Chapter 6: Financing a Business Flashcards
What do business need in order to finance their activities?
a steady flow of money
Where does a majority of a businesses funds come from?
internal funds
What are INTERNAL FUNDS?
money a company receives from the sale of its products or services
What are EXTERNAL FUNDS?
money from an outside source
What are four examples of external funds?
- loans
- sale of stock
- selling a bond
- floating a bond
What is FLOATING A BOND?
selling it to the public to make a profit off interest
What percentage of a companies needs are covered by internal funds?
58%
What are EARNINGS?
the funds that remain after expenses
What are another names for earnings?
profit and residual
What is another name for profit residual?
earnings
What are RETAINED EARNINGS?
money put back into the company
Explain earnings and retained earnings in terms of companies and dividends…
If a company pays dividends, then earnings and retained earnings are different because the dividend payments are taken out of retained earnings
If a company does not pay dividends, earnings and retained earnings are the same
What percentage of a companies needs are covered by external funds?
42%
In what two ways can a company borrow money?
- float a bond
- take out a loan
If retained earnings are not enough, what three things can a company do to get more money?
- borrow
- sell stock
- spend less
What are the four different forms of borrowing and what percentage do they account for?
- long term debt: 16%
- short term debt: 12%
- trade loan: 10%
- sale of stock: 4%
What is a form of long term debt?
bonds
What three things can companies borrow money for long term?
- equipment
- buildings
- land
What three things can companies borrow money for short term?
- payroll
- raw materials
- merchandise
What is a TRADE LOAN?
credit extended by vendors to their customers
What is PRINCIPAL?
amount borrowed
What is the cost of borrowing?
interest = principal x rate x time I = PRT
KNOW how to calculate the cost of borrowing!
What is the interest when the principal is 1000 the rate is 10% and the time is 1 yr?
$1100
What is a DISCOUNTED LOAN?
a loan from which interest is deducted in advanced and the borrower receives the remainder
What is DISCLOSURE?
a federal law (practiced today) that requires all loans to be expressed in APR (annual percentage rate)
have to tell you exactly what you are paying so loans are higher in price
What is the most important type of bonds?
corporate
What is COMMERCIAL CREDIT?
loans to businesses
What is CORPORATE BOND?
a certificate representing debitness to the owner (owing someone money)
What ate the 4 characteristics of a corporate bond?
- $1000 face value to maturity
- your a creditor of the company
- maturity date (4 yrs)
- IOU
What two things can stockholder do?
- select the board
- declare dividends
What is ROUNDLOT?
buying shares in even hundreds
What is ODDLOT?
buying shares not divisible by hundreds
What is the difference between roundlot and oddlot?
roundlot is bought in even hundreds, oddlot is not
What are COMMON STOCKS?
tied to the profits of the earnings of a company
What are PREFERRED STOCKS?
purchased/ sold based on dividend yield
What is the difference common and preferred stocks?
common: tied to the profits of the earnings of a company
preferred: purchased/ sold based in dividend yield
What is the SECURITIES AND EXCHANGE COMMISSION (SEC)?
a federal agency charged with protecting the public against wrong doing in the sale of securities
What does the securities and exchange commission (sec) operate under?
caveat emptor
What is CAVEAT EMPTOR?
let the buyer be aware
it requires the company to provide the public, through the prospectus, their annual report if you own the stock
What is the INITIAL PUBLIC OFFERING (IPO)?
how stock is first offered to the public
Why sell stock?
to raise money to start your company
How stock is first offered to the public?
ipo
What is UNDERWRITING?
- you hire a securities firm to buy your entire issue of stock
- the firm gives you the cash and they then sell the shares to the public
What is SYNDICATE?
if the issue is too large for one firm, the seller may share it amongst firms (each firm takes a piece)
What do IPO’S only reflect?
brand new companies
What is FLOAT?
when the firm sells the stock to their clients
Once stocks are sold to the public, all future sales are handled through… ?
a stock exchange which is a physical entity
What are stock exchanges considered?
physical entities
What are two examples of stock exchanges?
- New York Stock Exchange (NYSE)
- The American Stock Exchange
What is another name for the New York Stock Exchange?
the big board
What is the OVER THE COUNTER MARKET (OTC)?
a list of small companies which are sold from brokers accounts throughout the country which is not a physical entity
Which of the two is a physical entity?
stock exchanges or over the counter markets
stock exchanges
How is the buying and selling of stocks done?
through an auction
What is LISTED?
companies have the right to sell stock on one exchange
Who are the two types of people that can buy stocks?
- investors
- speculators
What are INVESTORS?
a person who buys stock in order to share in the profits/ growth of the company over a longer period of time
What are SPECULATORS?
those who buy or sell stock to earn a quick profit
What is another name for a speculator?
trader
In what two ways do investors make money?
- dividend payments
- capital gains
What are the two groups speculators fall into?
- bulls
- bears
What are BULLS?
a person who anticipates an increase in the price of a stock
they buy long
What are BEARS?
a person who anticipates a decrease in the economy or stock price
they sell short
What is BUYING LONG?
buy stock at a low price and sell at a high price
What is SELLING SHORT?
you make money when the price of a stock drops
What are the two types of corporate bonds?
- mortgage bond
- debenture bond
What is a MORTGAGE BOND?
backed by the assets of the company issuing (guaranteed)
What is a DEBENTURE BOND?
backed by a promise to pay loaner back
no guarantee
higher rate of return
What is DEFAULT?
to not pay an obligation when it matures
What is MUTUAL FUND?
a corporation that sells stock and uses the proceeds to invest or speculate in the securities market
What are 2 advantages of a mutual fund?
- spread the risk through diversification
- professional management
What is a BALANCE SHEET?
finical statement summarizing a firms assets, liabilities, and net worth
What is an ASSET?
the value of the things we own
What are five examples of assets?
- cash
- accounts receivable
- machines and equipment
- buildings and land
- inventory
What are ACCOUNTS RECIEVABLE?
money owed to a firm by its customers
What is INVENTORY?
products ready for sale yet unsold
What are LIABILITIES?
money that is owed by a business to someone
What are three examples of liabilities?
- accounts payable
- notes payable
- mortgage
What are ACCOUNTS PAYABLE?
money owed to suppliers
What are NOTES PAYABLE?
short term loans owed by the company in less than a year
What is MORTGAGE?
long term loans
What is NET WORTH?
surplus + common stock
What is an INCOME STATEMENT?
summary of a firms revenue, costs, and takes over a period of time
What is another name for income statement?
profit and loss statement
What is another name for a profit and loss statement?
income statement
How do you calculate an income statement?
sales - expenses = gross income
gross income - corporate tax = net income
net income - dividends (if paid) = retained earnings
What are five expenses that need to be considered in an income statement?
- manufacturing cost
- depreciation
- selling costs
- interest
- administrative cost
When are earnings and retained earnings of a company the same and when are they different?
They are different when the company pays dividends because the dividend payments are taken from their retained earnings
They are the same when the company pays NO dividends
How do you find the dividend yield?
dividend / last
- move decimal 2 places to the RIGHT*
- ALWAYS IN A %*
How do you find the earnings per share?
last / PE ratio
ALWAYS IN $ AND CENTS
How do you find the sales?
ADD two 0’s to the number stated
How do you find the opening price?
Look at the net change:
- If (+) you subtract the net change from last
- If (-) you add the net change to last
How do you find the value of a P/E Ratio?
lower is better
