Business
Corporate Debt
Corporate debt refers to the money that a company borrows from external sources to finance its operations and expansion. This debt can be in the form of bonds, loans, or other financial instruments. Companies use corporate debt as a way to raise capital, but it also comes with the obligation to repay the borrowed amount along with any agreed-upon interest.
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4 Key excerpts on "Corporate Debt"
eBook - PDF- Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
A new legal agreement would be agreed to by all parties stating that the principal and interest payments would be made by the trust. We discuss accounting for defeasance further below. Types of Companies That Have Significant Debt Financing Finance 5.2.3 As noted in earlier chapters, the business model involves obtaining financ- ing to invest in assets that are then used to produce income. Financing is generally obtained through three sources: 1. Borrowing 2. Issuing equity (shares) 3. Using internally generated funds There are advantages and disadvantages to using each of the above-noted sources of financing. See What Do the Numbers Mean? 14.3. Borrowed funds must be repaid and therefore increase liquidity and solvency risk. However, on the positive side, borrowed funds (if invested properly) can increase profits. This is known as leverage: using other people’s money to maximize returns to shareholders. As long as the interest paid on debt financing is less than the return earned when the funds are invested, the excess is profit. Credit ratings reflect credit quality. The market closely moni- tors these ratings when determining the required yield and pricing of bonds at issuance and in periods after issuance, especially if a bond’s rating is upgraded or downgraded. It is not surprising, then, that bond investors and companies that issue bonds keep a close watch on credit ratings, both when bonds are issued and while the bonds are outstanding. 14-8 CHAPTER 14 Long-Term Financial Liabilities Information for Decision-Making Companies must manage their cash flows and borrowings to ensure that there are enough funds to continue to operate and to maximize profits and benefit from opportunities. Continued access to low-cost funds is important. For this reason, the amount of long-term debt financing is an import- ant ratio. Too little long-term debt financing means the company is not taking advantage of lever- age.
eBook - PDF- Stephen Bottomley, Kath Hall, Peta Spender, Beth Nosworthy(Authors)
- 2017(Publication Date)
- Cambridge University Press(Publisher)
However, due to the concept of corporate legal personality, shareholders do not own the property of the company – the company does. The legal nature of a share is discussed below at 8.15.15. By comparison, debt capital refers to borrowings by the company. The legal relationship between the company and a lender is that of debtor and creditor and is predominantly regu- lated by contract law. Importantly, lenders do not become members of the company that they provide finance to and usually do not have voting rights in the company. Their claims are against, not in, the company. 2 As stated by Redmond ‘they stand outside the collectivity whose interests define those of the company’. 3 However, the relationship between a company and its creditors may be subject to significant statutory regulation. For example, when the company raises debt through issuing debentures the Corporations Act requires that certain disclosures be made. Likewise, when a loan is secured the lender will consider the registration system under the Personal Property Securities Act 2009 (Cth). This is dealt with below at 8.20.15. 8.10.05 Sources of corporate finance and the consequences Different types and sizes of company will have different needs for finance and different ways of raising it. Small companies may need small amounts of capital, borrowed from financial institutions on short- or medium-term loans. For some companies, capital raising (either debt Chapter 8 Corporate finance 195 4 The 1998 reforms were prompted, amongst other things, by Companies and Securities Law Review Committee, ‘Shares of No Par Value and Partly-Paid Shares’ (Report No 11, Australian Government, 1990) and Corporations Law Simplification Program, Share Capital Rules: Proposal for Simplification (Australian Government, November 1994). 5 See generally Justin Mannolini, ‘The brave new world of no par value shares’ (1999) 17 Company and Securities Law Journal 30.
eBook - PDF- Henry E. Riggs(Author)
- 2022(Publication Date)
- Springer(Publisher)
53 C H A P T E R 5 Capital Structure Using Debt Prudently Our balance sheet focus thus far has been dominantly on current assets, fixed assets, and current liabilities. We have said little about how corporations are financed or capitalized. This chapter focuses on the permanent capital used by corporations: capital obtained by selling stock to shareholders, by retained earnings, and by borrowing on a long-term basis. That is, our attention turns to the long-term debt and owners’ equity sections of the balance sheet. A thorough discussion of financing methods can be found in any of a host of corporate finance textbooks or trade books. Here we can only introduce some key topics, taking the perspective of the corporation rather than that of investors. Long-term debt and shareholders’ equity are considered the corporation’s permanent sources of funding. Current liabilities also supply funds (for example, short-term bank borrowing and accounts payable), but these sources tend to expand and contract in proportion to the volume of business activity. Current liabilities would dry up if the corporation ceases doing business; of course, so also would the current assets; thus, they are not considered permanent. SOURCES OF DEBT Money can be borrowed from many sources, including the owners’ relatives, commercial banks, trade creditors, insurance companies, private investors, and the public market. I will not attempt to generalize about borrowing from your relatives; amounts you could borrow and terms and conditions depend on who your relatives are and what they think of you and your business! Let us look at the other debt sources. Trade Credit Terms of sale in a large majority of commercial transactions are “net 30 days.” The buyer is expected to pay in 30 days from the date of shipment of the goods or performance of the services, but of course many buyers do not. A few pay more quickly and others stretch their payments to 45, 60, or 90 days.
eBook - PDF- OECD(Author)
- 2014(Publication Date)
- OECD(Publisher)
However, contrary to what many believe, debt is not necessarily a bad thing: it can be positive, provided it is used for productive purposes such as purchasing assets and improving processes to increase net profits. Moreover, the debt-to-equity ratio is more meaningful when compared over a period of time. Non-consolidated debt data provide important information about the total indebtedness of the financial corporations sector. Comparability Data are non-consolidated for all OECD countries, except for Australia and Israel. According to SNA standards, a consolidated set of balance sheets for a sector is, first, an aggregation of all stocks, followed by the elimination of all stocks that represent relationships among units belonging to the same sector. Source OECD (2013), National Accounts of OECD Countries, Financial Balance Sheets , OECD Publishing, Paris, http://dx.doi.org/ 10.1787/22214461 (except for Australia and Israel). Online database OECD (2013), “Financial Balance Sheets”, OECD National Accounts Statistics (database), http://dx.doi.org/10.1787/na-fbs-data-en . Information on data for Israel: http://dx.doi.org/10.1787/ 888932315602 . Definition The debt to equity ratio indicator is calculated by dividing the debt of financial corporations by the total amount of shares and other equity liabilities of the same sector. Debt is a commonly used concept, defined as a specific subset of liabilities. All debt instruments are liabilities, but some liabilities such as shares, equity and financial derivatives are not debt. Debt is predominantly obtained as the sum of the following liability catego-ries: currency and deposits, securities other than shares (except financial derivatives), loans, insurance technical reserves and other accounts payable. On the denominator side, shares and other equity correspond to a part of the own resources of financial corporations which are, by convention, reported on the liability side of the companies.
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