Financing a Business

Question 1

Methods of Obtaining Capitol

Answer 1

• Equity capitol- Owner contribute their own money to the business , from personal loans, property as security of loan.
• Retained earnings- Profits that are not taken out of business but are saved for future use by business
• Debit capitol- Money that others loan to a business. (Existing equity capitol > Debt capitol)

Question 2

Obtaining equity capitol.

Answer 2

*Sole proprietorship- Must rely on pwn personal assets if they want to retain ownership of company.
Form of business ownership needs to change 1. Forming a partnership with new partners to invest money. 2. Forming corporation and selling stock.

*Partnerships- A partner may be brought in because of his business expertise rather than for additional capitol. However partners usually invest their personal money into business to balance the amount of money each owner has and spread financial risk.

*Corporations- Third way to raise capitol by forming corporation and bringing in additional owners through sale of stock. Corporate structure in small business is effective way to raise equity capitol as individual monetary investment is smaller than partnerships.
Original owner may continue as primary manager of business.

Question 3

Types of Stock

Answer 3

*Common stock- Ownership that gives holders the right to participate in managing the business through voting privileges and the right to share profits through dividends. One vote per share of stock
Par value- dollar value shown on a share of stock, which is arbitrarily assigned amount that is used for bookkeeping purposes.
Market value- The price at which stock is actually bought and sold.

*Preferred stock- Stock that gives holders first claim on corporate dividends if a company earns a profit

Question 4

Value of stock

Answer 4

*Secondary stock issuance- When corporation needs additional equity they sell new stock, if approved by board of directors.
*Valuing a Company’s stock- Real value of stock is not the par value but what buyers are willing to pay(market price)
Book value is the value of a share of stock, calculated by dividing the corporations net worth by total number of shares outstanding.
*Retained earnings- Business can hold some of its profits in reserve for use in the business. It is a good policy to not distribute all the profits.
1. Replacement of buildings/equipment due to depreciation.
2. Replacement of obsolete equipment.
3. Purchase of new capitol assets to expand business.
4. Financial protection during periods of low sales and profits

Question 5

Short-term Debt Capitol

Answer 5

*Short-term dept of s loan what must be repaid with interest within a year.
1. Obtaining funds from Banks.
Line of credit is the authorization to borrow up to a minimum amount for a specified period of time.
Promissory note is an unconditional written promise to pay the lender a certain sim of money at a particular time, or on demand if certain adverse conditions arise.
Security is something of value pledged as assurance of the fulfillment of an obligation.

2. Obtaining funds from other sources.
   * Trade credit is obtained when a business buys goods and services that do not require immediate payment.
   * Factor is a firm that specializes in lending money to businesses based on the account receivable.
   * Sales finance company provides capitol to a business based on debts owed by customers

Question 6

Long-term Debit Capitol

Answer 6

Long-term debt capitol is borrowed for longer than a year, needed for assets that will have a long life(lands, buildings)
1. Term loan- a medium of long term financing used for operating funds or the purchase or improvement of fixed assets.
Lease is a contract that allows the use of an asset for a fee paid on schedule, monthly.

2. Bonds- a long-term debit instrument sold by the business to investors
   * debentures are unsecured bonds(no assets are pledged as security)
   * Mortgage bond- is secured by specific long-term assets of the issuer
   * Convertible bond- permits a bondholder to exchange bonds for a predetermined number of share of common stock at a later date.

Question 7

Obtaining capitol

Answer 7

1. Cost of capitol.
2. Interest rate.
3. Influence of Capitol Contributors.

Question 8

Sources of Outside Capitol

Answer 8

1. Underwriting
2. Stock Options
3. Venture Capital

Question 9

Underwriting

Answer 9

• Investment bank- an organization that helps a business raise large sums of capital through the sales of stocks and bonds.
• Initial public offering(IPO)- the first time that a company sells stock to the public.

Question 10

Stock options

Answer 10

• Stock option is a right granted by a corporation that allows current stockholders to buy additional shares when issued at a fixed price for specific period of time.
• Employee stock ownership plan (ESOP) is a plan that allows employees to become owners of the company they work for through the incremental purchase of stock.

Question 11

Venture capital

Answer 11

Financing obtained from an investor or investment group that provides large sums of money to promising new or expanding small companies.