Methods for Financing Business Flashcards
What is a firm?
A firm is a company or business
What is retained profit?
Where is it used?
Profit is the difference between the revenue earned by a firm and its costs. Portion of profits are used to reward shareholders and fund investment
When does a company need to borrow?
There are many occasions when a firm lacks money to pay expenses. This results in delays between providing goods and services and receiving payments.
Firms may also need to fund investment.
What is borrowing?
Firms borrow from financial institutions such as banks.
What are shares?
A share is a financial asset that gives one part ownership in a company. The more shares owned, the greater control one has over the company
Why might an investor buy shares?
Capital gains can be made
Dividends provide an income stream
They provide the means to take over a company
Where are shares traded?
In the primary and secondary markets. Primary markets are where shares are issues. Investors buy the shares on the secondary market.
Why do companies issue shares?
Investors pay directly to the company issuing shares. Shares are a source of finance for the company
How does issuing a bond work?
A company issues bonds
Investors purchase the bonds
Until the maturity date, investors receive regular interest payments
When the bond matures, investors receive the cash in full
Bonds can be traded before they mature
What are the people who buy bonds called?
Investors
Creditors
Debtholders
What is the maturity date?
Bonds mature when the required amount of time has elapsed
What is the interest rate from bonds?
The annual interest payment on bonds are called the coupon or coupon rate. The payments schedules vary
