Debts

Debt and Danger Harold Lever and Christopher Huhne... 

The international debt crisis was brought about by Western bankers in search of quick profit and is now one of our most pressing problems. This book looks at the background and shows what we must do to avoid disaster. 

In compiling this book, the author has drawn freely from all sources of information available to him—research notes, original memoirs in scientific journals, reference works on organic chemistry, the numerous text books on practical organic chemistry, and pamphlets of manufac turers of specialised apparatus. Whilst individual acknowledgement cannot obviously be made—in many cases the original source has been lost track of—it is a duty and a pleasure to place on record the debt the writer owes to all these sources. Mention must, however, be made of Organic Syntheses, to which the reader is referred for further details of many of the preparations described in the text. 

Repellents are materials that affect insects and other organisms by dismpting their natural behavior of bloodseeking through biting of humans and animals, and are the first line of defense that can be readily used for this purpose (1). The best overall standard repellent is A/,A/-diethyl-y -toluamide [134-62-3] (DEBT), systematically named A/jAZ-diediji-S-methylbenzamide (1). 

The dermal adsorption of DEBT in humans has been studied in the Netherlands by appHcation of DEBT as undiluted technical material or as 15% solutions in alcohol. Labeled material was recovered from the skin, and absorption of DEBT was indicated by the appearance of label in urine after two hours of skin exposure. About 5—8% of the appHed treatments was recovered as metaboHtes from urine, and excretion of metaboHtes in the urine came to an end four hours after exposure ended. DEBT did not accumulate in the skin, and only a small (less than 0.08%) amount ended up in feces. Curiously, less has been absorbed through skin from 100% DEBT appHcation (3—8%, mean of 5.6%) than from 15% alcohol appHcation (4—14%, mean of 8.4%). These results have been described as consistent with previous absorption/metaboHsm studies using guinea pigs, rats, and hairless dogs. Other pubHcations on DEBT toxicology have been cited (92). 

Capital Investment. Erom the viewpoint of a project, all of the capital that must be raised is external capital. Equity capital is the ownership capital, eg, common and preferred stocks or retained cash, whereas debt capital consists of bonds, mortgages, debentures, and loans. Nearly all investment involves a mixture of both types so as to maximize the return on investment (21). The debt ratio (debt/total capital) for the chemical industry is typically over 30%. Because financial details are not well known during the preliminary phases of project analysis, the investment is viewed simply as the total capital that must be expended to design and build the project. 

Interest. The iaterest block on Eigure 1 represents the iaterest expense associated with the debt capital. It is an allowed corporate pretax expense for federal income tax purposes and is actually paid out to the debt holders as their earnings. 

Distributed Darnings. The dividends distributed to stockholders provide the earning on equity capital ia the same way that iaterest is the earning on the debt capital. However, the dividends are an after-tax expense and represent an arbitrary management decision. 

A logical choice for the discount rate is the average capital cost rate, where capital includes both the equity and debt capital. The estimation of a suitable value for the discount rate is not straightforward (23), but financial speciaUsts always seem ready to provide a number. 

Mfg cost (less depr and int) Capitalized fixed capital Capitalized total capital Operating income Interest on debt Depreciation (Tax basis) Net taxable income Federal income tax Investment tax credit Net income Cash flow... 

Symbol indicating differentiation Debt ratio defined by Eq. (9-139) Discounted-casb-flow rate of return Empirical constant in general equations... 

Total assets = stockholders equity -t- total debt (9-135) Equation (9-135) can also be written as... 

Stockholders equity = total assets — total debt (9-136) Equations (9-130) and (9-136) can be combined to give net annual profit... 

The difference between equity financing and debt financing is not always clear-cut. For example, preferred stock can be classified as stockholders equity or debt, depending on who is doing the financial analysis. 

Preferred stock is often used as an alternative to debt when companies do not wish to issue additional common stock or to incur the fixed interest charges required to finance debt. Preferred stockholders are not normally allowed to vote for the board of direciors. They have the right to receive fixed amounts of dividends before common stockholders are paid any dividends. However, a company does not have to pay dividends. The board of directors may decide to pay small or no dividends in a particular year. Holders of cumulative preferred stock... 

Common stockholders have a right to the residual assets of a company in the event of dissolution or liquidation but only after all the creditors and then any liabihties to the preferred stockholders have been paid. The larger the proportion of debt financing in a company, the smaller the amount the common stockholders are likely to receive if the company is liqiiidated. 

The advantage of using common stock to finance assets is that it does not incur nxed interest charges. Furthermore, there is no maturity date, as there is with all loans and most preference issues. Common stock can often be issued more easily than debt can be financed. However, the flotation costs of common stock can be quite high, especially when stock values are depressed, so that large discounts for the stock are needed to induce purchase. 

Debt Financing In practice, debt financing covers a variety of fixed-income securities, both long-term and short-term. The most common forms of long-term debt are bonds, mortgages, and debentures. 

A financial analyst looking at a company from a potential common stockholders point of view is hkely to classify preferred stock as debt. In contrast, bondholders and general creditors are likely to regard preferred stock as additional eqmty. Since preferred stock is a hybrid type of security, it may be issued by a company whose management is divided over the question of whether to use equity or debt to finance additional assets. However, preferred stock does have the disadvantage that the dividends are not allowed as a tax-deductible expense. 

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