HEcon: Chapter 10 -- Section 2

Preferred

Common or Preferred? Holders have no voting rights.

Common

Common or Preferred? Holders of this type have voting rights in a corporation. They elect the board of directors.

Preferred

Common or Preferred? If a corporation fails, holders must be paid first.

Common

Common or Preferred? If a corporation fails, holders of this type of stock are the last to be paid with whatever funds are left after paying all creditors.

Common

Common or Preferred? Issued by all public corporations; it is the stock most often bought and sold.

Preferred

Common or Preferred? Many corporations do not issue this type of stock.

Common

Common or Preferred? May pay dividends based on a corporation's performance.

Preferred

Common or Preferred? Pays a fixed dividend. This amount must be paid before holders of the other type of stock receive any dividends.

Preferred

Common or Preferred? The value of this stock changes in relation to how well the company is doing.

Common

Common or Preferred? The value this type of stock rises ad falls in relation to the corporation's performance and what investors expect it to do in the future.

- often costs more than borrowing to buy the same equipment

Disadvantage of leasing

- major expansion - long-lasting replacement equipment

Examples of things long-term financing is used for

trade credit

Extended by one firm to another business buying the firm's goods. It allows the buyer to take possession of goods immediately and pay for them at some future date, usually 30 to 90 days later.

intermediate-term financing

Funds borrowed by a business for 1 to 10 years.

long-term financing

Funds borrowed by a business for a period of more than 10 years or funds raised by issuing stock.

short-term financing

Funds borrowed by a business for any period of time less than a year.

loans

Have repayment periods from 1 to 10 years and generally require collateral such as stocks, bonds, equipment, or machinery. Considered to be a mortgage if it is secured by property such as the building in which the business is located.

10 to 15 years or more

How long does long-term financing last?

1 year

How long is the typical repayment period for unsecured loans?

the fixed rate of return of bonds or preferred stock

If economic growth in the overall market appears slow, investors may prefer what over the unknown return on common stock?

issue bonds

Interest rates affect the decision to...

leasing

Means renting rather than buying - whether it is a building, machinery, or the like.

unsecured loans

Most short-term bank credit for businesses.

Bonds

Promise to pay a stated rate of interest over a stated period of time and to repay the full amount borrowed at the end of that time.

debt financing

Raising funds for a business through borrowing.

collateral

Secured loans are backed by what?

equity financing

Selling stock is called this because part of the ownership of the company is being sold.

collateral

Something of value that the borrowers will lose if they do not repay a loan.

True

True or False: Bonds do not have voting rights attached to them.

True

True or False: Financially sound companies can sometimes get unsecured loans.

large companies

What are better risks to investors: small companies or large companies?

low

When are businesses more likely to borrow: When interest rates are high or low?

when interest rates are high

When might businesses be reluctant to take out a loan?

common stockholders

Who has say in issues of financing?

By paying within a specified amount of time

With trade credit, how can businesses receive a discount?

promissory note

With unsecured loans, the borrower must sign this to repay the loan in full by a specified time and within a specified rate of interest.

1. loans 2. leasing

2 forms of intermediate-term financing

1. common 2. preferred

2 types of stock

1. short-term 2. intermediate-term 3. long-term

3 categories of debt financing:

1. interest rates 2. financial condition of the company 3. market climate 4. control of the company

4 factors that determine a corporation's decision on whether to sell bonds or issue stock

1. trade credit 2. unsecured loans 3. secured loans 4. line of credit

4 types of short-term financing

a credit check

A business that wants to borrow must show creditworthiness by undergoing what?

their current debt is not too large

A company or corporation whose sales and profits are stable or are expected to increase can take on more debt if what?

line of credit

A maximum amount a company can borrow from a bank during a period of time, usually one year. Rather than apply each time for a loan, a company may automatically borrow up to the amount of the line of credit.

- leasing company will service the machinery at a low cost - business may deduct a part of the funds spent on a lease before figuring taxes

Advantages of leasing

accounts receivable

Amounts owed to a business by its customers.

- buying more land, buildings, or equipment

examples of what intermediate-term financing is for