Equity Securities And Investments To Board Of Directors From ✓ Solved

Equity Securities Andinvestmentsto Board Of Directorsfrom Alexis A

Discuss the differences and similarities between debt and equity securities, including their characteristics, accounting treatment, and implications for companies and investors. Explain how companies use both types of securities for raising capital, and describe the methods used to account for each. Include considerations such as risks, benefits, and treatment during liquidation. Support your discussion with credible academic references.

Sample Paper For Above instruction

Introduction

Capital formation is essential for the growth and sustainability of corporations and governments, and it is primarily achieved through the issuance of debt and equity securities. Understanding these financial instruments, their features, accounting methods, and strategic implications is crucial for stakeholders, including board members, investors, and financial managers. This paper elucidates the core differences and similarities between debt and equity securities, explores how organizations employ them for funding, and discusses their respective accounting treatments.

Characteristics of Debt and Equity Securities

Debt securities are financial instruments that represent borrowed funds that require repayment with interest at specified future dates. Typical examples include bonds, notes, and bills. They confer a creditor’s position to the holder, who expects periodic interest payments and repayment of the principal amount upon maturity. Debt instruments are often secured by collateral, especially in the case of secured bonds, which offer additional protection to lenders (Benjamin & Margulis, 2013).

Equity securities, on the other hand, denote ownership stakes in a corporation. Shareholders possess voting rights at general meetings and are entitled to dividends when declared. The value of equity securities fluctuates based on market perceptions, company performance, and broader economic factors, leading to higher volatility (Baker, Filbeck, & Kiymaz, 2015). Equity investors assume higher risk, as they are residual claimants—receiving payments after debt obligations are met—making their position subordinate during liquidation processes (Chorafas, 2014).

Utilization in Capital Raising

Organizations leverage debt and equity securities to raise capital aligned with their strategic objectives. Debt issuance allows companies to borrow funds at predetermined interest rates, which, if managed effectively, can be a cost-efficient method due to tax deductibility of interest expenses. Equity financing involves issuing shares to investors, providing permanent capital without obligating repayment but diluting ownership control (Warren, 2011).

Governments also utilize debt instruments, such as bonds, to finance public projects. The choice between debt and equity depends on factors like the company's current capital structure, market conditions, and desired financial leverage.

Accounting Treatment of Debt and Equity Securities

Debt Securities

Debt securities are recorded initially at their acquisition cost, including transaction costs, in the asset account "Debt Investments." Subsequently, depending on the intent of holding, they can be classified as held-to-maturity, trading, or available-for-sale securities. Held-to-maturity securities are measured at amortized cost, while trading and available-for-sale securities are marked to fair value, with unrealized gains or losses recognized accordingly (Gilbertson & Lehman, 2014).

Equity Securities

The accounting for equity securities hinges on the level of influence exerted over the investee. Minor investments (less than 20%) are recognized at fair value with gains and losses recorded through profit or loss. Investments between 20% and 50% reflect significant influence and are accounted for using the equity method, where the investor recognizes its share of the investee's profits or losses. Investments exceeding 50% are consolidated into the parent company's financial statements, combining assets, liabilities, revenues, and expenses (Weygandt, Kieso, & Kimmel, 2013).

Risks, Benefits, and Strategic Implications

Debt securities provide predictable interest payments and can enhance a firm's leverage but increase financial risk due to fixed obligations. Excessive reliance on debt may lead to solvency concerns, especially during downturns (Benjamin & Margulis, 2013). Conversely, equity securities dilute ownership but do not impose mandatory payments, reducing financial stress. Nonetheless, issuing additional equity dilutes earnings per share (EPS) and may signal undervaluation or financial weakness to the market.

During liquidation, debt holders are prioritized and paid first, underscoring the lower risk for creditors. Equity investors are last in line, incurring higher risk but also benefitting from potential appreciation and dividends when the company performs well (Chorafas, 2014).

Conclusion

Debt and equity securities serve distinct yet complementary roles in corporate finance. Their features influence strategic choices regarding capital structure, risk management, and financial reporting. Proper accounting for these instruments ensures transparency and compliance, aiding stakeholders in making informed decisions. A balanced approach utilizing both securities can optimize a company's cost of capital while maintaining financial stability.

References

• Benjamin, G., & Margulis, J. (2013). Angel capital: How to raise early-stage private equity financing. Hoboken, N.J: John Wiley.
• Baker, H. K., Filbeck, G., & Kiymaz, H. (2015). Private equity: Opportunities and risks. Wiley.
• Chorafas, D. N. (2014). The Management of Bond Investments and Trading of Debt. Elsevier Science.
• Gilbertson, C. B., & Lehman, M. W. (2014). Century 21 accounting. Hunt, M. F., & Weygandt, J. J. (2013). Problem solving survival guide to accompany Financial accounting, 7th edition.
• Warren, C. S. (2011). Survey of accounting. Mason, Ohio: Thomson/South-Western.