Explain what debt securities are, and describe the various types of debt securities.
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Corporations have the power to borrow money necessary for their operations by issuing debt securities. This power is inherent; it need not appear in the articles of incorporation. Unlike equity securities, debt securities do not transfer an ownership interest in the corporation. They create a debtor-creditor relationship. Accordingly, the corporation/debtor is obligated to pay a periodic interest charge as well as the balance of the debt on the maturity date. Debt securities arise in the form of notes, debentures, or bonds. Short-term debt instruments are called notes. They seldom have terms in excess of five years. Notes may be either secured or unsecured. When they are secured, the creditor may force the sale of the collateral if the debt is not paid according to the terms of the agreement. Long-term unsecured debt instruments are called debentures. They may have a term of 30 years or more. Frequently, debentures will have an indenture. An indenture is a contract protecting the rights of the debenture holders. It defines what acts constitute default by the corporation and stipulates the rights of the holder on default. In many instances, it places restrictions on the corporation's right to issue other debt securities in order to prevent the corporation from overextending itself. Long-term, secured debt securities are called bonds. They generally have indentures and therefore differ from debentures only because they are secured. The security may be real property, such as a building, or personal property, such as machinery, raw materials, or even accounts due from customers. Bondholders, as well as holders of secured notes, have priority as to the assets securing the debt. Therefore, they are more likely than unsecured note holders and debenture holders to receive greater portions of their claims should the corporation be forced to liquidate.
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a. The company's required earnings b. The company's residual earnings
Free cash flows (FCF) used in DCF valuations discussed in the chapter are defined as follows:
Tisa is a subordinate who simply acknowledges the power of her superior, Wally, based merely upon his relative position in the hierarchy of authority. She follows Wally because that is his social position in the business. She seldom questions orders and follows them simply because of her role in the hierarchy is to follow orders. Tisa and Wally’s society exemplify which of Hofstede’s dimensions?
a. Collectivistic b. High power distance c. Long-term orientation d. Low power distance
Dopson's Hardware was in bad financial shape. It owed so much money that vendors put the store on a cash-only delivery basis. As a result, the store had a dwindling inventory of goods to sell. The owner directed the sales staff to tell any customer asking about an unavailable item that it was on backorder and would be in stock the following week. When customers returned a week later as instructed, the item would still be unavailable. The owner's policy created a(n) ________ gap.
A. empowerment B. communication C. knowledge D. standards E. tangibility