Most corporations borrow money. That money can be borrowed from a bank, a finance company, a leasing company or through bonds issued on the bond market. However if you borrow money, at some point you have to pay it back, and in addition, you have to pay interest. What are the advantages of borrow money to a business and if a business does not borrow money what alternative does it have to raise the capital it needs to conduct business. Which option is least expensive?
Company owners generally have just three sources for capital: retained earnings, debt or equity. The cheapest source of capital is always your company's retained earnings(your companys profits).
Debt is generally less expensive than equity but can be difficult to obtain and often comes with constraints on the business.Lets first analyse the benifits.
However, taking on debt financing, though cheaper is not without risks for the firm taking on the debt (borrower). Or taking on debt may not be suitable in certain situations.
Now you know that debt is usually a cheaper source of finance than equity, but not always the case. So next time if you see debt on the balance sheet of a company you are looking at investing in, don't be too alarmed. If the quantum of debt is not too high and it is taken at cheap rates then it is a good, cheap alternative. The company's return on equity can even be enhanced through leverage.
However, this does not mean that taking on debt is suitable for all companies. And risks of over-leveraging are always there. Too much of a good thing is usually bad.
Most corporations borrow money. That money can be borrowed from a bank, a finance company, a...
Exercises #11 1. Xtra Corporation needs $50,000 for three months to finance its working capital. The company has arranged a short-term loan with a bank. The bank charges 8% annual interest rate with interest paid in advance. The bank also requires 5% of the borrowed amount as a compensating balance. Assume Xtra does not have money to serve as a compensating balance and pay interest upfront 1.1 How much Xtra have to borrow? 1.2 Find effective cost of bank loan...
x=3000 P 1.4 = A businessman borrowed money from a bank to finance his personal jet. The bank loan terms allowed him to defer payments for six months and then to make 36 equal end of payments thereafter. The original bank loan was $9600+X with an interest rate of 12% compounded monthly. After sixteen monthly payments, he finds himself in trouble due to business loss and went to a loan company for assistance in lowering his monthly payments. Luckily, he...
Cullumber Productions borrowed some money from the California Finance Company at a rate of 13.90 percent for a seven-year period. The loan calls for a payment of $1,253,000 each year beginning today. How much did Cullumber borrow? (Round factor values to 4 decimal places, e.g. 1.5214 and final answer to nearest whole dollar, e.g. 5,275.) Cullumber borrowed
Crane Productions borrowed some money from the California Finance Company at a rate of 17.20 percent for a seven-year period. The loan calls for a payment of $1,200,000 each year beginning today. How much did Crane borrow? (Round factor values to 4 decimal places, e.g. 1.5214 and final answer to nearest whole dollar, e.g. 5,275.)
Sheridan Productions borrowed some money from the California Finance Company at a rate of 17.40 percent for a seven-year period. The loan calls for a payment of $1,236,000 each year beginning today. How much did Sheridan borrow? (Round factor values to 4 decimal places, e.g. 1.5214 and final answer to nearest whole dollar, e.g. 5,275.)
Problem 6.25 (Solution Video) Crane Productions borrowed some money from the California Finance Company at a rate of 15.40 percent for a seven-year period. The loan calls for a payment of $1,340,000 each year beginning today. How much did Crane borrow? (Round factor values to 4 decimal places, e.g. 1.5214 and final answer to nearest whole dollar, e.g. 5,275) Crane borrowed Question Attempts: 0 of 2 used SAVE FOR LATER SUBMIT ANSWER
3) The company borrowed $20,000 to finance its business operation. The loan is due on December 31. Required: Calculate the interest and principle the company would have to pay the bank on December 31 under each of the following assumptions: a) The loan is at 12%, borrowed on January 2 of the same year. b) The loan is at 10%, borrowed on January 2 of the same year. c) The loan is at 12%, borrowed on April 1 of the...
Problem 6.25 (Solution Video) Sunland Productions borrowed some money from the Californa Finance Company at a rate o 15.4 percent or seven-year per od The loan calls or ฮ payment o $1,541,000 each year beginning today. How much did Sunland borrow? (Round factor values to 4 decimal places, e.g. 1.5214 and final answer to nearest whole dollar, e.g. 5,275.) Sunland borroweds
Cost of short-term financing) The R. Morin Construction Company needs to borrow $90 comma 000 to help finance the cost of a new $126 comma 000 hydraulic crane used in the firm's commercial construction business. The crane will pay for itself in 1 year, and the firm is considering the following alternatives for financing its purchase: Alternative Along dashThe firm's bank has agreed to lend the $90 comma 000 at a rate of 12 percent. Interest would be discounted, and...
A company borrowed money from a bank by signing a three-month note payable in the amount of $15,000 on December 1. The note requires the company to pay interest at an annual rate of 8%. The company records adjusting entries on December 31. The adjusting entry that the company should record for accrued interest on December 31 would include a debit to interest expense for O $100. O $300. O $1,200 O $900. $160.