1. FINANCING A BUSINESS Chapter Goals:
10/6/2000
FINANCING A BUSINESS
Chapter Goals:
Distinguish between equity (owner) capital, retained earnings, and debt (creditor) capital.
Explain the difference between common and preferred stock, and discuss three ways to value
stock.
Discuss ways that companies can obtain short-term and long-term debt capital.
Describe important factors companies consider in deciding how to obtain the capital they need.
Discuss common sources of outside capital for companies.

2. METHODS OF OBTAINING CAPITAL
Chapter 17
10/6/2000
METHODS OF OBTAINING CAPITAL
Capital: the $ required to start or expand a business
Equity (owner) capital: the business owners personal contributions to the business
Retained earnings: a type of equity capital where owners do not take profits out of the business but instead save for use by the business
Debt (creditor) capital: capital that others loan to a business

3. Financing through Equity Capital
Chapter 17
10/6/2000
Financing through Equity Capital
Stock: share of ownership in a corporation
Common stock: owners have right to share in profits and vote on basic issues within the corporation.
May or may not receive dividends
Dividends: portion of companies profits are distributed to shareholders. Issued by the corporations BOD
Preferred stock: owners have first claim on dividends (fixed) but have no voting rights
Certificate of Incorporation states what type of stock a corporation is authorized to issue. Good practice to issue only common stock when first starting a business
Corporate Profits
Stock-holders: dividends
Business: retained earnings

4. Stock values Value of stock: three ways to look at value of stock
Chapter 17
10/6/2000
Stock values
Value of stock: three ways to look at value of stock
Market value: the price investors pay for the stock on any given day
Par (stated) value: an arbitrary dollar value that is printed on the stock certificate that is used for bookkeeping purposes
Book value: found by dividing corporations net worth (assets minus liabilities) by the number of shares outstanding
Used in special situations: determining the value of an entire business that is about to be sold, estimating amt of $ to distribute to shareholders when a corp. is dissolved

5. Financing through retained earnings
Corporate Profits
Stock-holders: dividends
Business: retained earnings
Retained earnings (aka plowing back earnings)
Reasons to plow back:
Replacement of bldgs. and equipment as result of depreciation
Replacement of equipment as result of obsolescence (out of date)
Addition of new facilities or expansion of business
Financial protection during periods of low sales and profits, such as recessions or tough competition

6. Financing through Debt capital
Short-term capital: must be repaid with interest within a yr or less
Obtaining funds from banks
Open line of credit: authorized to borrow up to a certain amt for specific period of time
Promissory Note: unconditional written promise to pay lender a certain sum of $ at a particular time
Obtaining funds from other sources
From insurance companies or Federal agencies
Factor: a firm that specializes in lending $ to business based on accts receivable. Purchases accts receivable at discount and then collects full amt
Sales finance company: purchases installment sales contracts at a discount

7. Financing through Debt capital
Long-term capital: borrow for longer than a yr
Notes: extend for a long period of time (1 to 15 yrs).
Principal and interest repaid on a regular basis over life of the note
Lease: substitute for long-term financing where a contract allows use of an asset for a fee pd on a schedule
Bonds: long-term written promise to pay a definite sum of $ at a specified time. Corporation borrowing $ from individuals.
Principal (par value)- pd at maturity date of the bond
Interest- pd at specified intervals
Types of bonds
Debenture bonds: Unsecured bonds
Mortgage bonds: secured by specific assets pledged as guarantee
Convertible bonds: a bond that can be exchanged for shares of common stock

8. SELECTING A METHOD OF OBTAINING CAPITAL
Cost of capital
Filing forms, gaining authority from gov., legal fees on agreements, printing, record keeping
Interest rates
High- borrow short-term
Low- borrow long-term
Power of contributors to influence business operations
Mortgage bonds- owners have lien (claim) on assets of company
Common stockholders- voting rights and shared earnings

9. SOURCES OF OUTSIDE CAPITAL
Investment banks: organizations that help a business raise large sums of capital through sale of stocks and bonds
Initial public offering: first time company sells stock to public
Stock rights options: contracts that allow stockholders to buy additional shares for less than the mkt price for a specified period of time
Cheaper because corporation sells stock itself and does not use investment banker
Venture capitalists: investment groups that lend large sums of money to promising new or expanding small companies
Require carefully developed business plan that shows high potential for success