Lesson 9: Debt and Equity Financing

A balance sheet classification of a company's probable future obligations maturing beyond its next year of operations.

Long-term liabilities

A supplemental form of ownership used in some corporations in addition to common stock. Typically have no voting rights, but do have a limited priority right over common stockholders to declared dividends and any distributions at dissolution. May be called Equity Bonds

Preferred stock

Any of a company's common or preferred shares currently held by owners. Differs from issued shares due to "treasury stock."

Outstanding stock

Amount paid by investors for a shares that is above the stated share value.

Paid in capital in excess of par

Nominal per share amount. For common shares this is virtually irrelevant. For preferred shares it is important as it is often the basis for calculation of preferred dividends.

Par value

Obligations to pay cash in the future.

Payables

Trading below par or stated value. Stated interest rate is below current market interest rate.

Bond Discount

Trading above par or stated value. Stated interest rate is above current market interest rate.

Bond Premium

A written contract with legal terms of a bond.

Bond indenture

Borrowing of cash from the public or other creditors with MANY potential creditors vs one as in a Note.

Bonds

Actual amount received at the time of issuance is more than (premium) or less than (discount) the face value.

Bonds issued at a premium or discount

Actual amount received at the time of issuance is equal to the stated value or "par value" indicated in the indenture.

Bonds issued at face value

The recipient of a loan. , meaning the recipient of cash or other assets from a lender which must be repaid in the future, usually with interest. A borrower might also be referred to as a "debtor."

Borrower

Capital contributions made by owners of a corporation in exchange for shares of common stock and preferred stock, including amounts contributed at par value and any paid in capital in excess of par.

Capital stock/contributions

Assets pledged as security for a loan in case of default.

Collateral

Basic form of ownership for corporations. Includes right to vote in certain corporate matters and the right to participate equally per share in any dividends and distributions in the event of dissolution.

Common stock

Type of share/stock providing carryover rights on any unpaid dividends (i.e. priority claims when dividends are declared equal to all prior unpaid stated dividends

Cumulative preferred stock

Borrowing or the incurring of liabilities to obtain assets/resources.

Debt financing

Any act of non-compliance with the terms of a note payable or any other obligation or legal contract.

Default

Taxable income and GAAP income are different due to temporary and permanent differences. Temporary differences result in tax expenses recorded for GAAP that will result in a Balance Sheet offset to balance the accounting.

Deferred Income Taxes

Specified benefits to employees in retirement. GAAP requires complicated actuarial calculations. Before rule 60% of Fortune 500 companies offered this as a benefit. Now, less than 15% do.

Defined Benefit Pension Plans

A designated amount to a fund separately owned and operated on behalf of employees. 401(k), 403(b) are primary type. Often stated as a % of earned wages or matched amount compared to employee amounts.

Defined Contribution Pension Plans

Board resolution stating payment to its stockholders as of a specified "date of record." Stated as a per share amount.

Dividend declaration

A company's distribution of current or previous profits to its owners.

Dividends

The amount of any unpaid preferential rights to per share payments declared.

Dividends in arrears

The required accounting approach when a company acquires significant influence over the affairs of another company.

Equity Method of Accounting

The acquiring of assets or resources for a business through either owners' capital contributions or retained earnings.

Equity financing

The forced sale of an asset(s) intended to generate cash in full or partial payoff of a loan. Typically takes place when a borrower is in default on a loan secured with collateral.

Foreclosure

An adjusting journal entry made as a result of changes in monetary exchange rates affecting the valuation of a company's investment in foreign subsidiaries.

Foreign currency translation adjustment

Loan requiring equal monthly payments in an amount sufficient to pay the entire amount of principal and interest due over the term of the loan (usually 15 or 30 years).

Fully amortizing mortgage

When the value of the asset has declined below the recorded book value.

Impairment

The price charged by providers of debt financing, or in other words, the cost incurred in the borrowing of assets.

Interest

A phrase referring to ownership rights in a company.

Interests in a company

Number of common or preferred shares that have been given to owners in exchange for capital contributed or services provided to a corporation and includes re-purchased or treasury shares.

Issued stock

Payment to shareholders made by issuing more shares and defined as more than 20 to 25% of the shares outstanding at the date of declaration.

Large stock dividend

The borrowing of an asset, usually cash, to be repaid in the future.

Loan

The account used to increase or decrease trading or available for sale investment securities to their fair market values.

Market Adjustment

The due date for payment of all or a portion of principal on a loan, note payable, bond or any other obligation of a company.

Maturity

The periodic payment of principal during the term of a mortgage note.

Mortgage amortization

The providing of cash by a lender for which the borrower's obligation is secured by real estate through a trust deed.

Mortgage loan

Non-common shares issued without a provision for the carryover of unpaid dividends.

Non-cumulative preferred stock

A form of debt financing where title to the assets are not held by the company, but the company has full control and use for its operations for a set period of time. Cumulative future payments are recorded as a liability and the value of the resource as an asset.

Operating Lease

The amount payable under a loan or note payable, excluding interest. The original amount of a loan or note payable.

Principal

Exchange where previously issued and publicly held investment securities (stocks and bonds) may be bought and sold. The NYSE and NASDAQ are secondary markets.

Secondary market

A term used to describe protections to a lender in the event of loan default, collateral. Also a term for a share of stock.

Security

Single unit of ownership in a corporation and has equal voting and dividend rights with every other share of stock in its class, either common or preferred.

Shares

Payment to owners in the form of additional shares of stock rather than cash.

Stock Dividend

Rights given to employees or others to purchase shares of a company's stock at a predetermined price at certain times.

Stock options

New shares are issued to existing stockholders in exchange for shares that are currently owned. % ownership remains the same, but the per share value of the company delines.

Stock split

The period over which an obligation is to be outstanding.

Term

Shares of previously issued stock that have been bought back by the issuing company and are no longer outstanding.

Treasury stock

A legal document, typically executed in conjunction with a mortgage loan authorizing a third-party to sell designated real estate if there is a default under the terms of the note.

Trust deed

The rate at which a company is expected to pay on average according to its capital structure. This includes all sources of debt and equity capital.

Weighed-average cost of capital (WACC)