Liabilities Defined and ClassifiedLiabilities are dt th imeasured at their present value at the time incurred. This is the amount a creditor wouldSlide 5Chapter Tena creditor would accept to cancel the debt.Understanding the BusinessThe mixture of debt and equity used to finance a company’s operations is ll d thit lttcalled the capital structure:Slide 6Chapter TenDebt - funds from creditorsEquity - funds from shareholders
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Characteristics of Bonds PayableAdvantages of bonds:•Stockholders maintain control because debt holders can not Disadvantages of bonds:`Risk of bankruptcy increases because the interest and vote.•Interest expense is tax deductible. (Tax shield of interest expense)•The impact on earnings is positive because money can often be borrowed at a low interest rate and invested to principal must be paid back as scheduled or creditors will force legal action.Slide 7Chapter Tenearn a higher return. (increase ROE)Characteristics of Bonds PayableFace Value $1,000Coupon 10%Jun 30 & Dec 311. Face Value (Maturity or Par Value, Principal)BOND PAYABLEMaturity Date 1/1/19Bond Date 1/1/09Slide 8Chapter Ten2. Bond Date3. Maturity Date (Principal Repayment Date)4. Stated Interest Rate (Coupon Rate)5. Interest Payment DatesOther factor:6. Market Interest Rate(Yield, Effective Interest Rate, or Discount Rate)