14. Financing Sources Flashcards
The 72 rule (important)
to double the money, divide 72 by the interest rate to get the number of year
define stock
portion of ownership in a corporation
define common stock
basic form of ownership which have voting rights for major issues
define blue-chip stock
common stock of
- well-established and respected company
- sound financial history
- stable pattern of dividend payout
examples: Digi, TM, Genting Malaysia
define dividend
payment to shareholder, on a per-share basis, out of a company earnings
define market value
current price of a share of stock in stock market
define book value
value of a common stock expressed as
- firm owner equity divided by the number of common shares
define securities
stocks, bonds, and mutual funds representing secured
define securities market
market where bonds and stocks are sold
primary and secondary securities market
primary for new stocks and bonds
secondary for existing stocks and bonds
Securities Commission Malaysia (important)
to regulating and systematically developing capital market in Malaysia
investment bank
financial institution that specialized in issuing and reselling new securities
stock exchange
organisation that provide institutional auction setting in which stock can be bought and sold
- Bursa Malaysia
bull market and bear market (important)
bull - rising stock price lasting 12 months or more than that, giving confidence for future gain and motivation to buy
bear - falling stock price, giving motivation to sell
define market index
statistical indicator used to track performance and change in prices of stock market
risk return relationship (important)
safer investment - lower return
riskier investment - higher return
define interest dividend yield
percentage of yearly dividend income divided by current market value of investment
price appreciation
increase of value of investment at two points in time
define capital gain
profit from increasing investment
define total return
sum of interest dividend yield and capital gain
formula of investment return (important)
( (current dividend + capital gain) / original investment )x100%
define diversification
invest in several different kind of investments
define asset allocation
allocate relative amount of fund to each of several investments alternatively
define portfolio
combined holdings of all financial investments
4 sources of fund
- owners’ savings
- borrow from bank
- solicit cash from private outside investors
- sell bonds to public
debt financing and equity financing
debt - long-term borrowing from outside source of the company (long-term loan)
equity - using owner’s funds from inside the company (common stock)
pros of debt financing
- speed of availability
- no public disclosure
pros of equity financing
- no interest
- cash flow
- less risk
cons of equity financing
- dividend to shareholder is more expensive than the interest
- retained earnings as source causing low dividend to shareholders
secured bond and unsecured bond
secured - borrower pledging asset as collateral to the lender
unsecured - do not required collateral, to meet short term operating expenses
corporate bond
obligating the company to pay interest periodically and repay the principal at the maturity
bond indenture
legal document containing complete detail of a bond issue
define maturity date
the date when the repayment of bond is due
define face value
- par value
- the amount of money the lender lent to the borrower
- the lender will receive upon the repayment
3 type of corporate bond
- short-term (<5years)
- intermediate term (5-10years)
- long term (>10 years)
example of equity financing
becoming a public corporation
initial public offering (IPO)
the first sale of company stock to the public
what is prospectus
a file containing information of security to be offered and the issuing company
