Chapter 21 Accounting in Action cm2

a) Differences to the investor include: Debt-fixed rate of return; priority in liquidation (less risk); taxed as ordinary income. Equity-participate in success or failure of the company (greater risk); can be taxed as capital gains.

Differences to company include: Debt-required payments (demands on cash flow); negative on balance sheet; interest is expense (effects reported income {bad} and tax liability {good}); often cheapest cost of funds. Equity-dividends and stock repurchase done at convenience of company (distribution of excess cash flow); positive on balance sheet; payments are not an expense; often highest cost of funds; shares risk with investor.

b) Firms often choose to lease long-term assets rather than buy them for a variety of reasons...