Finance Q&A....?

What if the company's initial cash flow warranted increasing the debt load, but future cash flows prohibited the company from making payments on their debt?

What affect does this have on potential dividends to stockholders?

Would you classify yourself as more of a high or low risk investor?

With what type of investment, are you "losing" by putting your funds in bonds?

1. If a company cannot pay its debt, it is called "in default". If the company cannot resolve their default, either through a restructuring of terms or raising capital elsewhere (e.g. equity or sale of assets) - then the company is insolvent. The company is then usually brought into bankruptcy, either voluntarily or involuntarily.

2. Debt holders have second priority in seniority after vendors. Equity holders have last priority on cash flows. Any default on debt holders, subsequent move toward bankruptcy would essentially dramatically reduce the outlook for dividend to equity holders.

3. I would characterize myself as high risk. I am relatively young (long investment horizon), ambitious (want to have a good retirement lifestyle) and rich (can afford to take on high risk in my portfolio).

4. There is something called "opportunity cost". When you invest one dollar in one thing, it means that you can't invest in something else. Now, how do you measure the "something else"? You can be asset specific, like stocks, which have returned about 11% per annum over the very long term, bonds (which return about 6% over the long term) or take an average basket of all things you can invest in, which is about 7% (i.e. a basket of bonds, equities, real estate, commodities, hedge funds, art and every other security in the world).