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Financing the Business

Financing the Business. Retained profits are the main source of finance for most businesses. Retained Profits vs. New Shares. The Dividend Payout Ratio = 1 – The Plowback Ratio Is the percentage of profits used as dividends, instead of kept as retained profits.

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Financing the Business

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  1. Financing the Business

  2. Retained profits are the main source of finance for most businesses.
  3. Retained Profits vs. New Shares The Dividend Payout Ratio = 1 – The Plowback Ratio Is the percentage of profits used as dividends, instead of kept as retained profits
  4. * If it is not justified on business grounds, a no-dividend policy can reduce shareholder value.
  5. Short-Term Sources of Internal Finance
  6. Ordinary Shares
  7. Preference Shares
  8. (Bank) Loans
  9. Bonds
  10. Interest Rates
  11. Warrants
  12. Loan Covenants are security agreements by businesses who borrow money
  13. Operating leases are short-term leases which are expensed. They do not appear on a business’s books. Finance Leases (or capital lease): A business asks a financial institution to buy the long-term asset and then lease it to the business. Both the asset and the lease (liability) appear on the business’s books, usually for the life of the asset.
  14. Popularity of Finance Leases
  15. Sale-and-Leaseback: A business sells a fixed asset to a financial institution, then agrees to lease the asset back over a period of time. (Example,: Hotels)
  16. Hire-Purchase (HP) Agreements: A financial institution buys an asset on behalf of a business customer. The business then hires (rents) the asset from the financial institution, and the payments go toward buying the asset.
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