Southern New Hampshire University
Respond to each and then upload your responses.
1) De ne at least two common credit agreement provisions (loan covenants) a. Dividend Limitation -- This simply states that the organization will obly pay dividends up to a set amount of funds and will not pay any amount over that amount. b. Current Ratio Requirement -- The most efficient way to explain this, would be the company states a limit and states that the assets of the organization may not be under one hundred and fifty percent of organizations liabilities.
2) Classify the following as long term or current liabili es: Accounts Payable, Accrued Liabili es, Note Payable with total balance due in 5 years, Mortgage Loan with payments made monthly over 5 years.
a. Accrued Liabilities -- Current b. Accrued Payables - Current c. Mortgage Loan with payments to made monthly (60 payments) -- Current d. Note Payable that includes total balance due within next five years -- Long- term.
3)What are the three components of the cost of capital? a. Common Stock -- This type of stock does not require the organization to pay out dividends out to shareholders in exchange for common stock. This form of stock is also considered to have the lowest risk associated with it. b. Preferred Stock -- This type of stock, when it is issued out to the stockholders of the organization has an assigned interest rate to it. c. Debt -- This occurs when an organization makes the commitment to return both principals and interest to a lender over a specified period of time.
4) Calculate the a er tax cost of debt using the following informa on (hint: see page 285 in text).
A company issues $2 million at 9% interest with a 15% tax rate.
What is the a erfttax cost of debt? $153,000
Calculate the cost of issuing preferred stock using the same informa on above.
What is the preferred stock interest cost? $180,000
Using the informa on above, what are the advantages and disadvantages of both methods?
Southern New Hampshire University Preferred Stock
Advantages Using this method, the organization has no repayment mandate to the
shareholders of the initial investment that was made. Debit would require a
payment to a lender over a specific period of time with fixed monthly payments Including a convertibility cause, it is possible to eliminate the interest payments.
as it is converted into the company common stock, which is at a price that has
been already set. However, this has to be stated in the stock agreement at the very beginning. Disadvantages
. Much higher cost
After-tax cost of debt.
Advantages
Accrued losses can be used as an offset for tax liabilities
Net losses can be carried forward for the preceding accounting period
Interested in considered as a deductible
Disadvantages Cash on hand can be less that report in financial statements
Extra fees
Investments unwilling to purchase the debit of an organization without a discount.
5) What are