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Corporate Debt Expansion

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1. Corporate debt has been expanding very dramatically since World War II. What has been the impact on interest coverage, particularly since 1977?
2. What are some specific features of bond agreements?
3. What is the difference between a bond agreement and a bond indenture?

1. Why has corporate management become increasingly sensitive to the desires of large institutional investors?
2. Why might a corporation use a special category such as founders' stock in issuing common stock?
3. What is the purpose of cumulative voting? Are there any disadvantages to management?

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1. Corporate debt has been expanding very dramatically since World War II. What has been the impact on interest coverage, particularly since 1977?

Since 1977, major changes in corporate financing occurred including the phenomenal growth in the use of junk bonds, the onslaught of debt-financed hostile takeovers and leveraged buyouts. Many commentators warned that these debt-bloated companies and an economic downturn could turn the nineties into the decade of bankruptcy. As we know interest coverage reflects the ability of the company to pay its interest and calculated as annual operating earnings (income before interest and taxes) divided by annual interest expense. A firm's capital structure can affect the value of the firm only if investors are willing to pay more or less for the leveraged highly indebted firm. In the leveraged firm, the debt holders must receive their interest payments before the shareholders receive the remaining profits. Today most investors prefer firms which stay out of financial distress so that losses are not easily incurred. As the ...

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Umut Oltulu, MBA
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  • MBA, Texas A&M University-Kingsville
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