buss fi 3- 4 Flashcards
can be in the form of borrowing from banks
or other lending institutions or issuance of debt securities like
commercial papers and bonds.
Debt financing
creates a contractual obligation for the
borrower to pay interest and the principal.
Debt Financing
refers to issuance of new shares of stocks
and retained earnings plowed back into the operations of the
company
Equity financing
The latter is also called
internally generated funds
the safest source of financing for a company
because it does not require any mandatory payment of
dividends
Equity financing
also provides the company financial
flexibility.
Equity financing
are not tax-deductible.
Cash Dividends
which means that for
somebody to take more risk, he must be
compensated by an expected higher return. If this is
not the case, then why take additional risk
“high risk, high return”
was developed based on repeated observations of how
companies fund their financing requirements.
pecking order hypothesis
These are the funds that
come from operating cash flows.
Internally generated funds
When internally generated funds have been
exhausted, debt financing is the next alternative
Debt
The last in the priority list of financing is……This is not surprising given that it is more difficult
to issue new shares of stocks
Equity.
Suppliers of raw materials and
merchandise are the best sources of short-term working
capital. This is the reason why a good relationship has to be
nurtured with suppliers. As much as possible, honor the
credit terms
Supplier’s credit
If you have enough personal
assets and you control the company, advancing funds to the
company, when there are financial requirements, is an easy
way for the company to raise funds. Interest on these
advances can be charged by the stockholder
Advances from stockholders
There are occasions when the management
of a company decides to borrow short-term loan to address this
problem.
Supplier’s credit
Advances from stockholders
Credit cooperatives
Bank loans
Lending companies
Informal lending sources such as “5-6”
Banks can provide both short-term and long- term loans. Some banks also provide credit facilities, not just to big corporations, but also to small and medium enterprises. But also, to small and medium enterprises.
Bank loans
much faster as compared to banks but
they charge higher interests, higher than the banks but
lower compared to a more informal lending, popularly
known as “5-6”
Lending companies.
These are small lending companies
which cater normally to small and medium enterprises.
Lending companies.
This is a very
expensive source of financing and should be avoided
Informal lending sources such as “5-6”.
are used for long-term investments
Long-term funds
Long-term funds are used for long-term investments or sometimes called
capital investments
can also be used to finance permanent working capital requirements.
Long-term
funds
All individuals and businesses face the same two basic finance-related problems:
- Where to put the money?
- Where to get the money?
is earned or incurred for the use of the principal amount
over the relevant time period.
Interest
simply earning interest on
interest.
Compound Interest
This means that the basis for the computation of the applicable
interest for a certain period is not only the original principal but also any
interest earned in the previous period assuming all cash flows would be
paid or received in lump sum upon maturity.
Compoud Interest
the value of a current asset at a future date
based on an assumed rate of growth
Future value
as they use it to estimate how
much an investment made today will be worth in the future.
Future Value
It refers to money that comes from the collection of receivabes, proceeds from loadns, or issuance of new share and advances from stockholders
Cash receipts
This policy state that permanent working capital and a part of temporary caworking capital is being financed by a long term financing sources.
Conservatice policy
This policy state that permanent working capital and a part of temporary caworking capital is being financed by a short term financing sources.
Agressive policy
It is the measure of a company’s liquidity, operational efficiency, and short term financial health.
working capital
According to
this hypothesis, this is how companies fund their
requirements
- Internally generated funds
- Debt
- Equity
are normally used to finance the day-to-day
operations of the company.
Short-term funds
It is used for working capital
requirements such as accounts receivable and inventories.
Short-term funds
