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Financing a Business Chapter 16 Chapter 16 Financing a Business
©2008 Thomson/South-Western
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Methods of Obtaining Capital
Equity capital — owners’ personal contributions to the business (Sole Proprietorship; Partnership; & Corporation) Retained earnings — profits not taken out of the business but saved for use by the business Debt capital — money that others loan to a business Chapter 16 Financing a Business
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Sources of Start-Up Capital
Chapter 16 Financing a Business
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Types of Stock Common stock — gives holders the right to participate in managing the business by voting on basic issues at annual meetings and electing board of directors; holders can also share in profits Preferred stock — gives holders first claim on corporate dividends if the company earns a profit, and priority over common stockholders if the company fails Chapter 16 Financing a Business
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Value of Stock Par value — arbitrary dollar value assigned to shares of stock when they are issued Market value — price at which stock is actually bought and sold Book value — value calculated by dividing the corporation’s net worth by the total number of shares outstanding Chapter 16 Financing a Business
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Distribution of Corporate Profits
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Debt Capital Short-term debt capital Long-term debt capital
Funds obtained from banks Line of credit Promissory note Funds obtained from other sources Trade credit Long-term debt capital Term loans (long-term notes) Bonds Chapter 16 Financing a Business
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Obtaining Capital Factors in selecting a method of obtaining capital:
Cost of capital Interest rates Power of contributors to influence operations Chapter 16 Financing a Business
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Main Sources of Outside Capital
Investment banks — organizations that help businesses raise large sums of capital through sale of stocks and bonds Stock options — rights granted by a corporation that allows current stockholders to buy additional shares when issued at a fixed price for a specific period of time Venture capital — financing obtained from an investor or investment group that lends large sums of money to promising new or expanding small companies Chapter 16 Financing a Business
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