tailieunhanh - Lecture Fundamental accounting principles (19/e) - Chapter 14: Long-term liabilities

After completing this chapter you should be able to: Explain the types and payment patterns of notes, compare bond financing with stock financing, assess debt features and their implications, compute the debt-to-equity ratio and explain its use. | LONG-TERM LIABILITIES Chapter 14 Chapter 14: Long-term Liabilities. Bonds do not affect stockholder control. Interest on bonds is tax deductible. Bonds can increase return on equity. BOND FINANCING Advantages Requires payment of both periodic interest and par value at maturity. Can decrease return on equity when the company pays more in interest than it earns on the borrowed funds. Disadvantages A1 There are several advantages for issuing bonds instead of stock. Companies issue bonds because it is a way to raise needed capital without sacrificing ownership in the company. The interest on bonds is tax deductible, thereby reducing the actual taxes paid by the company. Issuing bonds can increase the return on equity if the company earns a higher return on the borrowed funds than it pays in interest. On the other side of the issue, there are some disadvantages to issuing bonds. Bonds require regular payment of interest and repayment of the principal borrowed. These required cash payments may be difficult if a company faces tight cash flows. Bonds can also decrease the return on equity if the company pays more in interest than it earns on the borrowed funds. Bond market values are expressed as a percent of their par value. BOND TRADING Bond Rate Maturity Yield Volume Close Change IBM 7% 25 130 + A2 Bonds are securities that can be readily bought and sold. A large number of bonds are traded on the New York Exchange and the American Exchange. Since bonds are bought and sold in the market, they have a market value, or price. For convenience, bond market values are expressed as a percent of their par value. Here is a typical bond quote. The IBM bond has a stated interest rate of 7%, matures in 2025, has a market yield to maturity of , 130 bonds were sold yesterday for a total trade at par of $130,000, each bond is selling for of par or $1, per bond, since the close yesterday the bond price increased by . | LONG-TERM LIABILITIES Chapter 14 Chapter 14: Long-term Liabilities. Bonds do not affect stockholder control. Interest on bonds is tax deductible. Bonds can increase return on equity. BOND FINANCING Advantages Requires payment of both periodic interest and par value at maturity. Can decrease return on equity when the company pays more in interest than it earns on the borrowed funds. Disadvantages A1 There are several advantages for issuing bonds instead of stock. Companies issue bonds because it is a way to raise needed capital without sacrificing ownership in the company. The interest on bonds is tax deductible, thereby reducing the actual taxes paid by the company. Issuing bonds can increase the return on equity if the company earns a higher return on the borrowed funds than it pays in interest. On the other side of the issue, there are some disadvantages to issuing bonds. Bonds require regular payment of interest and repayment of the principal borrowed. These required cash .