1. Planning Equity Financing
Chapter 13
Planning Equity Financing

2. 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)

3. 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)

4. What are the Advantages of Sole Proprietorships and Partnerships?
Ease of formation
Income taxes only at the individual’s level
More owner involvement

5. What are the Disadvantages of Sole Proprietorships and Partnerships?
Unlimited liability
Limited ability to raise capital
Mutual agency (partnerships)

6. What are the Advantages of Corporations?
Limited liability
Unlimited life
Ability to raise capital

7. What are the Disadvantages of Corporations?
Regulatory requirements
Double taxation

8. 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

9. What are the Most Common Preferences given to Preferred Stock?
Cumulative
Participating
Callable
Redeemable
Convertible

10. What are the Different “Numbers of Shares” Concerning Stock?
Authorized
Maximum number of shares that can be issued
Issued
Number of shares distributed to stockholders (not retired)
Outstanding
Number of shares currently held by stockholders

11. What is Treasury Stock?
Treasury stock is previously issued stock that has been repurchased by the corporation.
Therefore, the number of shares outstanding is equal to the number of shares issued less the number of shares of treasury stock.

12. What are the “Values” Associated with Stock?
Par
Arbitrary amount used to determine legal capital, stated in the charter
No Par - no minimum price established
No Par, Stated
Arbitrary amount used to determine legal capital, not stated in the charter
Market
Current selling price

13. What Types of Dividends are Distributed?
Cash
Checks written and payable to stockholders
Stock
Additional shares of stock distributed to stockholders
Property
Assets other than cash distributed to stockholders

14. What is the Difference Between a Stock Dividend and a Stock Split?
Additional shares of stock are distributed to stockholders
Split
Old shares are turned in by stockholders and new shares with a different par value are issued in return

15. What are the 4 Dates Associated with Dividends?
Declaration
Board of directors determines the amount of the dividend and the date of record and payment
Record
Individual stock ownership is determined
Ex-dividend
2 to 3 days prior to date of record, last day to purchase stock and receive the dividend
Payment
Dividend is distributed