WEEK 14: FINANCIAL MANAGEMENT -2 BUSN 102 – Özge Can.
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Transcript of WEEK 14: FINANCIAL MANAGEMENT -2 BUSN 102 – Özge Can.
WEEK 14:
FINANCIAL MANAGEMENT -2
BUSN 102 – Özge Can
Finding and Allocating Funds
18-2
Financing Alternatives:
1) Debt Financing Arranging funding by borrowing money
2) Equity Financing Arranging funding by selling ownership shares in
the company, publicly or privately
18-3
Criteria to Compare: Debt vs. Equity Maturity Claim on income Claim on assets Influence over management Tax consequences Employee benefit potential
4
Debt Financing vs. Equity Financing
18-5
Length of Term
Short-Term Financing Financing used to cover
current expenses Generally repaid within
a year
Long-Term Financing Financing used to
cover long-term expenses such as assets
Generally repaid over a period of more than one year
18-6
Cost of Capital
Cost of Capital: Average rate of interest a firm pays on its combination of debt and equtiy
For any financing to make economic sense: Expected returns > Cost of capital
Cost of capital depends on three main factors: risk, interest rates, opportunity cost
18-7
Interest Rates
Prime Interest Rate The lowest rate of interest that banks charge for
short-term loans to their most creditworthy customers
18-8
Opportunity Cost
Leverage: The technique of increasing the rate of return on
an investment by financing it with borrowed funds
Capital Structure: A firm’s mix of debt and equity financing
18-9
Financial Leverage: Example
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
18-10
Short-Term Debt Alternatives:
1. Credit Cards Short term loans by banks to card-holders
2. Trade Credit Credit obtained by a purchaser directly from a
supplier
3. Secured Loans Loans backed up with assets that the lender can
claim in case of default, such as a piece of property
18-11
Short-Term Debt Alternatives:
4. Unsecured Loans Loans that require a good credit rating but no
collateral
5. Line of Credit An arrangement in which a financial institution
makes money available for use at any time after the loan has been approved
18-12
Short-Term Debt Alternatives:
6. Commercial Paper Short-term promissory notes, or contractual
agreements, to repay a borrowed amount by a specified time with a specified interest rate
7. Factoring Obtaining funding by selling accounts receivable
18-13
Sources of Long-Term Debt:
18-14
Long-Term Debt Alternatives:
1. Long-Term Loans Bank or other lender provides the fund, borrower
agrees to repay within specific term (from 1 to 25 years)
2. Lease An agreement to use an asset in exchange for
regular payment; similar to renting
18-15
Criteria for Long-Term Loans: “Five Cs”
18-16
Long-Term Debt Alternatives:
3. Corporate Bonds A method of funding in which the issuer borrows
from an investor and provides a written promise to make regular interest payments and repay the borrowed amount in the future
18-17
Key Types of Corporate Bonds:
Secured Bonds Bonds backed by specific assets that will be given to
bondholders if the borrowed amount is not repaid Debentures
Corporate bonds backed only by the reputation of the issuer
Convertible Bonds Corporate bonds that can be exchanged at the
owner’s discretion into common stock of the issuing company
18-18
Equity
1. Private Equity Ownership assets that aren’t publicly traded;
includes venture capital and angel investors
2. Public Stock Offerings Offering shares of stock to the public through a
stock market
18-19
Public Stock Offerings (IPOs)
18-20
Public Stock Offerings (IPOs) Underwriter:
A specialized type of bank that buys the shares from the company preparing an IPO and sells them to investors
Prospectus: An SEC-required document that discloses
required information about the company, its finances, and its plans for using the money it hopes to raise
18-21
Next Week – Our Last Session: Assignment #4: Submission Summary of Financial markets
and investment strategies (Textbook, Chapter 19)
Final Exam – Discussing of quiz#2 and other example questions
22