why do firms fail financially
undercapitalization, poor control over cash flow and inadequate expense control
what do financial managers do
plan, budget, control funds, obtain funds, collect funds, conduct audits, manage taxes, and advise top management on financial matters
what are 3 budgets in a financial plan
- capital budget (spending plan for huge assets like property)
- cash budget (projected cash balance at the end of a given period)
- operating budget (summarizes the information in the other two budgets)
what are firms major financial needs
- managing day by day operations
- controlling credit operations
- acquiring needed inventory
- making capital expenditures
whats the difference between debt financing and equity financing
debt financing raises funds by borrowing and equity raises funds from within the firm through investments of retained earnings, sale of stock to investors, or sale of part ownership to venture capitalist
whats short term financing vs long term financing
short term raises funds to be repaid in less than a year whereas long term financing raises funds to be repaid over a longer period
why should businesses use trade credit
trade credit is the least expensive and the most convenient for of short term financing
what is meant by a line of credit
line of credit is an agreement by a bank to lend a specific amount of money to he business at any time, if the money is available
whats the difference between secured loan vs unsecured loan
unsecured: has no collateral backing it
secured: have collateral backed by assets such as accounts receivable, inventory, or other property of value
is factoring a form of secured loan
no, factoring means selling accounts receivable at a discounted rate to a factor
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 firms retained earnings, or from venture capital firms
what are 2 major forms of debt financing
selling bonds and borrowing from individuals, banks, and other financial institutions. Bonds can be secured y some form collateral or can be unsecured (debenture bonds). The same is true of loans.
what are the advantages of issuing bonds
- management retains control since bondholders cannot vote for the board of directors
- interest paid on bonds is tax deductible
- bonds are only a temporary source of financing, and after they’re paid off the debt is eliminated
- bonds can be paid back early id they are callable, and sometimes bonds can be converted to common stock
what are disadvantages of issuing bonds
- bc bonds are an increase in debt, they may adversely affect the markets perception of the company
- the firm must pay interest on its bonds
- the firm must repay the bonds face value on the maturity date
what are major forms of equity financing
equity financing involves selling stock, using retained earnings, or acquiring funds through venture capitalists
what are advantages to a firm of selling stock
- the stock investment never has to be repaid to stockholders, since they become owners in the company
- there’s no legal obligation to pay stock dividends
- the company incurs no debts, so it may appear financially stronger
what are disadvantages to a firm of selling stock
- stockholders become owners of the firm and can affect its management by voting for the board of directors
- its more costly to pay dividends since they are paid in after tax profits
- managers may be tempted to make stockholders happy in the short term rather than plan for long term needs
whats leverage
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
whats a venture capital
money that is invested in new or emerging companies that are perceived as having great profit potential
what are capital expenditures
major investments in either tangible long term assets
whats a debenture bond
bond that is unsecure
what is cost of capital
the rate of return a company must earn in order to meet the demands of its lenders and explanations of its equity holders
what is an IPO
Initial public offering: the first public offering of a corporation’s stock
what are risk/return trade offs
the principle that the greater the risk a lender takes in making a loan, the higher the interest rate required
