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through debt or the issue of stock. A capital stmcture weighted heavily towards one end or the other couldbetoorisky. Atypicalutilityhasacapitalstructuremadeupofabout50%long-termdebt,45% common stock, and 5% preferred stock. Differentformsoffinancinggiverisetovariousrisklevels. Forinstance,debtisafixedchargeandif eamings fluctuate, the firm's ability to make the obligated payments may be constrained. Debt is also a long-term c o d t m e n t with a fixed maturity and is risky because the expectations and plans for the firm overthelongrunmaychange. Ontheotherhand,debtiscostlimited,andthecostofdebtisnormally lowerthanthatofcommonstock. Also,theinterestassociatedwithdebtfinancingistaxdeductible. Forms of long-term debt include bonds, mortgages, and debentures. A bond is a long-term promissory note. Usually these notes are issued in denominations of $1,000. Bonds are payable in full at the end oftheirstatedlife. Forexample,thepurchaserofa10-year$1,000bondwithastatedcouponrateof6% paid annually will receive $60 per year through year ten and receive $1,000 for redemption of the bond at the end of year ten. Company assets are normally pledged as security for bonds issued. A debenture, on the other hand, is also a long-term bond but it Is unsecured (no lien on specific property of the company as collateral) (Weston and Brigham 1981). A mortgage is a pledge of company property as security for a loan. Most mortgage loans, or term loans, are granted as uniform payment loans, which are amortized in most cases. Amortization provides a gradual uniform stream of repayment, which safeguards both the lender and the borrower. For example, supposeabusinessborrows$10,000at10%compoundedannuallytoberepaidin5years. Theannual payment due to the lender can be calculated by multiplying the uniform capital recovery factor UCRF = [d(l + d)n]/[(l + d)" - 11 (2-18) bytheamountborrowed. Inthisexample,UCRFequals [o.i(i + 0.1)~]/[(1+ 0.1)~- 11 = 0.2638 (2-19) which when multiplied by the $10,000 borrowed gives a uniform annual payment to the lender of $2,637.97. Table2-8illustratestheamortizationscheduleforthisexample. (1) Annual Payment Year (I x UCRF) (2) Interest (d x COI.4"'")) $ 1,000.00 836.20 656.03 457.83 239.82 $ 3,189.87 (3) Repayment of Principal (Col. I - COI. 2) $ 1,637.97 1,801.77 1,981.95 2,180.14 2,398.16 $ 10,000.00 (4) Principal Balance (Col. 4("4 - Col. 3) $ 10,000.00 8,362.03 6,560.25 4,578.30 2,398.16 0.00 0 I $ 2 3 4 2,637.97 2,637.97 2,637.97 2,637.97 2,637.97 5 Totals $ 13,189.87 Table 2-8. Amortization Schedule 25PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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