Unit 7

Question 1

Debt financing

Answer 1

The process of raising capital by selling debt to investors

Question 2

Equity financing

Answer 2

The process of raising capital by selling shares in a company

Question 3

Maturity (one of the main issues related to debt)

Answer 3

The date on which the life of a transaction or financial instrument ends, after which it must be renewed or it will cease to exist

Question 4

Cost (one of the main issues related to debt)

Answer 4

The amount the firm is borrowing + interest rate

Question 5

Payment schedule (one of the main issues related to debt)

Answer 5

Outlines the timing and amounts of payments that the borrower is required to make to the lender

Question 6

Collateral (one of the main issues related to debt)

Answer 6

It’s property or other assets that a borrower offers to a lender to secure a loan

Question 7

Short-term borrowing

Answer 7

Loans with a maturity of one year or less, used to cover current cash needs

Question 8

Long-term borrowing

Answer 8

Loans with a maturity longer than one year

Question 9

Maturity mismatch

Answer 9

Financing long-term assets with short-term sources, generating liquidity problems because the company might not have enough cash on hand to cover its short-term debts when they come true

Question 10

Short term debt

Answer 10

• Accounts receivable financing
• Factoring
• Inventory financing
• Floor planning
• Lines of credit

Question 11

Accounts receivable financing

Answer 11

When a company gets money from a lender by using its accounts receivable as collateral. So, instead of waiting for customers to pay, the company can access cash immediately by borrowing against those invoices

Question 12

Factoring

Answer 12

An intermediary agent that provides cash or financing to companies by purchasing their accounts receivables

Question 13

Floor planning

Answer 13

Type of financing commonly used in industries where expensive items are sold

Question 14

Line of credit

Answer 14

A flexible loan that a bank or financial institution offers to its customers

Question 15

Long term debt

Answer 15

• Term loans
• Bonds

Question 16

Term loans

Answer 16

A loan from a bank to a company that is used to finance expansion efforts, with a fixed maturity date (5-7yrs)

Question 17

Bonds

Answer 17

Debt securities used by a borrower and bought by a creditor

Question 18

Face value

Answer 18

The amount paid to the holder at maturity

Question 19

Zero-coupon bonds (type of bond)

Answer 19

The only cash that the investor receives is the face value of the bond in the maturity date

Question 20

Debentures (type of bond)

Answer 20

A bond that has only the “full faith and credit” of the company as collateral, don’t have specific collaterals, investors just rely solely on the company’s promise to repay debt

Question 21

Mortgage bonds (type of bond)

Answer 21

Backed by a specific collateral, typically homes or buildings. This creates Secure Lenders, so may make the interest rate lower

Question 22

Convertible bonds (type of bond)

Answer 22

Give the lender a chance of converting their bonds into shares of common stock of the issuing company at a predetermined price, known as the strike price

Question 23

Senior debt (type of debt)

Answer 23

A type of loan that gives its holders priority over payment and assets

Question 24

Payment priority (senior debt)

Answer 24

When a company generates income and needs to make payments to its lenders, holders of senior debt are the first to be paid, they receive their payments before any other creditors or lenders, which gives them a higher level of security in receiving the money owed to them

Question 25

Asset priority (senior debt)

Answer 25

In the unfortunate event of bankruptcy or liquidation, senior debt holders have the first claim on the company’s assets, this means that if the company has to sell off its assets to repay its debts, senior debt holders are at the front of the line to recover their investment

Question 26

Funding from external sources such as:

Answer 26

Angel investors
Venture capital firms
Corporate investors
Capital markets (IPO)

Question 27

Angel investors

Answer 27

Individual investors who buy equity in small private firms. For many start-ups, the first round of outside private equity financing is often obtained from angels

Question 28

Venture capitalists

Answer 28

Firms that can provide substantial capital for young companies. They typically control about 1/3 of the seats of start-up’s board of directors, and often represent the single largest voting block on the board.

Question 29

Common stock

Answer 29

A share of ownership in the corporation which confers right to any common dividends as well as rights to vote on election of directors and other important events

Question 30

Dilution

Answer 30

When a company issues new shares that result in a decrease in existing stockholders’ ownership percentage of that company

Question 31

Initial public offering

Answer 31

The process of selling stock to the public for the first time

Question 32

Stock market

Answer 32

The trading of shares representing the partial owning of companies, they provide liquidity for a company’s shres and determine the market price for those shares

Question 33

Primary market

Answer 33

A corporation issuing new shares of stock and selling them to investors

Question 34

Secondary market

Answer 34

After the initial transaction in the primary market between the corporation and investors, the shares continue to trade in secondary market between investors without the involvement of the corporation

Question 35

Physical market

Answer 35

Physical stock exchange markets (for example the NYSE). They post two prices for every stock they make a market in: the price they stand willing to buy the stock at (the bid price) and the price they stand willing to sell the stock for (the ask price)

Question 36

Over the counter

Answer 36

Stock transactions can be made over the phone or by computer network (for example Nasdaq). Nasdaq is called an OTC market, they are a collection of dealers or market makers connected by computer networks

Question 37

Valuation principle

Answer 37

We can see market prices to determine the value of an investment opportunity to the firm