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Business Accounting GEN COMBO LL MANAGERIAL ACCOUNTING; CONNECT ACCESS CARD

Borrowed Capital: The money which is borrowed by a company from outsiders for a specified period of time with a promise to repay the amount with interest over it is known as borrowed capital. For example, long term debts, bonds payable, debentures, etc. Owned Capital: The money from the equity stockholders and reserves of the company is termed as owned capital. Owned capital is repaid only in case winding up of the company. To determine: The president of a plastics company was quoted in a business journal as stating, .We haven’t had a dollar of interest-paying debt in over 10 years. Not many companies can say that.. As a stockholder in the company, how would you feel about its policy of not taking on debt? Solution: The president is basically saying that the company has no financial leverage and it is employing the equity funds of the company. With lack of any financial leverage, the company is raising funds by issue of stock of the company which results in increase of number of outstanding stocks. Consequences of not using debt in the capital structure are :- 1. When the number of outstanding stock increases, the value of the stock and interest of the stockholders will decrease. 2. The earning per share will decrease. 3. It also results in dilution of power of the stockholders. 4. If the company uses debt in the capital structure, the equity funds could be used in some other profitable investment. So as a stockholder of the company, considering the consequences of not using debt I would not be satisfied with the policy of not taking on debt.

Borrowed Capital: The money which is borrowed by a company from outsiders for a specified period of time with a promise to repay the amount with interest over it is known as borrowed capital. For example, long term debts, bonds payable, debentures, etc. Owned Capital: The money from the equity stockholders and reserves of the company is termed as owned capital. Owned capital is repaid only in case winding up of the company. To determine: The president of a plastics company was quoted in a business journal as stating, .We haven’t had a dollar of interest-paying debt in over 10 years. Not many companies can say that.. As a stockholder in the company, how would you feel about its policy of not taking on debt? Solution: The president is basically saying that the company has no financial leverage and it is employing the equity funds of the company. With lack of any financial leverage, the company is raising funds by issue of stock of the company which results in increase of number of outstanding stocks. Consequences of not using debt in the capital structure are :- 1. When the number of outstanding stock increases, the value of the stock and interest of the stockholders will decrease. 2. The earning per share will decrease. 3. It also results in dilution of power of the stockholders. 4. If the company uses debt in the capital structure, the equity funds could be used in some other profitable investment. So as a stockholder of the company, considering the consequences of not using debt I would not be satisfied with the policy of not taking on debt.

GEN COMBO LL MANAGERIAL ACCOUNTING; CONNECT ACCESS CARD

GEN COMBO LL MANAGERIAL ACCOUNTING; CONNECT ACCESS CARD

16th Edition

ISBN: 9781260088458

Author: Ray H Garrison

Publisher: McGraw-Hill Education

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GEN COMBO LL MANAGERIAL ACCOUNTING; CONNECT ACCESS CARD

Ch. 15 - Prob. 1Q Ch. 15 - What is the basic purpose for examining trends in...Ch. 15 - Prob. 3Q Ch. 15 - Prob. 4Q Ch. 15 - Prob. 5Q Ch. 15 - Prob. 6Q Ch. 15 - Prob. 7Q Ch. 15 - Prob. 8Q Ch. 15 - A company seeking a line of credit at a bank was...Ch. 15 - Prob. 1F15

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