Debt is basically what is owed to a creditor. Debtors have no profit making capabilities outside of what is previously negotiated in the contract, and they are prioritized for pay back over investors.
Debt can be broken into two basic categories: loans and bonds. Loans are basically a lump sum of money that is exchanged such that at a later time, that lump plus an extra percentage fee are paid back. Bonds are similar to loans except that they are a security issued by public or private institutions, and typically have more complex contractual features than a basic loan.
Both loans and bonds, at their simplest form, can be evaluated in the following manner:
Value of Debt = (Value)*(1+(cost of borrowing))
We will go over the cost of borrowing in more detail in the next post, but for now, the cost of borrowing can be treated as a simple interest rate.
Usually, debt is expressed as one form of a liability on a company’s balance sheet. Other features such as short term and long term capital owed are also expressed within the liabilities section of a balance sheet.
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization),
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