Business Chapter 15

What are the most common way firms fall financially?

1. undercapitalization 2. por control over cash flow 3. inadequate expense control

line of credit

A given amount of unsecured short-term funds a bank will lend to a business, provided the funds are readily available.

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 are firms' major financial needs?

Businesses need financing for four major tasks: (1) managing day-by-day operations, (2) controlling credit operations, (3) acquiring needed inventory, and (4) making capital expenditures.

What are 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 are the major forms of equity financing?

Equity financing involves selling stock, using retained earnings, or acquiring funds through venture capitalists

cash budget

Estimates cash inflows and outflows during a particular period like a month or quarter.

financial managers

Examine financial data prepared by the accountants and recommend strategies for improving financial performance.

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.

Whats' 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.

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.

venture capital

Money that is invested in new or emerging companies that are perceived as having great profit potential

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).

Cash flow forecast

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

budget

Sets forth management's expectations for revenues and allocates the use of specific resources throughout the firm.

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

Short term financing raises funds to be repaids in less than a year, whereas long term financing raises funds to be repaid over a longer period

What are the advantages and disadvantages of issuing bonds?

The advantages of issuing bonds include the following: (1) management retains control since bondholders cannot vote for the board of directors; (2) interest paid on bonds tax-deductible; (3) bonds are only a temporary source of financing, and after they are paid off the debt is eliminated; (4) bonds can be paid back early if they are callable, and sometimes bonds can be converted to common stock The disadvantages of bonds include the following: (1) because bonds are an increase in debt; they may adversely affect the market's perception of the company; (2) the firm must pay interest on its bonds; and (3) the firm must repay the bond's face value on the maturity date.

What are the advantages and disadvantages to a firm of selling sotck?

The advantages of selling stock include the following: (1) the stock investment never has to be repaid to stockholders, since they become owners in the company; (2) there is no legal obligation to pay stock dividends; and (3) the company incurs no debt, so it may appear financially stronger. Disadvantages of selling stock include the following: (1) stockholders become owners of the firm and can affect its management by voting for the board of directors; (2) it is more costly to pay dividends since they are paid in after tax profits; and (3) managers may be tempted to make stockholder happy in the short term rather than plan for long-term needs.

what are the three budgets in a 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. It projects dollar allocations to various costs and expenses given various revenues.

inital public offering

The first public offering of a corporation's stock.

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.

debenture bond

a bond backed only by the reputation of the issuing corporation

bond

a corporate certificate indicating that a person has lent money to a firm (or a government)

what is meant by a line of credit?

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

unsecured loan

a loan that doesn't require any collateral

financial control

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

term-loan agreement

a promissory note that requires the borrower to repay the loan in specified installments

operating (or master) budget

an aggregate of the firm's other budgets and summarizes its proposed financial activites

secured loan

backed by collateral, something valuable such as property

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 or retained earnings, sale of stock to investors, or sale of part ownership to venture capitalists

capital budget

forecasts a firm's spending plans for major asset purchases that often require large sums of money, like property, buildings, and equipment

equity financing

is money raised from within the firm, from operations or through the sale of ownership in the firm (stock)

leverage

raising funds through borrowing to increase the firm's rate of return

debt financing

refers to funds raised through various forms of borrowing that must be repaid

stocks

shares of ownership in a company

finance

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

risk-return trade-off

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

financial management

the job of managing a firm's resources so it can meet its goals and objectives

trade credit

the practice of buying goods and services now and paying for them later

factoring

the process of selling accounts receivable for cash

cost of capital

the rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders