Flashcards in Chapter 9 Deck (3)
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1
Q
Bonds (Debt) vs. Stocks (Equity)
Bonds (Debt Instruments:
A
- Not an ownership interest,but a moral and legal obligation to pay interest and principal to Lenders
- Creditors do not have voting rights for Board members
- Interest is considered a cost of doing business and is tax deductible
- Creditors have legal recourse if interest or principal payments are missed
- Excess debt can lead to financial distress and bankruptcy
2
Q
Bonds (Debt) vs. Stocks (Equity)
Stocks (Equity Instruments):
A
- Is an Ownership interest,moral not legal obligation to provide a fair investment return to Owners
- Common stockholders vote for the Board members
- Dividends are not considered a cost of doing business and are not tax deductible
- Dividends are not a legal liability of the firm and stockholders have no legal recourse if dividends not paid
- An all equity firm can not go bankrupt (financed 100% with Equity and with no Debt)
3
Q
The Dividend Growth Model:
A
Based on forecasting future Dividends (using three different growth rate assumptions) and discounting those future Dividends at the Common Stockholders’ Required Rate of Return.