Sources of Long-Term Debt Financing
• Financial leverage
– The use of borrowed funds to increase the return on
owners’ equity
– As long as the firm’s earnings are larger than the
interest charged for the borrowed money, there is a
positive effect on return on owners’ equity
• Lease
– An agreement by which the right to use real estate,
equipment, or other assets is temporarily transferred
from the owner to the user
– Sometimes used if a firm cannot obtain a loan to
acquire property, buildings, or equipment
– Can have tax advantages over long-term debt
financing
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Effects of Additional Capital
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Sources of Long-Term
Debt Financing (cont’d)
• Long-term loans
– Term-loan agreement
• For loans longer than 1 year
• A promissory note that requires a borrower to repay a loan in
monthly, quarterly, semiannual, or annual installments
– Interest rate and repayment terms are based on the reasons
for borrowing, the firm’s credit rating, the value of collateral
– Getting a loan
• Know potential lenders
• Maintain a good credit rating
• Fill out an application; submit a business
plan and financial statements; compile references
• Meet with loan officer
• If denied, determine why
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Sources of Long-Term
Debt Financing (cont’d)
• Corporate bonds
– A corporation’s written pledge that it will repay a
specified amount of money with interest
– Maturity date—the date on which the corporation is to
repay the borrowed money
– Interest is paid until maturity
– Types of bonds
• Registered bond—a bond registered in the owner’s name
by the issuing company
• Debenture bond—a bond backed only by the reputation
of the issuing corporation
• Mortgage bond—a bond secured by various assets of the
issuing firm
• Convertible bond—a bond that can be exchanged, at the
owner’s option, for a specified number of shares of the
corporation’s common stock
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Sources of Long-Term
Debt Financing (cont’d)
• Corporate bonds (cont’d)
– Repayment provisions for corporate bonds
• Bond indenture—a legal document that details all
the conditions relating to a bond issue
• Call premium—an amount paid to the bond owner if
the corporation buys back the bond before the
maturity date
• Serial bonds—bonds of a single issue that mature
on different dates
• Sinking fund—a sum of money to which deposits are
made each year for the purpose of redeeming a
bond issue
• Trustee—an individual or an independent firm that
acts as the bond owners’ representative
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Comparison of Long-Term Financing
Methods
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