FOCUS: Financing a Business

1. FOCUS:Financing a Business

2. OBJECTIVES: Find out • How FINANCIAL MARKETS help businesses obtain CAPITAL RESOURCES • How businesses BORROW • What EQUITY is and how it’s used to finance business growth • How businesses SAVE

3. OBJECTIVES: Find out • What the STOCK MARKET is & why it’s important • How to read a STOCK TABLE • What a BALANCE SHEET is & how to use it • What an INCOME STATEMENT is & how to use it

4. INVESTMENTis the purchase of CAPITAL RESOURCES used to produce goods & services

5. FINANCIAL MARKETSare where SAVERS exchange with BORROWERS and others who are willing to pay for the use of the money

6. SAVERS BUSINESSES

7. KEY POINT: • Every DOLLAR of INVESTMENT = one less DOLLAR of CONSUMPTION

8. ASSETS: what a company OWNS LIABILITIES: what a company OWES Business Accounting:

9. How do BUSINESSES use the FINANCIAL MARKETS to obtain money? • BORROW (debt financing) • Sell SHARES of ownership (EQUITY financing) • SAVE the money themselves (RETAINED EARNINGS – save and plow back into business!)

10. 3 KINDS OF FINANCING • SHORT-TERM FINANCING • INTERMEDIATE-TERM FINANCING • LONG-TERM FINANCING

11. SHORT-TERM FINANCING: • Trade credit • Unsecured loans • Secured loans • Line of credit CASH-FLOW PROBLEM pp. 266-7

12. TYPES OF SELLERS: • RETAILER – sells directly to the public (consumers) • WHOLESALER – supplies businesses which sell directly to consumers; does NOT sell to the public – sells to businesses! pp. 266-7

13. TRADE CREDIT: • BUY NOW, PAY LATER (30-90 days) • Business’s CAPITAL is not tied up in INVENTORY • Extended by supplier because it increases sales & profits (interest) • DISCOUNT for quick-pay! pp. 266-7

14. UNSECURED LOANS: • No COLLATERAL • Guarantees with a PROMISSORY NOTE (specified time & interest rate) pp. 266-7

15. SECURED LOANS: • Backed by COLLATERAL --machinery --inventories --ACCOUNTS RECEIVABLE (money owed business by its customers) pp. 266-7

16. LINE OF CREDIT: • Maximum amt. of $ a company can borrow from a bank during a period of time (1 yr.) • No new loan application; auto OK up to amt. specified pp. 266-7

17. SHORT-TERM FINANCING: Let's Review! • Trade credit • Unsecured loans • Secured loans • Line of credit CASH-FLOW PROBLEM pp. 266-7

18. INTERMEDIATE-TERM FINANCING: • Loans (1 to 10 yrs.) • Leasing (renting rather than buying) pp. 266-7

19. LOANS: • 1-10 years • COLLATERAL: stocks, bonds, equipment, machinery • MORTGAGE if secured by property pp. 266-7

20. LEASING: • Renting rather than buying • + low cost service • + income tax deduction • - often more expensive than buying pp. 266-7

21. INTERMEDIATE-TERM FINANCING: Let's Review! • Loans (1 to 10 yrs.) • Leasing (renting rather than buying) pp. 266-7

22. LONG-TERM FINANCING: • BONDS • STOCKS pp. 266-7

23. PLEASE NOTE the DIRECT RELATIONSHIPbetween RISK and SIZE of REWARD! High RISK = High REWARD! Low RISK = Low REWARD! BUT...

24. PLEASE NOTE the INVERSE RELATIONSHIPbetween RISK and LIKELIHOOD of REWARD! High RISK = LONG SHOT! Low RISK = SURE THING!

25. BONDS: • Corporate or gov’t. I.O.U. (certificate of indebtedness) • Specified interest rate • Specified time • Pd. In full upon MATURITY pp. 266-7

26. BONDHOLDER= Company’s creditor

27. TWO KINDS of BONDS: Government Bonds Corporate Bonds pp. 266-7

28. County & Municipal Bonds: • BOND ISSUE = election in which local government seeks public approval for the sale of BONDS to raise funds usually for SCHOOL or COMMUNITY improvements

29. UNDERWRITING: • When a securities firm (investment bank) underwrites an issue of stocks or bonds, it buys a corporation’s entire issue of stock or bonds and then sells the securities to the public

30. BONDS= Low RISK... Low RETURN!

31. The BOND… • Is given to the lender (BONDHOLDER) • By a borrower (THE BOND SELLER -- the financial intermediary)

32. TERMS of the LOAN: The BORROWER will pay: The BORROWER will pay: INTEREST (the profit paid the lender for the use of his or her money) • PRINCIPAL (entire amount borrowed)

33. VOCABULARY TERMS: • FACE VALUE: the purchase price of the bond (PAR value or principal) • MATURITY DATE: the particular day at which time the borrower promises to pay back the loan in full (both principal and interest) • COUPON RATE: the predetermined rate of interest

34. BOND RATINGS: • RISK is measured by the credit rating of the bond’s issuer. • RATINGS indicate the ability of a corporation of local government to repay its debts. MOODY’S INVESTOR SERVICES rates bonds on a scale from AAA (highest quality) to C (no interest being paid, bankruptcy filed or in default) DDD – veeeeeeeeerry risky!

35. BONDS GOVERNMENT BONDS CORPORATE BONDS Higher RISK! Higher RETURNS! • Lower RISK! • Lower RETURNS!

36. STOCKS: • EQUITY financing • Shares of ownership pp. 266-7

37. 2 Ways to Make Money from Stocks: • DIVIDENDS (share of profits pd. to stockholders) • CAPITAL GAINS (profits from sale of stock)

38. STOCKHOLDER= Company’s part owner

39. TWO KINDS of Stock Companies: Private Company Public Company pp. 266-7

40. TWO KINDS of STOCK: Common Stock Preferred Stock pp. 266-7

41. Common Stock: PROXY = gives another permission to cast your vote for you • issued by all public corporations • Owners have voting rights; elect board of directors • Pays DIVIDENDS based on performance • Value varies with corp. performance • Last to be pd. If corp. fails pp. 266-7

42. Preferred Stock: • not issued by all corps. • No voting rights Value varies with performance • PREFERENTIAL treatment= --pays fixed dividend before common stockholders are pd. --If corp. fails, pd. before common stockholders are pd. pp. 266-7

43. SALE of STOCKS & BONDS: • Primary or New Issues Market • Secondary Market (what you think of commonly as the stock market) TWO VERY DIFFERENT STOCK MARKETS!

44. PRIMARY MKT: Not the one you think of as the STOCK MARKET! IPO • IPO = initial public offering • Investment bankers sell new shares of stock for corps. • Proceeds go to corps. w/ profit for investment bankers who UNDERWRITE the STOCK ISSUE

45. UNDERWRITING: • When a securities firm (investment bank) underwrites an issue of stocks or bonds, it buys a corporation’s entire issue of stock or bonds and then sells the securities to the public

46. SECONDARY MKT: The ONE you think of as the STOCK MARKET! • Commonly called the STOCK MARKET • Stock sold on EXCHANGES or OTC (over-the-counter) • Proceeds go to stockholder who sells w/ profit to broker NOT to corporation • w/o 2ndary mkt to trade in, few would buy new issues

47. 2 Ways to Make Money from Stocks: • DIVIDENDS (share of profits pd. to stockholders) • CAPITAL GAINS (profits from sale of stock)

48. Organized Exchanges: Real places in real spaces! Dow Jones Industrial Avg. • NYSE: New York Stock Exchange (2000+ of the largest & best-known corps.) • AMEX: American Stock Exchange (about 1000 midsize corps. w/ strong growth potential) • Regional exchanges: Los Angeles, Chicago, Boston • Foreign exchanges: FTSE,CAC-40

49. Over-the-Counter Mkt: NOT real places in CYBER spaces! • Decentralized, computerized markets • NASDAQ: National Assoc. of Securities Dealers Automated Quotation System

50. Securities Exchange Commission: • Federal governmental agency which regulates sales and protects investors • 5 members appt. by U.S. Pres. • Investigate charges of fraud & violations like insider trading