Unit 7 Flashcards
Debt financing
The process of raising capital by selling debt to investors
Equity financing
The process of raising capital by selling shares in a company
Maturity (one of the main issues related to debt)
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
Cost (one of the main issues related to debt)
The amount the firm is borrowing + interest rate
Payment schedule (one of the main issues related to debt)
Outlines the timing and amounts of payments that the borrower is required to make to the lender
Collateral (one of the main issues related to debt)
It’s property or other assets that a borrower offers to a lender to secure a loan
Short-term borrowing
Loans with a maturity of one year or less, used to cover current cash needs
Long-term borrowing
Loans with a maturity longer than one year
Maturity mismatch
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
Short term debt
- Accounts receivable financing
- Factoring
- Inventory financing
- Floor planning
- Lines of credit
Accounts receivable financing
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
Factoring
An intermediary agent that provides cash or financing to companies by purchasing their accounts receivables
Floor planning
Type of financing commonly used in industries where expensive items are sold
Line of credit
A flexible loan that a bank or financial institution offers to its customers
Long term debt
- Term loans
- Bonds
Term loans
A loan from a bank to a company that is used to finance expansion efforts, with a fixed maturity date (5-7yrs)
Bonds
Debt securities used by a borrower and bought by a creditor
Face value
The amount paid to the holder at maturity
Zero-coupon bonds (type of bond)
The only cash that the investor receives is the face value of the bond in the maturity date
Debentures (type of bond)
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
Mortgage bonds (type of bond)
Backed by a specific collateral, typically homes or buildings. This creates Secure Lenders, so may make the interest rate lower
Convertible bonds (type of bond)
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
Senior debt (type of debt)
A type of loan that gives its holders priority over payment and assets
Payment priority (senior debt)
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
Asset priority (senior debt)
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
Funding from external sources such as:
Angel investors
Venture capital firms
Corporate investors
Capital markets (IPO)
Angel investors
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
Venture capitalists
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.
Common stock
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
Dilution
When a company issues new shares that result in a decrease in existing stockholders’ ownership percentage of that company
Initial public offering
The process of selling stock to the public for the first time
Stock market
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
Primary market
A corporation issuing new shares of stock and selling them to investors
Secondary market
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
Physical market
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)
Over the counter
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
Valuation principle
We can see market prices to determine the value of an investment opportunity to the firm
