E-Finance CH3 Flashcards
what are the sources of financing
- Long and short terms financing
- Equity and debt financing
- Internal and external financing
What are the methods of short term financing
- Commercial papers
-issues by large, well known corperations - Short-term bank loan
- small amount of money granted by the bank - Overdrafts
- withdraw more than the firm has from current account - Accured expenses
- expenses that has been incurred but not paid by the end of period (e.g salaries) - Trade credit
- defer payment for its purchase - Factoring
- sell account receivable to financial institution for cash
What are some of the long term financing methods
- Issuing common stocks
- only limited companies - Issuing bonds
- large limited companies - Long term bank load
- large amount of money granted by bank for investment in fixed assets e.g factories and machinnary - Retained profits
- Profits that hasn’t been distributed to it’s stockholders as dividends - Hire purchases & leasing
- rent goods - firm dont own the goods lease
- pay by instalments overtime
- can use the goods but does not own it until paid fully
Comparison of short and long term financing
Cost: short term is cheaper like the interest rates
Risk: Long term is more stable source of capital ( less risky)
Flexibility: Short term more flexible. Can adjust the amount of capital according to short term needs
What is debt and equity financing
Debt financing:
funds obtained from sources other than owners
Equity financing:
funds obtained by owners of the firm
Advantage and disadvantage of debt and equity financing
Debt:
+ owner’s control is unaffected
+ Less costly
- riskier, interest must be paid periodically
- principal repaid at maturity
Equity:
+ common stock dividend are variable and not guaranteed
+ commo stock has no maturity
- owner’s control decrease
- more costly
Advantage and disadvantage of equity financing
+ less risky, common stock dividend is not guranteed & common stock has no maturity
- Owners’ control will decrease
- More costly
What is internal and external financing
Internal:
funds obtained from the firm internally e.g generated cash flow
External:
funds obtained from outside of the firm
Advantage and disadvantage of internal financing
+ more flexible, no need approval to use retained profits
+ less costly, dont involve transaction cost and interest expense
+ greater freedom in decision making
–> no additional owners
–> no need to disclose financial information
- managers can be less careful in evaluating investment projects and waste money
- ammount of capital raised is limited
Advantage and disadvantage of external financing
+ More sources of capital
+ compels the firm to evaluate the investment projects
- less flexible because more owners. –> need approvals
- more costly, involves transaction costs and interest expense
- less freesdm in decision making
