18.2 long term debt financing


Okay i’m chapter 18 lesson 2 which is long-term debt financing we just talked about short term now we’re talking about long-term um identify the components of a loan application and journalize transactions related to long-term financing so applying for a business loan as as a business expands it must purchase more equipment and other plant assets the assets or

Other financial resources available to a business are called capital we talked about that in a previous chapter and purchases of plant assets used in the operation of a business are called capital expenditures capital expenditures by assets and assets are used for a long period of time they’re not disposable we talked about how capital assets they’re used for a

Long time so their value decreases over time that’s how when we that’s how we talked about it in a previous chapter so they usually cost a lot of money corporations often require large amounts of capital to finance capital expenditures a business can obtain this capital from both internal and external sources the portion of net income not paid as a dividend is

An internal source of capital but internal capital may not be adequate there for a corporation must acquire additional capital from external sources these might be included these might include borrowing money or selling stock so banks are usually a very convenient source for external capital you need to obtain a loan and with a loan the bank takes a risk that you

As a borrower will not repay it it takes a risk that the company is going to go under and not be able to pay back the banks so banks often require a business to pledge certain assets to secure a loan assets pledged to a creditor guarantee repayment of a loan and it’s called collateral if the borrower is unable to repay the loan the creditor creditor can take the

Collateral and sell it to pay off the debt when you apply for a business loan there’s lots of questions that get asked of you each section addresses common questions asked by the bank loan officers so what are the funds going to be used for what experience do the owners of the business have who makes the decisions do they anticipate any problems what’s the market

Demand for the product or service what’s what’s the competition look like in the business what are the financial projections have you planned for the future when is this project you’re working on going to be profitable what is the business plan collateral what are the assets that you’re going to offer as collateral how much are they worth will be easy to resell them

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Also capital profile what is the business risking in a project does the business have an adequate stake in the project to ensure management’s motivated to succeed so signing a long term note payable note payable signed as evidence of the debt when receiving a bank loan our example is april first signed a five-year 8% note for a hundred and twenty thousand dollars

And there is a receipt so our cash account is affected as is our long term notes payable account and we feel in our cash receipts journal first of all with the account title and the receipt number the amount borrowed goes into credit in the general credit column and then cash received from the bank goes into the cash debit column the banks require the company to

Make monthly payments on the notes so after some treasures signs the note the bank deposits the principal amount of the note in sun treasures checking account it the note agreement requires that it make a payment on the first of every month upon signing the note the bank provided some treasures with a schedule of monthly payments so we have the ballast is how much

They borrowed and then each month what is paid so the first month they’re paying eight hundred dollars in interest and sixteen hundred thirty-three dollars and seventeen cents as principal so they pay this total amount together and then subtract it from the beginning balance so there’s your ending balance this any balance goes in the beginning of the next month

Interest principal subtracted out that goes here etc for five years ok so the monthly payment is always going to be the same amount but if you see the interest in the principal changes it becomes less and less interest more and more principal until you would get to the end of the five years and your interest is very small on your principal is very big let’s see

So if you love the interest in the principal portions of the august payment are highlighted in the payment schedule the monthly payment will enable some treasures to fully repay the loan by the end of five years which is 60 months so our first example august first paid cash for a monthly loan payment 1666 dollars and five cents interest seven hundred and sixty

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Seven dollars and twelve cents was the interests of the principal the interest which is a total of two thousand four hundred thirty-three dollars and seventeen cents with a check number so it’s affecting our long term notes payable we have to pay that down interest expense and then our cash goes down and our cash payments journal we write the dates the long term

Notes payable account and the interest expense account the check numbers there also so the principal amount the interest amount would you add together or the cash paid large loans can be difficult to obtain from a single bank an alternative to borrowing money from a bank is to borrow money from individual investors a long term promise to pay a specified amount on

A specified date and to pay interest as stated at stated intervals is called a bond like notes payable bonds are written promises to pay bonds generally have extended terms such as 5 10 or 20 years also bonds payable tend to be issued for larger amounts than notes payable all bonds representing the total amount of a loan are called a bond issue a corporate corporation

Usually sells an entire bond issue to a securities dealer who then sells individual bonds to individual investors the process of selling bonds is commonly referred to as issuing bonds so we discussed right here each bond has a face value and interest rate and a due date the face value is the amount to be repaid at the end of the bond term the interest rate used

To calculate periodic interest payments on a bond is called the stated interest rate the face value is multiplied by the stated interest rate to calculate periodic interest payments to investors many bonds pay interest semi-annually okay um issuing bonds so here’s our first example on july first issued 20-year six and a half percent five thousand dollar bonds at

A hundred and eighty thousand dollars with a receipt so we have our face sorry here we are there’s our first example our cash is going to increase our bonds bonds payable is going to increase so let’s fill out our cash receipts journal so our date bonds payable with our receipt number credit is affected and our cash and debit received so we borrowed one hundred

And eighty thousand dollars and recently we received one hundred and eighty thousand dollars in cash now let’s see how that all works out for so paying interest on bonds corporations issue one check for the amount of interest to be paid usually to an agent such as a bank the agent then handles the details of sending interest checks to individual bondholders some

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Treasures bond son treasures bonds require that interest be paid semi-annually on june thirtieth and defense and december 31st interest on the bond is calculated as the base value multiplied by the stated interest rate so we have the face value of one hundred and eighty thousand dollars and the stated interest rate of six point five percent so if we do some times

Point zero six five gives us 11,700 but the fraction is the time of the year it’s a half a year so you can x 180 / 360 which is fifty eight fifty or start over time 0.065 divide that by two when you get the same number so our interest interest expenses affected as is our cash so to fill out our cash payments journal and we have account title of interest expense

Check number that was issued the interest amount in the cash credit and that’s it so what is the purpose of a business plan submitted with a loan application it convinces the bank that you know what you’re doing that you have a plan that you know where the money’s gonna where the money is going what’s is going to purchase when do you expect to become profitable

Etc what can happen to collateral if a borrower is ain’t unable to repay a bank loan the bank takes it and they sell it in hopes of repaying the debt that you owe them identify the primary sections of a business plan this is on page um 559 so we went over questions of interest to bank officers there’s also a summary of the business plan which is the answers to

The bank officers so the bank asks all of these questions and we went over each one of these questions the answer to those questions is in essence the company’s business plan investor a sells a bond to investor be just days before the interest payment is made which investor receives the interest payments investor be because they own the bond what are two common

Differences between notes payable and bonds bonds generally have extended terms such as five ten or twenty years also bonds payable tense tend to be issued for larger amounts than notes payable and that’s it

Transcribed from video
18.2 long term debt financing By MsCarlyShellhammer