ACCT 201: Chapter 9

Funds coming from those outside of the company are sources of ____

External financing

If interest rates decline, the borrower can buy back the high-interest-rate bonds at a(n) ____ and issue new bonds at the new, lower interest rate

Fixed price

____ use equity financing to a greater extent to finance their asset growth

High-tech companies

Using ____, we separate the issue price of convertible debt into its liability (bonds) and equity (conversion option) components

IFRS

Each ____ includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance

Installment payment

Recording a journal entry for a note's first two monthly payments includes a debit to ____ and a credit to ____ to each month

Interest Expense & Notes Payable, Cash

Profits generated by the company are a source of ____

Internal financing

For most large corporations, bonds are sold, or underwritten, by ____

Investment houses

The three largest bond underwriters are ____

JPMorgan Chase, Citigroup, and Bank of America

A(n) ____ is a contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time

Lease

____ has grown to be the most popular method of external financing of corporate assets in America

Leasing

____ enables a company to earn a higher return using debt than without debt

Leverage

____ is one of the first places decision makers look when trying to get a handle on risk

Long-term debt

The higher a company's earnings relative to its interest expense, the more likely it will be able to ____

Make current and future interest payments

The times interest earned ratio measures a company's ability to ____

Meet interest payments as they become due

The formula for Times interest earned ratio equals ____

Net income + Interest expense + Tax expense/ Interest expense

Bonds are very similar to ____

Notes

____ are contracts in which the lessor owns the asset and the lessee uses the asset temporarily

Operating leases

To keep costs down, the issuing company may choose to sell the debt securities directly to a single investor, such as a large investment fund or an insurance company. This is referred to as a ____

Private placement

____ bonds are backed by collateral

Secured

A(n) ____ is a bond issue matures in installments

Serial

A(n) ____ is an investment fund to which an organization makes payments each year over the life of its outstanding debt

Sinking fund

Interest expense incurred when borrowing money is ____

Tax-deductible

Why would a company choose to borrow money rather than issue additional stock in the company? One main reason is ____

Taxes

A(n) ____ is bond issue matures on a single date

Term

____ provides an indication to creditors of how many "times" greater earnings are than interest expense

Times interest earned ratio

The formula for debt to equity ratio equals ____

Total liabilities/ Stockholder's equity

Traditionally, interest on bonds is paid ____ on designated interest dates, beginning six months after the original bond issue date

Twice a year (semiannually)

Under ____, the entire issue price of convertible debt is recorded as a liability

U.S. GAAP

____ bonds are not backed by collateral

Unsecured (Debentures)

Most bonds are ____ and ____ and ____ bonds

Unsecured, term, callable

____ refers to borrowing money from creditors (liabilities)

Debt financing

To measure a company's risk, we often calculate the ____

Debt to equity ratio

Callable bonds protect the borrower against future ____

Decreases in interest rates

____ are not tax-deductible

Dividends paid to stockholders

____ refers to obtaining investment from stockholders (stockholders' equity)

Equity financing

Why Do Many Companies Lease Rather Than Buy?

1. Leasing improves cash flows through up to 100% financing 2. Leasing improves the balance sheet by reducing long-term debt 3. Leasing can lower income taxes

Companies have three primary sources of long-term debt financing:

1. Notes 2. Leases 3. Bonds

For accounting purposes, we have two basic types of leases:

1. Operating leases 2. Capital leases

A(n) ____ provides a summary of the cash paid, interest expense, and decrease in carrying value for each monthly payment

Amortization schedule

____ typically use debt financing to a greater extent for their financing

Amusement parks

For smaller loans it's best to borrow money through a ____ rather than ____

Bank, bond

Why do most companies prefer operating leases?

Because the ratio of total liabilities to stockholders' equity is lower, making the company appear less risky to investors and lenders from the standpoint of potential bankruptcy

A(n) ____ is a formal debt instrument that obligates the borrower to repay a stated amount, referred to as the principal or face amount, at a specified maturity date

Bond

Callable bonds benefit the ____

Borrower

Convertible bonds benefit ____

Both the borrower and the lender

A(n) ____ is borrower can pay off bonds early

Callable

____ occur when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset

Capital leases

The mixture of liabilities and stockholders' equity a business uses is called its ____

Capital structure

A(n) ____ means lender can convert bonds to common stock

Convertible