18-1 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 18Condensed18Condensed Financial Management

18-2 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Sources of Funds & Financing

18-3 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Why Firms Need Funds Short-Term Funds Meeting monthly expenses Unanticipated emergencies Cash-flow problems Expanding current inventory Temporary promotional programs Long-Term Funds New product development Replacing capital expenditure Mergers or acquisitions Expansion into new markets Building new facilities

18-4 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Sources of Funds 1. 1.Debt Capital 2. 2.Equity Capital

18-5 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Types of Financing 1. 1.Short-Term 2. 2.Long-Term

18-6 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Short-Term Financing

18-7 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Sources of Funds Short-Term Trade Credit – –2/10, net 30 Promissory Notes Family/Friends Banks, etc. – –Secured Loan – –Unsecured Loan Factoring Commercial Paper

18-8 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Different Forms of Bank Loans Secured Loans (collateral) – –Pledging (accts receivable) – –Inventory Financing (raw materials) Unsecured Loans Line of Credit (not guaranteed) – –Revolving Line of Credit (guaranteed) Comm’l Finance Companies – –Non-banks

18-9 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Long-Term Financing

18-10 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Sources of Funds Long-Term Debt – –Term-Loan – –Bonds Secured Unsecured Equity – –Stock – –Retained Earnings – –Venture Capital

18-11 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Long-Term Debt Financing

18-12 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Term Loans

18-13 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Bonds Classes ¢Unsecured ¢Debenture ¢Secured ¢Mortgage

18-14 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Long-Term Equity Financing

18-15 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Sources of Equity Financing Equity Capital Internal Sources External Sources Retained Earnings Owner Contributions Sale of Partnerships Venture Capital Public Sale of Stock