CH15 - Finance Flashcards
short term spending expenditures
accounts payable : unpaid bills due in a year
accounts receivable : funds due from customers who have bought on credit
inventories : materials and goods that it will sell within the year
long-term (capital) expenditures
funds to cover long-term expenditures for fixed assets such as land, buildings, and machinery, more carefully planned
trade credit and 3 forms
granting of a credit by one firm to another, short-term loan
1) open-book credit : informal agreement
2) promissory notes : legally binding, states when and how much will paid
3) trade draft : attached to the merchandise shipment by the seller + states date and amount due, must be signed -> becomes trade acceptance
secured short-term loans
bank loans, involve promissory note, has interest, requires COLLATERAL (inventories, accounts receivable, stocks, etc), can allow those that don’t qualify for unsecured credit
unsecured short-term loans + one type
borrower does not have to put up collateral, but bank requires borrower to maintain a compensating balance, promissory note once terms are negotiated
lines of credit : the firm knows the maximum amount it will be allowed to borrow (ex. for a coming year)
debt financing + 2 primary sources
long-term borrowing from outside the company, most appealing to firms with predictable profits and cash-flow patterns
2 main sources : long-term loans (can be arranged quickly + possible to change terms BUT hard for large borrows and restrictions), sale of bonds
corporate bond def
contract / promise by the issuing company or organization to pay the bondholder a certain amount of money (the principal) on a specified date, plus interest, in return for use of the investor’s money
bond indenture : terms of the bond, including the interest rate, the maturity date of the bond, and which of the firm’s assets, if any, are pledged as collateral.
equity financing
When companies sell shares to investors to raise capital
takes the form of issuing stock or retaining the firm’s earnings. Both options involve putting the owners’ capital to work
issuing common stock
By selling shares of common stock, the company obtains the funds it needs to buy land, buildings, and equipment. Individuals and companies buy a firm’s stock, hoping that it will increase in value (a capital gain) or will provide dividend income.
value of a common stock in 3 ways
1 - par value : face value of a share of stock that is set by the issuing company’s board of directors
2 - book value : shareholders’ equity (the sum of a company’s common stock par value, retained earnings, and additional paid-in capital) divided by the number of shares
3 - market value : real value, current price on the market
market capitalization
multiplication of the number of a company’s outstanding shares times the market value of each share
retaining the firm’s earnings
These earnings represent profits not paid out in dividends. Using retained earnings means that the firm will not have to borrow money and pay interest on loans or bonds
what are securities
stocks and bonds because they represent a secured (asset-based) claim on the part of investors. Collectively, the market in which stocks and bonds are sold is called the securities market.
Primary securities markets = handle the buying and selling of new shares (initial public offerings or IPOs) of stocks and bonds by firms or governments
Secondary securities market = market for existing stocks and bonds
stock exchange + stockbroker def
stock exchange : composed of individuals (stockbrokers) and organizations (investment banks) that provide a setting in which shares of stock can be bought and sold
stockbroker : receives buy and sell orders from those who are not members of the exchange and executes the orders. In return, the broker earns a commission from the person who placed the order
discount broker : well-informed individual investors a fast, low-cost way to participate in the market, no advice
market indexes
provide a useful summary of trends in specific industries and the overall stock market -> useful for choosing investments
