GSU ACCT 2102 - Debt Financing (5 pages)

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Debt Financing

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Debt Financing


Lecture number:
Lecture Note
Georgia State University
Acct 2102 - Prin of Acct Ii

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ACCT 2102 Lecture 3 Lecture 4 Review 9 9 I Cash Flows II Depreciation III After Tax Cash Flows Lecture 5 9 11 I Debt Financing A Definition of Liabilities B Types of Liabilities C Rate of Return D Interest and Taxes II Risk of Debt Financing A Financial Risk B Measures C Times Interest Earned III Reward of Debt Financing A Financial Leverage B Measures IV Equity Financing A Owner s Equity B Debt versus Equity Financing V Return of Equity A Definition B Calculation VI Financial Ratio A Debt to Equity VII Types of Business Combinations A Advantages Disadvantages of Sole Proprietorships and Partnerships B Advantages Disadvantages of Corporations VIII Determining the Allocation of Profits Losses in Partnership Current Lecture These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Purpose of Financing o Business need to acquire new assets financing helps fund these assets Assets Liabilities Owner s Equity o There is debt financing and equity financing Debt Financing o Debt financing uses a company s liabilities which are a debt of the company o Liabilities can be short term or long term o Liabilities can also be formal or informal Formal liabilities borrowings from third parties notes and bonds payable Informal liabilities arise through the normal course of business accounts payable wages payable o In Ch 12 we discussed Rate of Return the rate the makes creditors feel that loaning is worthwhile o The interest rate associated with that return is associated with debt o When interest paid on debt is an expense it reduces net income and is deductible for tax purposes o Taxes decrease whenever interest expense is deducted on the tax return The company s cost of carrying the debt and the rate actually paid on the debt are then reduced also Risks of Debt Financing There are risks to debt financing There is always the possibility that a company as debt obligations become due won t

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