MANAGEMENT CONSULTANCY – Solutions Manual CHAPTER 19 SOURCES OF INTERMEDIATE AND LONG-TERM FINANCING: DEBT AND EQUITY I. Questions 1. The bond agreement specifies such basic items as the par value, the coupon rate, and the maturity date. 2. The priority of claims can be determined as follows: senior secured debt, junior secured debt, senior debenture, subordinated debenture, preference shares, ordinary shares. 3. Bond conversion. 4. The advantages of debt are: a. Interest payments are tax deductible. b. The financial obligation is clearly specified and of a fixed nature. . In an inflationary economy, debt may be paid back with cheaper pesos. d. The use of debt, up to a prudent point, may lower the cost of capital to the firm. The disadvantages are: a. Interest and principal payment obligations are set by contract and must be paid regardless of economic circumstances. b. Bond indenture agreements may place burdensome restrictions on the firm. c. Debt, utilized beyond a given point, may serve as a depressant on outstanding ordinary shares.
