BUSN 1300: Chapter 16

priority, lenders have priority claims on assets

Describes the characteristic of *claim on assets* for *debt financing*

residual

Describes the characteristic of *claim on assets* for *equity financing*

nondiscretionary, usually a recurring cost and usually fixed

Describes the characteristic of *claim on income* for *debt financing*

discretionary cost

Describes the characteristic of *claim on income* for *equity financing*

n/a, doesn't create any opportunities for compensation alternatives

Describes the characteristic of *employee benefit potential* for *debt financing*

stock options

Describes the characteristic of *employee benefit potential* for *equity financing*

usually little

Describes the characteristic of *influence over management* for *debt financing*

varies

Describes the characteristic of *influence over management* for *equity financing*

specific- contract usually specifies when debt must be repaid

Describes the characteristic of *maturity* for *debt financing*

n/a, equity doesn't need to be repaid

Describes the characteristic of *maturity* for *equity financing*

deductible

Describes the characteristic of *tax consequences* for *debt financing*

not deductible

Describes the characteristic of *tax consequences* for *equity financing*

(1) establish your investment objectives, (2) learn to analyze financial news, (3) plan and create an investment portfolio, (4) engage in buying and selling securities

Four major steps required to become an investor

zero-based budgeting

a budgeting approach in which each department starts from zero every year, and must justify every item in the budget, rather than simply adjusting the previous year's budget amounts

full-service broker

a certified expert who advises you on selecting investments; usually has many option and is more expensive

broker

a certified expert who is legally registered to buy and sell securities on behalf of individuals and institutional investors

discount broker

a certified expert who provides fewer services for buying and selling securities and is generally charges a lower commission

NSDAQ

a computerized stock exchange originated by the National Association of Securities Dealer

operating budget

a detailed financial plan that identifies all the revenues and expenses the company expects to see over a certain time frame

secondary markets

a division of the securities market that handles all the public buying and selling after that

primary markets

a division of the securities market that handles the IPO of stocks and bonds

financial plan

a document that outlines the funds needed for a certain period of time, along with the sources and intended uses of those funds

capital structure

a firm's mix of debt and equity financing

bear market

a market situation in which most stocks are decreasing in value

bull market

a market situation in which most stocks are increasing in value

budget

a planning and control tool that reflects expected revenues, operating expenses, and cash receipts and outlays

short selling

a procedure in which you sell stock you borrow from a broker in the hope of buying it back later at a lower price, returning the borrowed stock to the broker and keeping the price difference; usually done when it is believed that the concerned stock is about to drop in price

bottom-up mandate

a situation in which individual supervisors and managers add up the amounts they need based on number of employees, project expenses, supplies, and other costs

top-down mandate

a situation in which top executives specify the amount of money each functional area can have based on the company's total available budget for the year

collateral

a tangible asset a lender can claim if a borrower defaults on a loan

securities market

a term that encompasses the stock, bond, and derivatives market

accounts payable

amounts that a firm currently owes to other parties; also called A/P or payables

accounts receivable

amounts that are currently owed to a firm; also called A/R or receivables

lease

an agreement to use an asset in exchange for regular payment, similar to renting

line of credit

an arrangement in which a financial institution makes money available for use at any time after tha loan has been approved

money market

an over-the-counter marketplace for short-term debt instruments such as Treasury bills and commercial paper

equities market

another term for the stock market

debentures

are backed only by a corporation's promise to pay

debt financing

arranging funding by borrowing money

equity financing

arranging funding by selling ownership shares in the company, publicly or privately

convertible bonds

can be exchanged for a predefined number of shares of the corporation's common stock

derivatives

contracts whose value is derived from some other entity--usually and asset of some kind, but not necessarily; used to hedge against or speculate on risk

trade credit

credit obtained by a purchaser directly from a supplier

less expensive and easier to get than conventional loans, can generate large amounts of money fairly quickly

describes advantages of commercial paper

widely available, convenient, no external scrutiny of purchases

describes advantages of credit cards

frees up working capital, makes cash flow more predictable, provides some protection against bad debt and customer bankruptcies; can be arranged more quickly than loan

describes advantages of factoring

usually has smaller down payment than loans, can provide access to essential assets for companies that don't qualify for loans, helps company's avoid buying assets that decline in value or become obsolete, often frees company from maintenance or other recurring costs

describes advantages of leases

can provide large amount of money without diluting ownership through sale of equity, allows company to make major purchases of vital assets

describes advantages of long-term loans

can provide financing to companies that don't qualify for unsecured loans or other alternatives

describes advantages of secured loans

usually free as long as payments on time, purchaser can manage cash flow more easily, consolidates multiple purchases into one payment

describes advantages of trade credit

can provide cash or access to wash without requiring a collateral

describes advantages of unsecured loans

available only to large corporations with strong credit

describes disadvantages of commercial paper

high interest rates, lack of scrutiny and ease of use can lead to overuse

describes disadvantages of credit cards

can be expensive depending on company's terms

describes disadvantages of factoring

more expensive than some other alternatives

describes disadvantages of secured loans

buyer typically has to establish payment history with seller, availability and term vary by seller

describes disadvantages of trade credit

cost varies based on credit rating, not available to those with unproven or bad credit

describes disadvantages of unsecured loans

typically from 10-30 years

describes length of term for corporate bonds

typically several years for equipment and vehicles, longer for real estate

describes length of term for leases

from 1-25 years

describes length of term for long-term loans

available only to large companies with strong credit ratings

describes the disadvantages of corporate bonds

can restrict how assets can be used, no equity gained from payments (exception of lease-to-own arrangements), can be more expensive than borrowing

describes the disadvantages of leasing

not all companies qualify for loans at acceptable terms, payments take up part of cash flow, higher down payments

describes the disadvantages of long-term loans

participating in the global money market, large institutional investors provide unsecured, short-term loans to corporations

describes the funding mechanism for commercial paper

company sells bonds to investors with promise to pay interest and principal according to set schedule

describes the funding mechanism for corporate bonds

creates a short-term loan every time purchase is made or cash advance is obtained

describes the funding mechanism for credit cards

third party takes over process of getting payment from customers and advances portion of accounts payable to seller

describes the funding mechanism for factoring

company earns right to use asset in exchange for regular payments, can be arranged directly between lessor and lessee or with third party

describes the funding mechanism for leases

bank or lender provides cash, borrower agrees to repay under specific terms

describes the funding mechanism for long-term loans

lender provides cash using borrower's assets as collateral

describes the funding mechanism for secured loans

allows buyer to make purchases without immediately paying for them

describes the funding mechanism for trade credit

lender provides lump sum of cash via a promissory note or on-demand access to cash via a credit line

describes the funding mechanism for unsecured loans

up to 270 days (can be special cases)

describes the length of term for commercial paper

revolving (no fixed payment date)

describes the length of term for credit cards

n/a

describes the length of term for factoring

up to 1 year (for short term loans)

describes the length of term for secured *and* unsecured loans

typically 30-90 days

describes the length of term for trade credit

smart contract

digital agreement in a distributed ledger such as blockchain that automatically executes when its criteria are fulfilled by incoming data

strategic plan

establishes goals, objectives, and priorities in reference to finding and allocating funds

short-term financing

financing used to cover current expenses--generally repaid within a year

long-term financing

financing used to cover long-term expenses such as assets--generally repaid over a period of more than one year

stock market, bond market, money market, derivatives market

four most significant markets

compute the cost of each source (of capital) then combine those in a weighted total for all sources

how cost of capital is calculated

over the counter

how stocks that don't meet the listing requirements of an exchange are sold

cash budget

identifies cash flows using accounts payable and accounts receivable, thereby helping managers monitor cash flow over the course of a month or other time period

start-up budget

identifies funds and spending needed to launch the company

financial budget

includes the cash budget and the budgeted income statement and balance sheet; meaning these are forward-looking versions of these statements rather than summaries of past amounts

secured loans

loans backed up with assets that the lender can claim in case of default, such as a piece of property

unsecured loans

loans that require a good credit rating but no collateral

mortgages

long-term loans on real estate

long-term loans, leases, corporate bonds

most common types of long-term debt alternatives

factoring

obtaining funding by selling accounts receivable

stock exchanges

organizations that facilitate the buying and selling of stock

capital budget

outlines planned purchases of real estate, new facilities, major equipment, and other long-term assets

private equity

ownership assets that aren't publicly traded; includes venture capital

project budgets

planned funding and spending for specific projects

financial management

planning for a firm's money needs and managing the allocation and spending of funds

commercial paper

short-term promissory notes, or contractual agreements, to repay a borrowed amount by a specified time with a specified interest rate

secured bonds

similar to secured loans, are backed by company-owned property that passes to the holder if issuer does not repay amount borrowed

credit crisis

situation in which a company doesn't have the cash it needs and can't borrow any more

scenario planning

situation in which managers identify two or more possible and different ways that events could unfold and have a budgetary plan for each one

liquidity crisis

situation where a company has insufficient cash to meet their short-term needs

margin trading

situation where investors buy stock using a combination of their own cash and money borrowed from their brokers

credit cards, trade credit, secured loans, unsecured loans, commercial paper, factoring

six types of short-term financing

hedging

term describing when a company may arrange contracts that allow them to buy supplies in the future at designated prices

balloon

term for payment when all of a loan is repaid at once

financial control

term for when the finance manager of a company compares the actual results of finalizing a budget with projections to discover variances and then recommends corrective action

highly leveraged

term to describe a company carrying a lot of debt

callable bonds, redeemable bonds

terms for bonds that contain the provision that allows corporations the right to pay off bonds before maturity

cost of capital

the average rate of interest a firm pays on its combination of debt and equity

risk/ return trade-off

the balance of potential risks against potential rewards

bond market

the collective buying and selling of bonds; most bond trading is done over the counter, rather than in organized exchanges

seed money

the first round of VC funding; called Series A

character, capacity, capital, conditions, collateral

the five C's lenders look at when considering applications for long-term loans

rate of return

the gain--or loss--of an investment over time, expressed as a percentage

no interest payments

the main pro for using a company's own cash to finance its growth

New York Stock Exchange, NYSE

the most famous physical stock exchange

economic order quantity, EOQ

the quantity of material that, when ordered regularly, results in the lowest ordering and storage costs

leverage

the technique of increasing the rate of return on an investment by financing it with borrowed funds

(1) balancing short-term and long-term demands, (2) balancing potential risks and rewards, (3) balancing leverage and flexibility

the three fundamental concepts of financial management

strategic plan, company's financial statements, external financial environment

the three information sources from which a financial plan takes its input

master budget

this incorporates the various budgets to present a complete and comprehensive view of the company's financial status and plans

(1) every company has a limited amount of money to spend, (2) revenues and costs are often difficult to predict, (3) it's not always clear how much money should be spent

three budgeting challenges

(+) the perceived risk associated with the company, (+) prevailing level of interest rates, (+) opportunity cost

three main factors that cost of capital depends on

length of term, cost of capital

two major considerations in choosing financing alternatives

balancing leverage and flexibility

which fundamental concept of financial management is described as. (+) can use debt strategically and sometimes out of necessity, (+) debt can be a tool, but it can also be a trap, (+) highly leveraged companies have far less ability to maneuver and are more vulnerable to setbacks

balancing potential risks and rewards

which fundamental concept of financial management is described as. (+) every decision involves a risk or reward trade-off, (+) higher risks may yield high rewards, (+) the safest choices aren't always the best choices

balancing short-term and long-term demands

which fundamental concept of financial management is described as. (+) must have ready cash to pay salaries, bills, and taxes, (+) needs a financial cushion to ride out rough times, (+) may need money for acquisitions or other extraordinary expenses, (+) must make strategic long-term investments

accounts receivable, accounts payable, inventory, and cash

working capital accounts