Chapter 9 Flashcards Preview

FIN 3303 > Chapter 9 > Flashcards

Flashcards in Chapter 9 Deck (3)
Loading flashcards...
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.