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1 The Balance Sheet (Continued): Additional Financing – Borrowing From Others CHAPTER F4 © 2007 Pearson Custom Publishing.

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Presentation on theme: "1 The Balance Sheet (Continued): Additional Financing – Borrowing From Others CHAPTER F4 © 2007 Pearson Custom Publishing."— Presentation transcript:

1 1 The Balance Sheet (Continued): Additional Financing – Borrowing From Others CHAPTER F4 © 2007 Pearson Custom Publishing

2 2 Financing Sources Internal Financing Internal Financing Over the long run, successful companies are “financed” by their profits from operations. Over the long run, successful companies are “financed” by their profits from operations. External Financing External Financing Funding from outside sources is often necessary during start-up phase, during times of expansion, and during temporary economic downturns for the business. Funding from outside sources is often necessary during start-up phase, during times of expansion, and during temporary economic downturns for the business. © 2007 Pearson Custom Publishing

3 3 External Financing Sources The two major sources of external financing are: The two major sources of external financing are: (1) Equity Financing: exchanging an ownership interest in the business for funds, such as selling stock by a corporation. (1) Equity Financing: exchanging an ownership interest in the business for funds, such as selling stock by a corporation. (2) Debt Financing: borrowing funds from any of several different sources, no ownership interest is given up. (2) Debt Financing: borrowing funds from any of several different sources, no ownership interest is given up. © 2007 Pearson Custom Publishing

4 4 Length of Financing Term Short-term Financing is needed for day- to-day operations. We will define short- term debt as any financing that must be paid back within five years. Short-term Financing is needed for day- to-day operations. We will define short- term debt as any financing that must be paid back within five years. Long-term Financing is needed to achieve the long-term goals of the business. We will consider it to be long- term debt if repayment is delayed for over five years. Long-term Financing is needed to achieve the long-term goals of the business. We will consider it to be long- term debt if repayment is delayed for over five years.

5 5 Learning Objective 1: Describe how banks earn profits. © 2007 Pearson Custom Publishing

6 6 Borrowing from Financial Institutions When individuals obtain loans for personal uses (cars, etc.), it is known as consumer borrowing. When individuals obtain loans for personal uses (cars, etc.), it is known as consumer borrowing. When a business obtains a loan it is known as commercial borrowing. When a business obtains a loan it is known as commercial borrowing. © 2007 Pearson Custom Publishing

7 7 Borrowing from Financial Institutions Most of the major banks are known as commercial banks because they make a great deal of loans to businesses. Most Credit Unions and Savings and Loans do not make commercial loans. Most of the major banks are known as commercial banks because they make a great deal of loans to businesses. Most Credit Unions and Savings and Loans do not make commercial loans. © 2007 Pearson Custom Publishing

8 8 Interest Interest represents rent paid to use borrowed money (the cost of borrowing). Interest represents rent paid to use borrowed money (the cost of borrowing). Banks make a profit primarily by paying out low rates of interest to customers for their deposits, while charging the customers higher rates of interests on loans. Banks make a profit primarily by paying out low rates of interest to customers for their deposits, while charging the customers higher rates of interests on loans. © 2007 Pearson Custom Publishing

9 9 How Banks Earn Profits Banks charge interest on loans to customers: Banks charge interest on loans to customers: Interest charged($10,000 x 9%)$900 Interest charged($10,000 x 9%)$900 Interest paid ($10,000x 4%) 400 Interest paid ($10,000x 4%) 400 Bank gross profit $500 Bank gross profit $500 Two major complications: Two major complications: 1. Loans may not be paid back (loan default). 1. Loans may not be paid back (loan default). 2. Customers might remove the cash from their deposit accounts. 2. Customers might remove the cash from their deposit accounts. © 2007 Pearson Custom Publishing

10 10 Learning Objective 2: Explain the effects on a company’s balance sheet when funds are borrowed from a bank. © 2007 Pearson Custom Publishing

11 11 Notes Payable Example Assume that Your Company signs a $10,000, 8%, 5-year note payable at the local commercial bank. Interest has to be paid at the end of each year, and the principal amount must be repaid at the end of the term. Assume that Your Company signs a $10,000, 8%, 5-year note payable at the local commercial bank. Interest has to be paid at the end of each year, and the principal amount must be repaid at the end of the term. ASSETS = LIABILITIES + EQUITY ASSETS = LIABILITIES + EQUITY $10,000 = $10,000 + $0 $10,000 = $10,000 + $0 © 2007 Pearson Custom Publishing

12 12 This would be the balance sheet impact at the time of the loan, no interest has yet accrued. Notes Payable Example © 2007 Pearson Custom Publishing

13 13 Learning Objective 3: Distinguish among notes, mortgages, and bonds. © 2007 Pearson Custom Publishing

14 14 Notes Payable A note payable is another name for a loan made between two entities. A note payable is another name for a loan made between two entities. Sometimes, a business may have to offer collateral in order to secure the note. The collateral (specific assets) will be forfeited if the loan goes into default. Sometimes, a business may have to offer collateral in order to secure the note. The collateral (specific assets) will be forfeited if the loan goes into default. A mortgage on real estate (land and/or buildings) is a long-term collateral loan. A mortgage on real estate (land and/or buildings) is a long-term collateral loan. © 2007 Pearson Custom Publishing

15 15 Bonds Payable A bond payable is a type of note payable usually borrowed for a long period of time and sold to investors in the financial markets. A bond payable is a type of note payable usually borrowed for a long period of time and sold to investors in the financial markets. Bonds may have collateral, but many do not. A bond without collateral is a debenture bond. Bonds may have collateral, but many do not. A bond without collateral is a debenture bond. © 2007 Pearson Custom Publishing

16 16 Learning Objective 4: Calculate interest payments for notes and bonds. © 2007 Pearson Custom Publishing

17 17 Calculating Interest Interest on a note payable would be calculated as follows: Interest on a note payable would be calculated as follows: Principal X Rate = Annual Interest Principal X Rate = Annual Interest $10,000 X 8% = $800 $10,000 X 8% = $800 Calculations differ slightly if for < 1 year: Calculations differ slightly if for < 1 year: Principal X Rate X Time = Interest Principal X Rate X Time = Interest $10,000 X 8% X 3/12 = $200 (3 mos.) $10,000 X 8% X 3/12 = $200 (3 mos.) © 2007 Pearson Custom Publishing

18 18 Interest Examples Calculate the monthly interest on a $100,000 loan, paying 9% annual interest. Calculate the monthly interest on a $100,000 loan, paying 9% annual interest. $100,000 X 9% X 1/12 = $750 $100,000 X 9% X 1/12 = $750 Calculate the semi-annual interest on a $1 Million, 7.5% bond. Calculate the semi-annual interest on a $1 Million, 7.5% bond. $1,000,000 X 7.5% X 6/12 = $37,500 $1,000,000 X 7.5% X 6/12 = $37,500 © 2007 Pearson Custom Publishing

19 19 In the example of a $100,000 bank loan, what was the lender’s return on investment. What was their return of investment? In the example of a $100,000 bank loan, what was the lender’s return on investment. What was their return of investment? Why does the local bank pay a higher rate of interest on long-term certificate of deposits (CDs) than they do on shorter-term CDs? Why does the local bank pay a higher rate of interest on long-term certificate of deposits (CDs) than they do on shorter-term CDs? Why does the local bank charge a lower rate of interest on mortgage debt than they do on credit card debt? Why does the local bank charge a lower rate of interest on mortgage debt than they do on credit card debt? Discussion Questions © 2007 Pearson Custom Publishing

20 20 A two-month note issued on January 10 is due on March 10. A two-month note issued on January 10 is due on March 10. A 60-day note issued on January 10 is due on March 11. A 60-day note issued on January 10 is due on March 11. January21 days January21 days February 28 days February 28 days March11 days March11 days 60 days 60 days Computing Due Dates © 2007 Pearson Custom Publishing

21 21 The rate of interest actually earned by a lender The rate of interest actually earned by a lender If P X R = I, then R = I ÷P If P X R = I, then R = I ÷P Discounted notes have higher effective rate than the stated interest rate. Discounted notes have higher effective rate than the stated interest rate. Effective Interest Rate © 2007 Pearson Custom Publishing

22 22 Smith borrows $10,000 at 10% from the bank for a year on a discounted basis. Compute the effective rate. Smith borrows $10,000 at 10% from the bank for a year on a discounted basis. Compute the effective rate. R = I ÷P = $1,000 ÷ $9,000 = 11.11% R = I ÷P = $1,000 ÷ $9,000 = 11.11% What if the note was for only 3 months? What if the note was for only 3 months? R = I ÷P x 12/3 = $250 ÷ $9,750 x 12/3 R = I ÷P x 12/3 = $250 ÷ $9,750 x 12/3 = 10.26% = 10.26% Discounted Notes © 2007 Pearson Custom Publishing

23 23 Learning Objective 5: Explain the functions of underwriters in the process of issuing bonds. © 2007 Pearson Custom Publishing

24 24 Discussion Question Assume that you own a company that has $100 million in total assets and annual sales of $200 million. You decide that you need an additional $20 million to undertake an ambitious expansion program. Assume that you own a company that has $100 million in total assets and annual sales of $200 million. You decide that you need an additional $20 million to undertake an ambitious expansion program. Do you think that the local commercial bank would have the ability to loan you that amount of money? Do you think that the local commercial bank would have the ability to loan you that amount of money? © 2007 Pearson Custom Publishing

25 25 The Role of Underwriters When the amount of a bond issue is very large, a group of underwriters will form a syndicate to sell the large bond issue. When the amount of a bond issue is very large, a group of underwriters will form a syndicate to sell the large bond issue. Underwriters are intermediary investment bankers who buy the issues and sell them to interested investors. Underwriters are intermediary investment bankers who buy the issues and sell them to interested investors. Underwriters make money by charging about one percent of the issue price. Underwriters make money by charging about one percent of the issue price. © 2007 Pearson Custom Publishing

26 26 Learning Objective 6: Describe the effect of market interest rates on bond selling prices. © 2007 Pearson Custom Publishing

27 27 Bonds Corporate bonds are a form of interest- bearing long-term debt that a corporation could use to borrow large amounts of funds. Corporate bonds are a form of interest- bearing long-term debt that a corporation could use to borrow large amounts of funds. Borrowing through notes payable is usually limited because most commercial banks cannot make extremely large loans for a very long period of time. Borrowing through notes payable is usually limited because most commercial banks cannot make extremely large loans for a very long period of time. © 2007 Pearson Custom Publishing

28 28 Bond Terminology The bond indenture is a legal document that specifies all of the details of the bond issuance. The bond indenture is a legal document that specifies all of the details of the bond issuance. The par value (also called face value) is the stated amount that the corporation will pay back to the bondholder at the end of the term. Most corporate bonds have a par value of $1,000. The par value (also called face value) is the stated amount that the corporation will pay back to the bondholder at the end of the term. Most corporate bonds have a par value of $1,000. © 2007 Pearson Custom Publishing

29 29 Bond Terminology The selling price (also called issue price or market price) of the bonds is usually stated as a percentage of the bond par value. The selling price (also called issue price or market price) of the bonds is usually stated as a percentage of the bond par value. For example: if a bond price is quoted at “95,” that means it is selling at 95% of face value, or $950. For example: if a bond price is quoted at “95,” that means it is selling at 95% of face value, or $950. © 2007 Pearson Custom Publishing

30 30 Bond Terminology The bond indenture will specify a nominal interest rate (also called the contract rate, coupon rate, or stated rate). The nominal rate is multiplied by the bond par value to determine the interest payments made to the bondholders. The bond indenture will specify a nominal interest rate (also called the contract rate, coupon rate, or stated rate). The nominal rate is multiplied by the bond par value to determine the interest payments made to the bondholders. © 2007 Pearson Custom Publishing

31 31 Bond Interest Example Interest Example: A $1,000 twenty- year bond has a stated interest rate of 8%, interest payable semiannually. Interest Example: A $1,000 twenty- year bond has a stated interest rate of 8%, interest payable semiannually. Every six months for twenty years, the bondholder will receive interest equal to Every six months for twenty years, the bondholder will receive interest equal to $1,000 X 8% X 6/12 = $40 © 2007 Pearson Custom Publishing

32 32 Bond Terminology Whereas the nominal interest rate does not change over the life of the bonds, the effective interest rate for any given bond issue can fluctuate on a daily basis. Whereas the nominal interest rate does not change over the life of the bonds, the effective interest rate for any given bond issue can fluctuate on a daily basis. The effective rate is also called market rate or yield rate of interest. The effective rate is also called market rate or yield rate of interest. © 2007 Pearson Custom Publishing

33 33 Bond Terminology The effective interest rate is determined by the bond market. If the bond price goes up, the effective interest rate goes down, and vice versa. The effective interest rate is determined by the bond market. If the bond price goes up, the effective interest rate goes down, and vice versa. However, once you buy a bond, you have “locked-in” that effective rate of interest for as long as you hold the bond. However, once you buy a bond, you have “locked-in” that effective rate of interest for as long as you hold the bond. © 2007 Pearson Custom Publishing

34 34 Issuing Bonds at Par Your Company so far has $20,000 cash to get started with. You feel that you need about $20,000 more and decide to issue ten-year, 8% bonds. Let’s assume that the bond market feels that 8% is an appropriate rate for the level of risk associated with your corporate bonds, and the 20 bonds are issued at par, or $1,000 each. Your Company so far has $20,000 cash to get started with. You feel that you need about $20,000 more and decide to issue ten-year, 8% bonds. Let’s assume that the bond market feels that 8% is an appropriate rate for the level of risk associated with your corporate bonds, and the 20 bonds are issued at par, or $1,000 each. NOTE: Brand new companies rarely issue bonds and when bonds are issued, they are usually used to acquire millions of dollars in financing, not thousands. NOTE: Brand new companies rarely issue bonds and when bonds are issued, they are usually used to acquire millions of dollars in financing, not thousands. © 2007 Pearson Custom Publishing

35 35 ASSETS = LIABILITIES + EQUITY ASSETS = LIABILITIES + EQUITY $20,000 = $20,000 + $0 $20,000 = $20,000 + $0 Issuing Bonds at Par © 2007 Pearson Custom Publishing

36 36 ASSETS = LIABILITIES + EQUITY ASSETS = LIABILITIES + EQUITY $20,000 = $20,000 + $0 $20,000 = $20,000 + $0 Issuing Bonds at Par © 2007 Pearson Custom Publishing

37 37 Notice that on the balance sheet, Your Company now has two liabilities: (1) the note payable to the bank for $10,000, and (2) the bonds payable of $20,000. Notice that on the balance sheet, Your Company now has two liabilities: (1) the note payable to the bank for $10,000, and (2) the bonds payable of $20,000. Only the principal amounts show up as liabilities at this time. Interest is only starting to accrue on these debts, so there is no interest liability to be recorded yet. Only the principal amounts show up as liabilities at this time. Interest is only starting to accrue on these debts, so there is no interest liability to be recorded yet. Issuing Bonds at Par © 2007 Pearson Custom Publishing

38 38 Discounts and Premiums Bond prices are influenced by many things. A bond might sell for par value as previously illustrated, but they usually sell at a discount or for a premium. Bond prices are influenced by many things. A bond might sell for par value as previously illustrated, but they usually sell at a discount or for a premium. If a bond sells for less than par value, it is being sold at a discount. If a bond sells for more than par value, it is being sold for a premium. If a bond sells for less than par value, it is being sold at a discount. If a bond sells for more than par value, it is being sold for a premium. © 2007 Pearson Custom Publishing

39 39 Learning Objective 7: Contrast the operations of the primary and secondary bond markets. © 2007 Pearson Custom Publishing

40 40 Primary Bond Market Investment bankers and banking syndicates typically act as underwriters and handle the initial issuance of bonds by a corporation. The underwriters will buy all of the new bonds from a company, then resell them to investors at a higher price. Investment bankers and banking syndicates typically act as underwriters and handle the initial issuance of bonds by a corporation. The underwriters will buy all of the new bonds from a company, then resell them to investors at a higher price. © 2007 Pearson Custom Publishing

41 41 Primary Bond Market The underwriters also help prepare the prospectus for the bonds. The prospectus provides details about the bonds and about the company issuing them. The underwriters also help prepare the prospectus for the bonds. The prospectus provides details about the bonds and about the company issuing them. In the prospectus you learn about the overall condition of the company, their future prospects (very speculative), and other information that is helpful for deciding whether you want to invest in the bonds. In the prospectus you learn about the overall condition of the company, their future prospects (very speculative), and other information that is helpful for deciding whether you want to invest in the bonds. © 2007 Pearson Custom Publishing

42 42 Once bonds have been issued by a corporation, those bonds can be freely bought and sold in the secondary bond market. The issuing corporation is basically unaffected by these subsequent sales between investors. Once bonds have been issued by a corporation, those bonds can be freely bought and sold in the secondary bond market. The issuing corporation is basically unaffected by these subsequent sales between investors. After the initial issuance, the company’s involvement is limited to paying interest on the due dates and paying off the principal at the end of the bond term. After the initial issuance, the company’s involvement is limited to paying interest on the due dates and paying off the principal at the end of the bond term. Secondary Bond Market © 2007 Pearson Custom Publishing

43 43 Reading the Bonds Listings Bonds Cur Yld.Vol.Close Net Chg. ATT 5.125s095.219499.38-0.5 ATT 7.125s126.9600104.3-0.25 ATT 8.125s227.6328107.3-0.75 BurNo 3.2s456.42550-2.5 NoPac 3s476.9143.38--- Motrla zr13…12290+6 HewlPkd zr17…4056.5--- HomeDpt 3.25s20cv10264-10.25 © 2007 Pearson Custom Publishing

44 44 Three different AT&T bond issues are shown. The first number listed is the nominal interest rate; 5.125%, 7.125%, 8.125%. Three different AT&T bond issues are shown. The first number listed is the nominal interest rate; 5.125%, 7.125%, 8.125%. The next number is a two-digit designation of the year that the bonds mature; 2009, 2012, 2022. (NOTE: The “s” is simply a separator between the interest rate and the date.) The next number is a two-digit designation of the year that the bonds mature; 2009, 2012, 2022. (NOTE: The “s” is simply a separator between the interest rate and the date.) Reading the Bonds Listings © 2007 Pearson Custom Publishing

45 45 The “Cur Yld.” is the effective interest rate (or current yield rate). The “Cur Yld.” is the effective interest rate (or current yield rate). The “Vol.” column shows the number of $1,000 bonds sold the previous day. The “Vol.” column shows the number of $1,000 bonds sold the previous day. “Close” shows the final selling price of the day, expressed as a % of par value, such as 99.375% of $1,000 par value. “Close” shows the final selling price of the day, expressed as a % of par value, such as 99.375% of $1,000 par value. Reading the Bonds Listings © 2007 Pearson Custom Publishing

46 46 The BurNo bonds sell for $500 (50% of $1,000). This discount is needed because the bonds have a stated interest rate of 3.2%, but bond investors want a rate of 6.4% on bonds at this level of risk. Are the NoPac bonds more risky or less? The BurNo bonds sell for $500 (50% of $1,000). This discount is needed because the bonds have a stated interest rate of 3.2%, but bond investors want a rate of 6.4% on bonds at this level of risk. Are the NoPac bonds more risky or less? Why would BurNo and NoPac issue bonds that pay such a low rate of interest? Why would BurNo and NoPac issue bonds that pay such a low rate of interest? Reading the Bonds Listings © 2007 Pearson Custom Publishing

47 47 The Motrla and HewlPkd bonds are zero coupon bonds, meaning that no interest payments are made, just the face value is repaid at the end of the term. The Motrla and HewlPkd bonds are zero coupon bonds, meaning that no interest payments are made, just the face value is repaid at the end of the term. Buy a HewlPkd bond for $565 and you will get back $1,000 when they mature in 2017 (hopefully!). Buy a HewlPkd bond for $565 and you will get back $1,000 when they mature in 2017 (hopefully!). Reading the Bonds Listings © 2007 Pearson Custom Publishing

48 48 The HomeDpt bonds are convertible bonds, which means they can be exchanged for (converted into) company stock. The HomeDpt bonds are convertible bonds, which means they can be exchanged for (converted into) company stock. It should be obvious by now that an investor would not pay $2,640 to buy a $1,000 bond that only pays 3.25% interest. The investor is actually buying the “right” to convert that bond into a specified number of common shares of HomeDpt stock. It should be obvious by now that an investor would not pay $2,640 to buy a $1,000 bond that only pays 3.25% interest. The investor is actually buying the “right” to convert that bond into a specified number of common shares of HomeDpt stock. Reading the Bonds Listings © 2007 Pearson Custom Publishing

49 49 Think about the effects of premiums on the effective interest rate. What annual effective interest rate is an investor earning on a $1,000 bond that pays 12.5% interest if she pays 105 to buy it? Think about the effects of premiums on the effective interest rate. What annual effective interest rate is an investor earning on a $1,000 bond that pays 12.5% interest if she pays 105 to buy it? Discussion Question © 2007 Pearson Custom Publishing

50 50 Learning Objective 8: Compare and contrast two investment alternatives— equity investment and debt investment. © 2007 Pearson Custom Publishing

51 51 Comparing Debt with Equity - Investments On pages F-112 through F-116, there is a thorough example of the choices that an investor would face if choosing between an equity investment (buying stock) and a debt investment (buying bonds). On pages F-112 through F-116, there is a thorough example of the choices that an investor would face if choosing between an equity investment (buying stock) and a debt investment (buying bonds). The focus is on the three questions: (1) Will I be paid? (2) When will I be paid? (3) How much will I be paid? The focus is on the three questions: (1) Will I be paid? (2) When will I be paid? (3) How much will I be paid? © 2007 Pearson Custom Publishing

52 52 Comparing Debt with Equity - Financing Let’s shift the focus away from someone who is planning to buy the stocks or bonds, to a company that is in need of additional financing and has to choose whether to issue stock (equity) or bonds (debt). Let’s shift the focus away from someone who is planning to buy the stocks or bonds, to a company that is in need of additional financing and has to choose whether to issue stock (equity) or bonds (debt). Let’s assume that the company wants to acquire approximately $20,000,000 cash, and their balance sheet looks like this prior to acquiring the additional financing: Let’s assume that the company wants to acquire approximately $20,000,000 cash, and their balance sheet looks like this prior to acquiring the additional financing: © 2007 Pearson Custom Publishing

53 53 Before Additional Financing Assume Mega wants the extra $20 million for expansion purposes. © 2007 Pearson Custom Publishing

54 54 With Debt Financing Notice that $20 million has been added to both cash and bonds payable. © 2007 Pearson Custom Publishing

55 55 With Equity Financing Notice that $20 million has been added to both cash and common stock. © 2007 Pearson Custom Publishing

56 56 Debt or Equity? Prior to obtaining the extra $20 million, Mega Corporation had equal amounts of debt and equity financing. Prior to obtaining the extra $20 million, Mega Corporation had equal amounts of debt and equity financing. This question boils down to the choices of having the $20 million show up in the debt section of the balance sheet or in the equity section. This question boils down to the choices of having the $20 million show up in the debt section of the balance sheet or in the equity section. © 2007 Pearson Custom Publishing

57 57 Debt or Equity? If Mega issues bonds, their debt would now be twice as large as the equity. Interest payments would be required by law, and the $20 million principal would have to be repaid at the end of the term. If Mega issues bonds, their debt would now be twice as large as the equity. Interest payments would be required by law, and the $20 million principal would have to be repaid at the end of the term. Interest on the bonds would be a tax deductible expense for Mega, thereby reducing the true cost of the interest. Interest on the bonds would be a tax deductible expense for Mega, thereby reducing the true cost of the interest. © 2007 Pearson Custom Publishing

58 58 Debt or Equity? If Mega issues stock, they will have no required fixed payments to make. Dividends could be paid to the shareholders, but they need not be. Mega is under no obligation to return the $20 million to the investors. If Mega issues stock, they will have no required fixed payments to make. Dividends could be paid to the shareholders, but they need not be. Mega is under no obligation to return the $20 million to the investors. However, by issuing stock, there is a potential dilution of the ownership interests currently held by stockholders. In other words, the pie is now sliced into many more pieces. However, by issuing stock, there is a potential dilution of the ownership interests currently held by stockholders. In other words, the pie is now sliced into many more pieces. © 2007 Pearson Custom Publishing

59 59 Which is Better? There is no definitive answer to this question, just as there was no definitive answer to the question in the text about which type of investment is better. There is no definitive answer to this question, just as there was no definitive answer to the question in the text about which type of investment is better. So much rides on the success or failure of the company’s future operations. If they are very successful, they should be able to easily repay the debt. However, if equity financing was used and they again are successful, then stockholders would likely benefit more than if debt financing was used. So much rides on the success or failure of the company’s future operations. If they are very successful, they should be able to easily repay the debt. However, if equity financing was used and they again are successful, then stockholders would likely benefit more than if debt financing was used. © 2007 Pearson Custom Publishing

60 60 Can you think of an alternative way for Mega Corp. to raise the $20 million they need? Can you think of an alternative way for Mega Corp. to raise the $20 million they need? What would be the effect of issuing preferred stock? Where does it show up on their balance sheet? Are they obligated to make annual payments? Are they obligated to pay it back someday? What would be the effect of issuing preferred stock? Where does it show up on their balance sheet? Are they obligated to make annual payments? Are they obligated to pay it back someday? Discussion Questions © 2007 Pearson Custom Publishing

61 61 End of Chapter 4 © 2007 Pearson Custom Publishing


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