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
