costs that might be incurred as a result of the use of different type of debt...
costs that might be incurred as a result of the use of different type of debt
Accounting and Finance
Homework Answers
A business needs funds to run its day-to-day operations. It can either use equity or debt. Debt is the borrowed funds and represent a liability for the business. Debt needs to be repaid at the end of its term.
Some of the types of debt that a business can use and its cost are explained below:
1. Loan
A business can take short-term or long-term loan from a bank or any other financial institution. The cost paid on loan is called as Interest cost. This interest can be paid annually, monthly, quarterly or semi-annually depending on the terms of the loan.
2. Bonds
A company can issue bonds in the market to raise funds. The cost
paid on bonds is called as the coupon payment. A coupon rate is
mentioned at the time of the issue of bonds.
3. Preference shares
A company can issue preference shares to raise funds. Preference shares is a debt for the business and the cost paid on them is called as Dividend. They receive dividend income in preference to the Equity shareholders.
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costs that might be incurred as a result of the use of different
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