BU127 Chapter Notes - Chapter 11: Interest Expense, Debenture, Book Value
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BU127 Full Course Notes
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Capital structure is the mixture of debt and equity a company uses to nance its operations. } shareholders maintain control because bonds are debt, not equity. } cash payments to the debt holders are limited to the scheduled payments of interest and principal. } the impact on earnings is positive (positive financial leverage) because money can often be borrowed at a low interest rate and invested at a higher interest rate. The use of borrowed funds to increase the rate of return on owner"s equity. Occurs when the interest rate on debts is lower than the rate of return on total assets. Bonds are securities that corporations issue when they borrow large amounts of money. Can be traded on established exchanges that provide liquidity to bondholders. As liquidity increases, the cost of borrowing decreases. A bond certi cate speci es the following items: Face value (a. k. a. principal, or par value) Maturity date: the date the principal must be repaid.
