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)