chp 18

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Venture capital helped

firms like Intel, Apple, and Cisco Systems get started and let Facebook and Google expand and grow

long-term forecast

predicts revenues, costs, and expenses for a period longer than 1 year, sometimes as long as 5 or 10 years.

short-term forecast

predicts revenues, costs, and expenses for a period of one year or less.

cash flow forecast

predicts the cash inflows and outflows in future periods, usually months or quarters.

Finance

the function in a business that acquires funds for the firm and manages them within the firm.

What's commercial paper?

Commercial paper is a corporation's unsecured promissory note maturing in 270 days or less

A start-up business typically

has few assets and no market track record, so the chances of borrowing significant amounts of money from a bank are slim.

Financial control

is a process in which a firm periodically compares its actual revenues, costs, and expenses with its budget.

term-loan agreement

is a promissory note that requires the borrower to repay the loan with interest in specified monthly or annual installments.

Venture capital

is money invested in new or emerging companies that some investors—venture capitalists—believe have great profit potential.

Cost of capital

is the rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders (stockholders or venture capitalists).

Capital expenditures

major investments in either tangible long-term assets such as land, buildings, and equipment, or intangible assets such as patents, trademarks, and copyrights.

budget

sets forth management's expectations for revenues and, on the basis of those expectations, allocates the use of specific resources throughout the firm.

Financial management

the job of managing a firm's resources to meet its goals and objectives.

Why should businesses use trade credit?

Trade credit is the least expensive and most convenient form of short-term financing. Businesses can buy goods today and pay for them sometime in the future.

Three of the most common reasons a firm fails financially are:

Under capitalization (insufficient funds to start the business). Poor control over cash flow. Inadequate expense control.

What do financial managers do?

Financial managers plan, budget, control funds, obtain funds, collect funds, conduct audits, manage taxes, and advise top management on financial matters.

promissory note

a written contract with a promise to pay a supplier a specific sum of money at a definite time.

What are the two major forms of debt financing?

Debt financing comes from two sources: selling bonds and borrowing from individuals, banks, and other financial institutions. Bonds can be secured by some form of collateral or unsecured. The same is true of loans.

What are the major sources of long-term financing?

Debt financing is the sale of bonds to investors and long-term loans from banks and other financial institutions. Equity financing is obtained through the sale of company stock, from the firm's retained earnings, or from venture capital firms.

What's the difference between debt financing and equity financing?

Debt financing raises funds by borrowing. Equity financing raises funds from within the firm through investment of retained earnings, sale of stock to investors, or sale of part ownership to venture capitalists.

risk/return trade-off.

The greater the risk a lender takes in making a loan, the higher the rate of interest.

indenture terms

The terms of the agreement in a bond issue

Venture capitalists invest in a business in return for part ownership of the business.

They expect higher-than-average returns and competent management performance for their investment.

What is meant by a line of credit and a revolving credit agreement?

A line of credit is an agreement by a bank to lend a specified amount of money to the business at any time, if the money is available. A revolving credit agreement is a line of credit that guarantees a loan will be available—for a fee.

pledging and works as follow

A percentage of the value of a firm's accounts receivable pledged (usually about 75 percent) is advanced to the borrowing firm.26 As customers pay off their accounts, the funds received are forwarded to the lender in repayment of the funds that were advanced.

What's the difference between a secured loan and an unsecured loan?

An unsecured loan has no collateral backing it. Secured loans have collateral backed by assets such as accounts receivable, inventory, or other property of value.

What's leverage, and how do firms use it?

Leverage is borrowing funds to invest in expansion, major asset purchases, or research and development. Firms measure the risk of borrowing against the potential for higher profits.

What are firms' major financial needs?

Managing day-by-day needs of the business. Controlling credit operations. Acquiring needed inventory. Making capital expenditures.

Is factoring a form of secured loan?

No, factoring means selling accounts receivable at a discounted rate to a factor (an intermediary that pays cash for those accounts and keeps the funds it collects on them).

What's the difference between short-term and long-term financing?

Short-term financing raises funds to be repaid in less than a year. long-term financing raises funds to be repaid over a longer period.

the three key budgets in the financial plan

The capital budget is the spending plan for expensive assets such as property, plant, and equipment. The cash budget is the projected cash balance at the end of a given period. The operating (master) budget summarizes the information in the other two budgets.


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