Chapter 12 Packet notes- Test 3 Flashcards Preview

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Flashcards in Chapter 12 Packet notes- Test 3 Deck (62)
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  • Spontaneous Financing 
  • External financing 
  • Profit retention 

Basic Types of Financing: Sources of Financing


  • Firms economic potential 
  • Company size and maturity 
  • Types of assets
  • Owner preferences for debt or equity

Factors that Determine Financing


Growth prospects and long-term profitability 

Firm's Economic Potential


Life-cycle position in business (beginning or mature).

Company Size and Maturity


Tangible or intangible.

Types of Assets


Tradeoffs required for debt and equity.

Owner Preferences for Debt or Equity


  • Voting control: owners must share control with other equity investors who buy the stock or make a large investment.
  • Financial Risk: Lower
  • Protential profitability: Lower potential return on investment for the owners.

High Equity and Low Debt Financing


  • Voting control: Owners maintain control without having to make a large investment.
  • Financial risk: Higher
  • Potential Profitability: Higher potential return on investment for the owners.

High Debt and Low Equity Financing


  • Return on assets
  • Return on equity

Debt or Equity Financing?


  • Rate of return earned on a firm's total assets invested.
  • Computed as operating income divided by total assets

Return on Assets


  • Rate of return earned on the owner's equity investment.
  • Computed as net income divided by owner's equity investment.

Return on Equity


  • Personal savings
  • Friends and family
  • Other individual investors
  • Venture capital firms
  • Large corporations
  • Public sale of stock



  • Friends and family
  • Other individual investors
  • Commercial banks
  • Business suppliers
  • Asset-based lenders
  • Government-sponsored programs
  • Venture capital firms
  • Community-based financial institutions
  • Large corporations



  • Personal savings
  • Family and friends
  • Credit cards

Three Sources of Financing (Sources Close to Home)


Owner equity is expected by other investors.

Personal Savings


Borrowing puts personal relationships at risk.

Family and Friends


Provides easy access to funds and assets; cards should be a method of payment and not a source of credit.

Credit Cards


  • Line of credit
  • Term loans
  • Mortgages

Types of Loans


An informal agreement between a borrower and a bank as to the maximum amount of funds the bank will provide at any one time.

  • Revolving Credit Agreement

Line of Credit


A commitment by a bank to lend up to a maximum amount.

Revolving Credit Agreement


Money loaned for a 5-10 year term, corresponding to the length of time the investment will bring in profits.

  • generally used to finance equipment

Term Loans


Two types which represent a long-term source of debt capital:

  • Chattel
  • Real Estate




A loan or which items of inventory or other moveable property serve as collateral.

Chattel Mortgage


A long-term loan with real property held as collateral.

Real Estate Mortgage


  • How much the bank will earn on the loan
  • What is the likelihood that the lender will be able to repay the loan?

Banker's Concerns


  1. Character of the borrower
  2. Capacity of the borrower to repay the loan
  3. Capital invested in the venture by the borrower
  4. Conditions of the industry and economy
  5. Collateral available to secure the loan

The Five C's of Credit


  • Do the purpose and amount of loan make sense, both for the bank and for the borrower?
  • Does the borrower have strong charcter and reasonable ability?
  • Does the loan have a certain secondary source of repayment?
  • Does the loan have a certain primary source of repayment?
  • Can the loan be priced profitabily to the customer and to the bank, and are this loan and the relationship good for both the customer and the bank?
  • Can the loan be properly structured and documented?

Lender's Questions


  • How much money is needed?
  • What is the venture going to do with the money?
  • When will the money be needed?
  • When and how will the money be paid back?

Banker's Concerns


  • Three years of the firm's historical statements
  • The firm's pro forma financial statements
  • Personal financial statements

Financial Information Required for a Bank Loan


Balance sheets, income statements, and statements of cash flow.

Three Years of the Firm's Financial Statements