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What are the main differences between corporate debt and
equity? Why do some firms try to issue equity in the guise
of debt?
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Answer / archana kulkarni
Equity capital is own fund whereas corporate debt is owed
fund.
Interest payment is mandatory on debt each year whereas
dividend is not re madatory to be declared and paid every
year. Also equity is long term capital and payable by
Company on liquidation whereas debt is to be paid on
specific time as prescribed in terms & conditions at the
time of issue. Therefore some firms try to issue equity in
the guise of debt.
| Is This Answer Correct ? | 12 Yes | 5 No |
Answer / archana
Interest payment is mandatory on debt each year whereas
dividend is not madatory to be declared and paid every
year. Also equity is long term capital and payable by
Company on liquidation whereas debt is to be paid on
specific time as prescribed in terms & conditions at the
time of issue. Therefore some firms try to issue equity in
the guise of debt.
| Is This Answer Correct ? | 7 Yes | 1 No |
corporate debt requried to pay fixed rate of interest and
it is mandentory in nature.however,on equity company may
pay dividend or not as the case.
At the time of liquidation corporate debt
have preferntial right and equity holdre have secondary
right after debt.
payment to corpo. debt is compulsory in
nature they has to paid even by calling money from equity
holder.payment to equity share holder has to made out
current profit or accumalted profit of company.
| Is This Answer Correct ? | 6 Yes | 3 No |
Answer / a.b.
Firms try to issue equity under the guise of debt because
the firm can take a deduction on all interest paid
throughout the year. Thus, the firm can enjoy pass-through
taxation, theoretically, on the payment of the interest
because those dollars are tax-free. This reduces the
overall taxable income of the firm, which reduces the tax
burden, which may even result in more money to distribute as
dividends to those equity holders. It's a win-win situation
for all, except the IRS. Thus, the IRS/Congress created 385
of the Internal Revenue Code which allows the IRS to
evaluate corporate debt to determine if it is essentially
equity under the guise as debt and treat it as such.
The above answers regarding the nature of debt and equity
are correct for the most part, but do not go far enough to
answer the question asked.
| Is This Answer Correct ? | 3 Yes | 1 No |
Answer / a. sanders
The main differences between the two are:
Debt is not an ownership interst in the firm. Creditors
generally do not have voting power.
The corporation’s payment of interst on debt is considered
a cost of doing business and is fully tax deductible.
Dividends paid to stockholders are not tax deductible.
Unpaid debt is a liability of the firm. If it is not paid,
the creditors can legally claim the assets of the firm.
This action can result in liquidation or reorganization,
two of the possible consequences of bankruptcy. (Ross,
Westerfield & Jaffe, 2010).
The reason some firms try to disguise equity as debt is for
the tax benefits of debt and the bankruptcy benefits of
equity.
| Is This Answer Correct ? | 1 Yes | 0 No |
Answer / ram
Interest payment is mandatory on debt each year whereas
dividend is not madatory to be declared and paid every
year. Also equity is long term capital and payable by
Company on liquidation whereas debt is to be paid on
specific time as prescribed in terms & conditions at the
time of issue. Therefore some firms try to issue equity in
the guise of debt.
| Is This Answer Correct ? | 0 Yes | 0 No |
Answer / a.b.
To clarify the above answer: The firm can take a deduction
on the interest paid on the debt. Thus, the interest paid
on the debt will not be taxed to the corporation, but will
be taxed to the debt holder. This is why it such payments
are essentially receiving "pass-through" status, whereas
dividend payments are taxed when the corporation receives
the funds and when the stock holder receives them - called
"double-taxation."
| Is This Answer Correct ? | 0 Yes | 1 No |
Answer / iqbal khan. m
equity is a fund generated through shares whereas debt is
amount taken as loan.
For equity company pay profit on shares to the shareholders
But in debt a fixed amount of interest is paid to the
creditor
| Is This Answer Correct ? | 1 Yes | 3 No |
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Benjamin O'Henry has owned and operated O'Henry's Data Services since its beginning ten years ago. From all appearances, the business has prospered. In the past few years, you have become friends with O'Henry and his wife. Recently, O'Henry mentioned that he has lost his zest for the business and would consider selling it for the right price. You are interested in buying this business, and you obtain its most recent monthly unadjusted trial balance which follows: O'Henry's Data Services Unadjusted Trial Balance November 30, 20XX Cash……………………………… $9,700 Accounts receivable……………………… 7,900 Prepaid expenses………… 2,600 Furniture, fixtures, & equipment 151,300 Accumulated depreciation $15,600 Accounts payable………… 3,800 Salary payable……………… Unearned service revenue 6,700 Benjamin O'Henry, capital 137,400 Benjamin O'Henry, withdrawals 2,000 Service revenue………… 14,300 Rent expense…………… Salary expense………… 3,400 Utilities expense……… 900 Depreciation expense Supplies expense…… Total…………………………………………. $177,800 $177,800 Revenues and expenses vary little from month to month, and November is a typical month. Your investigation reveals that the unadjusted trial balance does not include the effects of monthly revenues of $2,100 and monthly expenses totaling $2,750. If you were to buy O'Henry's Data Services, you would hire a manager who would require a monthly salary of $3,000. The most you would pay for the business is 20 times the monthly net income you could expect to earn from it. Compute this possible price. The least O'Henry will take for the business is his ending capital. Compute this amount. Under these conditions, how much should you offer O'Henry? Give your reason. I have the mathimatical part ok , please give reasons on how much and why I they would offer him the amount.
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