flexibility and lower costs when disposing of an asset
4. Leasing may offer protection against the risk of declining asset value
- Bond: is a formal debt instrument issued by a company to borrow money. The company must pay back a
stated amount (face amount) at a specific maturity date and periodic interest payments over the life of the
bond. Traditionally, interest on bond is paid twice a year, beginning 6 months after the issue date. Private Placement refers to selling the bonds to a
single investor to reduce costs. “Backed by collateral”, are supported on specific assets (aval en español)
The market interest rate is not specified in the bind contract, while
the stated interest rate is included
and is the one to be paid. Default
risk refers to the possibility that a
company will be unable to pay the
bond’s face amount. Higher risk,
higher return.
When issuing bonds with a discount, the discount account is a contra-liability, which is deducted from bonds payable.
Interest expense is not base on the stated rate but in the market rate (effective-interest method). When bond sells at
discount, interest expense will be more that the real cash paid for interest. That discount must be summed to the bond’s carrying
value for the second semmianuel payment.
When interest rate stated is bigger than market rate, the bonds will be issued at premium. The balance of Premium is added to Bonds
Payable. However, only the initial bonds payable amount must be paid, so the carrying value will be decreasing over the life of the
bond.
Regardless of whether bonds are issued at face amount, their carrying value at maturity will equal their face amount
Debt to equity: Measure a company’s risk. Higher debt ratio, higher risk. Return on Assets: amount of income generated for each dollar of assets. Times interest earned ratio: how many times greater earnings are than interest
expense. The higher a company’s earnings relative to its interest expense, the more likely it will able to make current and future interest payments.
CHAPTER 10
Paid-in capital is the amount stockholders have invested in the company. Retained earnings is the amount of earnings the company has kept or retained (not distributed in dividends). Treasury stock is a company’s own issued stock th
it has repurchased.
Invested capital is the amount of money paid into a company by its owners. Angel investors are wealthy individuals willing to invest on a promising business venture.
Venture capital firms provide additional financing for a percentage ownership in the company. The first time a corporation issues stock to its public is called an initial
public offering (IPO).
Stockholders are the owners of the corporation have certain rights: right to vote, receive dividends, and share in the distribution of assets if the company is dissolved
Advantages of a corporation: Limited liability and Ability to raise capital and transfer ownership. Disadvantages: additional taxes (double taxation) and more paperwork.
- Par value: is the legal capital per share of stock that’s assigned when the corporation is first established. It has no relationship to the market value. Non-par value stock
is common stock that has not been established a par value (a stated value can be assigned by the corporation, which is treated in the same manner as par value)
- Additional paid-in capital: is the amount paid for stock over par value.
- Preferred stock is preferred over common stock in two ways:
1. Preferred stockholders usually have first rights to a specified amount
of dividends
2. Preferred stockholders have preference in the distribution of assets
if corporation is dissolved.
- Treasury stock: is the name given to a company’s
own issued stock that it has purchased. Reasons to
purchase their stock:
1. Boost underpriced stock: decreasing supply of
stock in market.
2. Distribute surplus cash without dividends
3. Boost earnings per share
4. Satisfy employee stock ownership plans.
Retained earnings= Net income – dividends
Declaration date: date of announcement of the
next dividend to be paid.
Record date: company checks its stockholders. Payment date: actual distribution
When a corporation distribute shares of their own stock. These can be stock dividends or stock splits (giving the
number of amount each stockholder owns, if I own 100 shares I receive 100). Total assets, liabilities and equity do
not change as a result of a stock dividend.
- Return on Equity:
measures the ability to
generate earnings from
the resources that owners provide.
- Dividend yield: refers to how much a company pays out in
dividends relative to its share price.
- Earnings per share: measures the net income per share of
common stock. Is useful in comparing earnings performance for th
same company over time. - Price-earnings ratio: indicates how th
stock is trading relative to current earnings. -Growth stocks: are
those whose future earnings investors expect to be higher. -Valu
stocks: are those priced low in relation to current earnings.
The mixture of liabilities and stockholders’ equity a business uses is called its capital structure.
Interest expenses incurred when borrowing money is tax-deductible, whereas dividends paid to stockholders are not tax-deductible
Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance.
An amortization schedule provides a table format detailing the cash payment each period, the portions of each cash payment that represent interest and
the change in carrying value.
- Lease: is a contractual agreement by which the lessor provides the lessee the right to use an asset for specified period of time. Why leasing better than
buy:
1. Reduces the upfront cash needed to use an asset
2. Lease payments often are lower than installment payments
3. Leasing offers flexibility and lower costs when disposing of an asset
4. Leasing may offer protection against the risk of declining asset value
- Bond: is a formal debt instrument issued by a company to borrow money. The company must pay back a
stated amount (face amount) at a specific maturity date and periodic interest payments over the life of the
bond. Traditionally, interest on bond is paid twice a year, beginning 6 months after the issue date. Private Placement refers to selling the bonds to a
single investor to reduce costs. “Backed by collateral”, are supported on specific assets (aval en español)
The market interest rate is not specified in the bind contract, while
the stated interest rate is included
and is the one to be paid. Default
risk refers to the possibility that a
company will be unable to pay the
bond’s face amount. Higher risk,
higher return.
When issuing bonds with a discount, the discount account is a contra-liability, which is deducted from bonds payable.
Interest expense is not base on the stated rate but in the market rate (effective-interest method). When bond sells at
discount, interest expense will be more that the real cash paid for interest. That discount must be summed to the bond’s carrying
value for the second semmianuel payment.
When interest rate stated is bigger than market rate, the bonds will be issued at premium. The balance of Premium is added to Bonds
Payable. However, only the initial bonds payable amount must be paid, so the carrying value will be decreasing over the life of the
bond.
Regardless of whether bonds are issued at face amount, their carrying value at maturity will equal their face amount
Debt to equity: Measure a company’s risk. Higher debt ratio, higher risk. Return on Assets: amount of income generated for each dollar of assets. Times interest earned ratio: how many times greater earnings are than interest
expense. The higher a company’s earnings relative to its interest expense, the more likely it will able to make current and future interest payments.
CHAPTER 10
Paid-in capital is the amount stockholders have invested in the company. Retained earnings is the amount of earnings the company has kept or retained (not distributed in dividends). Treasury stock is a company’s own issued stock th
it has repurchased.
Invested capital is the amount of money paid into a company by its owners. Angel investors are wealthy individuals willing to invest on a promising business venture.
Venture capital firms provide additional financing for a percentage ownership in the company. The first time a corporation issues stock to its public is called an initial
public offering (IPO).
Stockholders are the owners of the corporation have certain rights: right to vote, receive dividends, and share in the distribution of assets if the company is dissolved
Advantages of a corporation: Limited liability and Ability to raise capital and transfer ownership. Disadvantages: additional taxes (double taxation) and more paperwork.
- Par value: is the legal capital per share of stock that’s assigned when the corporation is first established. It has no relationship to the market value. Non-par value stock
is common stock that has not been established a par value (a stated value can be assigned by the corporation, which is treated in the same manner as par value)
- Additional paid-in capital: is the amount paid for stock over par value.
- Preferred stock is preferred over common stock in two ways:
1. Preferred stockholders usually have first rights to a specified amount
of dividends
2. Preferred stockholders have preference in the distribution of assets
if corporation is dissolved.
- Treasury stock: is the name given to a company’s
own issued stock that it has purchased. Reasons to
purchase their stock:
1. Boost underpriced stock: decreasing supply of
stock in market.
2. Distribute surplus cash without dividends
3. Boost earnings per share
4. Satisfy employee stock ownership plans.
Retained earnings= Net income – dividends
Declaration date: date of announcement of the
next dividend to be paid.
Record date: company checks its stockholders. Payment date: actual distribution
When a corporation distribute shares of their own stock. These can be stock dividends or stock splits (giving the
number of amount each stockholder owns, if I own 100 shares I receive 100). Total assets, liabilities and equity do
not change as a result of a stock dividend.
- Return on Equity:
measures the ability to
generate earnings from
the resources that owners provide.
- Dividend yield: refers to how much a company pays out in
dividends relative to its share price.
- Earnings per share: measures the net income per share of
common stock. Is useful in comparing earnings performance for th
same company over time. - Price-earnings ratio: indicates how th
stock is trading relative to current earnings. -Growth stocks: are
those whose future earnings investors expect to be higher. -Valu
stocks: are those priced low in relation to current earnings.
