Hamilton, pp. 408-414: Debt Financing


Here are two kinds of debt securities: bonds and debentures!  Bonds are secured (by a lien against corporate property) and debentures are unsecured.  Publicly held corporations sell bonds all the time, but rarely sell stock to the public.  So debt financing is very important!


1.     The Concept of Leverage


You’re leveraged when you owe money to a third party.  If you can get a return in profit on the principal of the loan that’s greater than the interest rate, you win!  You usually want to borrow at least some money to maximize profits.  Debt also has tax benefits.  But creditors and shareholders will come into conflict!  They’re fighting over the same pie!


2.     Tax Treatment of Debt


If you’re a shareholder and you lend money to your corporation, then you can deduct the interest you get from your taxes, even though you couldn’t deduct a dividend payment.  The question has therefore come up whether debt should be considered as equity for tax purposes.


3.     Debt as a Planning Device


Hmmm…I don’t get this.  It’s sort of like if you loan yourself money from the corporation then if it goes under you’re protected somehow.  But how?  Not sure…


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