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Chapter Twenty. Mastering Financial Management. The Need for Financing. Short-term financing Money that will be used for one year or less Long-term financing Money that will be used for longer than one year Often involves large amounts of money. (Made in May; Sold in Sept).

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chapter twenty

Chapter Twenty

Mastering Financial Management

the need for financing
The Need for Financing
  • Short-term financing
    • Money that will be used for one year or less
  • Long-term financing
    • Money that will be used for longer than one year
      • Often involves large amounts of money
slide3

(Made in May;

Sold in Sept)

the three steps of financial planning
The Three Steps of Financial Planning
  • 1) Establish organizational goals
      • What do I want
  • 2) Budget the money needed to accomplish these goals
      • What does it cost
  • 3) Identify the sources of those funds
      • How do I pay for it
budgeting for financial needs what does it cost
Budgeting for financial needs (What does it cost)
  • Cash budget-(short term)
    • Traditional
      • Uses dollar amounts from preceding year
      • Promotes frenzy spending of surpluses at period end
    • Zero-based budgeting
      • Every expense in every budget must be justified each year
  • Capital budget-(long term)
    • Estimates a firm’s expenditures for major assets and its long-term financing needs
identifying sources of funds h ow do i pay for it
Identifying sources of funds (How do I pay for it)
  • Sales revenues
    • greatest part of financing; short term financing
  • Equity capital
    • Money from owners or sale of shares of ownership; long-term financing
  • Debt capital
    • Borrowed money obtained through loans
  • Proceeds from the sale of assets
    • older machinery, bond conversion
short term debt financing
Short-Term Debt Financing
  • Short-term financing is usually easier to obtain than long-term
    • Shorter repayment period means less risk of nonpayment
    • Amounts of short-term loans are smaller than long-term loans
sources of unsecured short term debt financing
Sources of Unsecured Short-Term Debt Financing

Unsecured financing - not backed by collateral

  • Trade credit
    • extended by a seller not requiring immediate payment at time of delivery
  • Promissory notes
    • A written pledge to pay money to a creditor at a specified future date - legal IOU
    • Unlike trade credit, promissory notes
      • usually include interest
      • Negotiable instruments
sources of unsecured short term debt financing9
Sources of Unsecured Short-Term Debt Financing
  • Unsecured bank loans
    • Interest rates vary with borrower’s credit rating
    • Offered through a line or credit, or credit cards
  • Commercial paper
    • Short-term promissory note issued by a large corporation
    • Interest rates are usually below that charged by banks for short-term loans
    • Used to gain interest on unused cash reserves
sources of secured short term debt financing
Sources of Secured Short-Term Debt Financing
  • Loans secured by inventory
    • Inventory is pledged as collateral
  • Loans secured by receivables
      • trade credit given to customers is pledged as collateral
      • repayability of receivables determines their value to the factor
sources of long term debt financing
Sources of Long-Term Debt Financing
  • Long-term loans - longer than 1 year
      • requires borrower to repay loan in periodic installments
    • Interest rate and repayment terms are based on:
      • the reasons for borrowing
      • the firm’s credit rating
      • the value of collateral
sources of long term debt financing13
Sources of Long-Term Debt Financing
  • Corporate bonds
    • A corporation’s written pledge that it will repay a specified amount of money with interest
    • Has a set interest rate until maturity that is paid up-front via discount
    • Types of bonds
      • Debenture bond—backed only by the reputation of the issuing corporation
      • Mortgage bond—secured by assets of the issuing firm
      • Convertible bond—can be exchanged for shares of the corporation’s common stock – why do this?
sources of equity financing long term
Sources of Equity Financing (Long Term)
  • For sole proprietorships or partnerships
    • Owner or owners reinvest in the business
    • Venture capital
  • For corporations
    • Sale of stock
    • Use of profits not distributed to owners
    • Venture capital

Venture capital

      • Money invested with the expectation that the firm has potential
      • Investors receive an equity position in the business and share in its profits
sources of equity financing long term15
Sources of Equity Financing (Long Term)
  • Selling stock
    • Initial public offering - IPO
      • When a corporation sells common stock to the general public for the first time
    • Preferred stock
      • owners who have no voting rights, but whose claims on profits are paid first
    • Common stock
      • owners who vote on corporate matters but whose claims on profits come second