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Lecture Introduction to Accounting: An integrated approach: Chapter 13 - Penne Ainsworth, Dan Deines

Chapter 13 - Planning equity financing. The goals of this chapter are: Explain how companies plan for debt versus equity financing, describe how partnership profits and losses are allocated, discuss the process of raising capital through equity financing in a corporation, explain the process of giving shareholders a return on investment, compare and contrast stock dividends and stock splits. | Chapter 13 Planning Equity Financing Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 13- What is the Risk of Debt Financing? Financial risk The chance that the company cannot meet its debt obligations as they become due Measures Debt to equity ratio (relationship of total debt to total owners’ equity) Times interest earned ratio (relationship of income before interest and taxes to interest expense) 13- What is the Reward of Debt Financing? Financial leverage The opportunity to generate a return that is greater than the cost of borrowing Measure Return on equity (relationship of net income to total owners’ equity) 13- What are the Advantages of Sole Proprietorships and Partnerships? Ease of formation Income taxes only at the individual’s level More owner involvement 13- What are the Disadvantages of Sole Proprietorships and Partnerships? Unlimited liability Limited ability to raise capital Mutual agency (partnerships) 13- What are the Advantages and Disadvantages of Corporations? Limited liability Unlimited life Ability to raise capital Regulatory requirements Double taxation Advantages Disadvantages 13- How do Partnerships Determine how Profits /Losses will be Allocated to the Partners? Fixed ratio Ratio of capital balances Salary allowances Interest allowances Combination 13- What are the Types of Stock Issued by Corporations? Common stock Residual interest Owners of the company Preferred stock Some rights of ownership Preference over common stock (but not debt) in dividends and/or liquidation 13- What are the Most Common Preferences given to Preferred Stock? Cumulative Dividend accumulate Participating Dividend in excess of stated rate Callable Corporation option Convertible Stockholder option Redeemable Stockholder option 13- What are the Different “Numbers of Shares” Concerning Stock? Authorized Maximum number of shares that can be issued Issued Number of shares distributed to . | Chapter 13 Planning Equity Financing Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 13- What is the Risk of Debt Financing? Financial risk The chance that the company cannot meet its debt obligations as they become due Measures Debt to equity ratio (relationship of total debt to total owners’ equity) Times interest earned ratio (relationship of income before interest and taxes to interest expense) 13- What is the Reward of Debt Financing? Financial leverage The opportunity to generate a return that is greater than the cost of borrowing Measure Return on equity (relationship of net income to total owners’ equity) 13- What are the Advantages of Sole Proprietorships and Partnerships? Ease of formation Income taxes only at the individual’s level More owner involvement 13- What are the Disadvantages of Sole Proprietorships and Partnerships? Unlimited liability Limited ability to raise capital Mutual agency (partnerships) 13- .