Debt Financing / Loans
Debt Financing / Loans
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Which statement/s concerning the difference between equity and debt is/are correct?
Interest payments can be deducted as expense from tax in case of debt.
A lender is liable as creditor for the business.
For equity there exists recourse in the amount of the capital contribution during liquidation.
With debt, there is a participation in loss.
The placing of equity depends on the existence of so called securities.
Which statements concerning the “profitability-leverage effect” are correct?
Leverage works like a negative lever on equity return.
The lever is positive, if the return on assets is greater than the cost of debt.
The risk of indebtedness is the higher the higher the danger that (at least on the long run) returns on total equity employed are above costs of debt.
The risk of indebtedness is the higher the lower the average returns on assets.
The risk of indebtedness is the higher the higher the level of debt.
An indenture is a legal document between a trust company and the bondholder summarizing the terms of the bond issuance and can also be called trust deed.
Owners of registered bonds have to send in coupons and certificates in order to receive interest payments and the final repayment of principal.
Accrued interest is another word for the annual payment of the coupon of a bond.
Companies often use sinking funds to provide cash on a regular basis in order to assure the repayment of its long-term debt.
When a company uses the defeasance method, it pays more bonds as coupon to the bondholder instead of paying interest in cash.
In case if company defaults, the subordinated lender…
Gets in line behind the general creditors but ahead of the preferred stockholder and the common stockholder.
Gets ahead of the all other creditors and stockholders.
Gets in line behind the preferred stockholder and the common stockholder.
Gets in line ahead of the general creditors but behind the preferred stockholder and the common stockholder.
Privately placed bonds usually (in comparison to the public offered bonds)…
More simple and not that costly to arrange, not that standardized but with more strict covenants.
Have smaller issue costs and do not differ from public offered bonds apart from that.
Cost much more to arrange, have complicated contract, have more strict covenants.
More simple and not that costly to arrange, highly standardized.
Restrictive covenants are…
Limitations set by bond issuers on the actions of bondholders in order to protect company from default option.
The clauses of the indenture, that contain restrictions imposed by company on bondholders.
Limitations set by bondholders on the actions of the issuers in order to prevent the company from purposely increasing he value of its default option .
The clauses of the indenture, that contain some restrictions imposed on bondholders by government.
The typical structure of a convertible bond is a normal straight line bond combined with a long call option for the investor.
The two lower bounds to the price of a convertible bond are its face value and its conversion value.
The conversion value must equal the value of the convertible because investors could otherwise gain a riskless arbitrage profit by purchasing the convertible, changing into stock(s) and selling them on the market.
The owner of a convertible has the right to change her claim for repayment of long term debt into common stocks of the issuing company at any time of duration.
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