1. Copyright by Paradigm Publishing, Inc. INTRODUCTION TO BUSINESS CHAPTER 16 Financing

2. Copyright by Paradigm Publishing, Inc. Methods of Debt Financing Debt financing: the act of borrowing funds. Capital: long-term funds Borrowing from Financial Institutions Pledging Collateral Loan Rate Prime Rate: the rate of interest typically charged on loans to the most creditworthy firms that borrow

3. Activity How much money do you need to OPEN your business? How are you going to get that money? Options? (Name some…) Part of the feasibility section of your report Let’s review the plan … Hand out– (quick review)

4. Costs Initial (list – start up) Monthly – fixed, variable Break Even – www.javacalc.comwww.javacalc.com Now that you know what you need THEN you write the Feasibility section – Goes first in plan -- “Where’s the Money?”

5. Break Even Point (www.javacalc.com)

6. Start up costs – rough estimates People: Hiring & training$ Lease Inventory Furniture Computers/phones Promotional costs Office supplies Other TOTAL$

7. Monthly Costs – rough estimate Payroll$ Rent Inventory Supplies Utilities Other TOTAL $

8. Revenue A. Estimated days open per week x 4.3 weeks per month = _____ B. Estimated customers per day = ____ C. Estimated average customer sale (per mktg plan) = _____ A (days) x B (customers) x C ($) = Estimated monthly revenue of $_______________ per month

9. Copyright by Paradigm Publishing, Inc. Methods of Debt Financing Fixed-Rate versus Floating-Rate Loans Types of Business Loans Loans Backed by the U.S. Government Issuing Bonds Bonds: long-term debt securities (IOUs) purchased by investors. Par Value: the amount that bondholders receive at maturity.

10. Interest Rate Charged on Loans Under Three Different Scenarios Copyright by Paradigm Publishing, Inc.

11. PRIME RATE Wall Street Journal Prime Rate By Bankrate.comBankrate.com This week Month ago Year ago 3.25 3.25 5.00 The initials stand for the Wall Street Journal, which surveys large banks and publishes the consensus prime rate. The Journal surveys the 30 largest banks, and when three-quarters of them (23) change, the Journal changes its rate, effective on the day the Journal publishes the new rate. It's the most widely quoted measure of the prime rate, which is the rate at which banks will lend money to their most-favored customers. The prime rate will move up or down in lock step with changes by the Federal Reserve Board. How it's used: The prime rate is an important index used by banks to set rates on many consumer loan products, such as credit cards or auto loans. If you see that the prime rate has gone up, your variable credit card rate will soon follow.

12. Summary of Risk Ratings Assigned by Bond Rating Agencies Copyright by Paradigm Publishing, Inc.

13. Methods of Debt Financing Indenture: a legal document that explains the firm’s obligations to bondholders. Secured bonds: bonds backed by collateral. Unsecured bonds: bonds that are not backed by collateral. Call feature: provides the issuing firm with the right to repurchase its bonds before maturity. Default Risk of Bonds

14. Copyright by Paradigm Publishing, Inc. Methods of Debt Financing Protective covenants: restrictions imposed on specific financial policies of a firm that has issued bonds. Issuing Commercial Paper: a short-term debt security normally issued by firms in good financial condition. Impact of the Debt Financing Level on Interest Expenses

15. Copyright by Paradigm Publishing, Inc. Methods of Debt Financing Common Creditors That Provide Debt Financing Commercial banks Savings institutions Finance companies Pension funds Insurance companies Mutual funds Bond mutual funds

16. Others… Personal money – “Skin in the Game” Love Money The Three “F”’s

17. Copyright by Paradigm Publishing, Inc. Methods of Equity Financing Equity financing: the act of receiving investment from owners (by issuing stock or retaining earnings). Retaining Earnings Dividend policy: the decision regarding how much of the firm’s quarterly earnings should be retained (reinvested in the firm) versus distributed as dividends to owners.

18. Copyright by Paradigm Publishing, Inc. Methods of Equity Financing Factors that Affect a Firm’s Dividend Policy Shareholder Expectations Firm’s Financing Needs Issuing Stock Common stock: a security that represents partial ownership of a particular firm. Preferred stock: a security that represents partial ownership of a particular firm and offers specific priorities over common stock.

19. Methods of Equity Financing When a business needs some equity funding but not enough to engage in a public stock offering, its owners may meet with representatives from venture capital firms. The owners will present their plan for how they would use the funds provided. The venture capital firms may extend funding if they think that they would receive a good return on their investment in the business. Copyright by Paradigm Publishing, Inc.

20. Methods of Equity Financing Issuing Stock to Venture Capital Firms Venture capital firm: a firm composed of individuals who invest in small businesses. Going Public Initial public offering (IPO): the first issue of stock to the public.

21. Copyright by Paradigm Publishing, Inc.

22. How Firms Issue Securities Public offering: the selling of securities to the public. Origination Underwriting Underwritten: the investment bank guarantees a price to the issuing firm, no matter what price the securities are sold for.

23. Copyright by Paradigm Publishing, Inc. How Firms Issue Securities Best-efforts basis: the investment bank does not guarantee a price to the firm issuing securities. Underwriting syndicate: a group of investment banks that share the obligations of underwriting securities.

24. Copyright by Paradigm Publishing, Inc. Other Methods of Obtaining Funds Financing from Suppliers Leasing: renting assets for a specified period of time.

25. Copyright by Paradigm Publishing, Inc. Deciding the Capital Structure Capital structure: the amount of debt versus equity financing. Revising the Capital Structure How the Capital Structure Affects the Return on Equity

26. Copyright by Paradigm Publishing, Inc. Remedies for Debt Problems Extension: provides additional time for a firm to generate the necessary cash to cover its payments to its creditors. Composition: specifies that a firm will provide its creditors with a portion of what they are owed.

27. Copyright by Paradigm Publishing, Inc. Remedies for Debt Problems Private liquidation: creditors may informally request that a failing firm liquidate (sell) its assets and distribute the funds received from liquidation to them. Formal Remedies Reorganization Liquidation value: the amount of funds that would be received as a result of the liquidation of a firm. Liquidation under Bankruptcy