finance business activities - · pdf file · 2013-12-16chapter 7 short-term...

BUS291 BUSINESS FINANCE 12/16/2013

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Finance Business Activities

7

7.1 FINANCING CHOICES

7.2 DEBT FINANCING: BONDS

7.3 EQUITY FINANCING: STOCK

7.4 STOCK AND BOND MARKETS

CHAPTER 7

Short-Term Financing Activities

Buying on Account

accounts payable

amounts owed to creditors for goods and services

current liabilities due within 12 months of the

transaction date

Financing Choices

Slide 2

Commercial Paper

commercial paper

unsecured, short-term debt instruments

issued by corporations


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Bank Loans and Notes

line of credit

an agreement that allows a company to obtain

additional loans without a new loan application

pre-approved credit limit

advances

additional money borrowed that does not

exceed credit limit

a signed, written promise to borrow money

between a borrower and a lender

promissory note

Slide 3

Long-Term Financing Choices

Using Debt

debt financing

accounts payable

loans

notes

bonds

Slide 4


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use of someone else’s money

expected return for investors is lower with

debt than with equity

interest payments on debt reduce a

company’s taxes

Bankruptcy is a potential drawback of

debt financing.

Using Debt

benefits include

Slide 5


companies may seek additional investors

for a company

benefits include

no increased bankruptcy risk

potential participation by additional owners

increased future potential for borrowing

Using Equity

equity financing

Slide 6



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Using Leasing

leasing

a legal agreement to use property that

belongs to another person

lessor

owner of the property

lessee

the user who rents the item

Slide 7


Types of Bonds

bond

a certificate representing a promise to pay

a definite amount of money at a stated

interest rate on a specified maturity date

creditor

when you own a bond, you are lending

money to the organization issuing the

bond

Debt Financing

Slide 8


5

Government Bonds

U.S. Savings Bonds

Series EE savings bonds pay interest

through discounting.

The difference between the purchase price and

the payoff value is the interest earned.

The I bond has a variable interest rate that

fluctuates with inflation.

Slide 9

Treasury Bills

maturities vary between 91 days to one year

Treasury Notes

maturities vary from one to ten years

Treasury Bonds

maturities ranging from 10 to 30 years

Federal Government Bonds

Slide 10

Government Bonds


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municipal bonds

issued by local and state governments

general obligation bond

backed by the full faith, credit, and taxing power

of the government issuing the bond

revenue bond

repaid with the income from the project that the

bond was issued to finance

State and Local Government Bonds

Slide 11

Government Bonds

taxable equivalent yield

the higher rate of return that is the

comparable rate of return had the interest

been subject to income taxes

Interest earned on municipal bonds is

exempt from federal and most state

income taxes.

Slide 12

Government Bonds


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external bonds intended for investors in another country

interest and principal are paid in the currency of the country in which investors live

dollar bonds external bonds intended for U.S. investors

internal bonds for investors in the country issuing the bond

payable in native currency

multiple currency bonds bonds payable in several currencies

Foreign Government Bonds

Slide 13

Government Bonds

Corporate Bonds

When you invest in stock, you are an

owner of the company.

When you buy a bond, you are lending

money to the company.

corporate bonds

issued by corporations

Slide 14


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secured by a specific asset or property

debenture bond

a corporate bond without collateral

callable bond

allows the company to pay off the debt before the maturity date at a specified price

convertible bond

can be exchanged for common stock in the same company

mortgage bond

Slide 15

Corporate Bonds

GLOBAL COMPANY BONDS

Global bonds are usually issued by

businesses with an international

reputation and high credit rating.

Slide 16


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Issuing Bonds

face value (maturity value) (par value)

indicates the amount being borrowed

maturity date

date when the bond must be repaid

Slide 17

Changing Bond Values

Reporting Bond Prices

Corporate bond prices are stated in

100s, with the bonds sold in $1,000

denominations (ten times the reported

amount).

par

a bond selling at face value

Premium

a bond selling above face value

Slide 18


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discount

a bond selling below face value

The price investors are willing to pay for

a bond depends upon the stated

interest rate.

Slide 19

Capital Gains

capital gain

the increase in value between the purchase price

and the maturity value

capital loss

the decrease in value between the purchase price

and the maturity value

yield to maturity (YTM)

the annual rate of return an investor would

receive when a bond is held until maturity

Slide 20


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Investment Bankers

investment banker

an individual or company that assists companies with issuing new securities

Advice to Company

helps companies determine if issuing bonds is appropriate

helps determine how much debt might be sold

Slide 21

setting the price

selling the new bonds

taking on the risk of the process

spread

the difference between the amount paid to

the company issuing the bonds and what

investors pay for the bonds

Underwriting Process

Slide 22

Investment Bankers


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Interest Rates

interest is paid periodically

face value is repaid to the investor on

the maturity date

Slide 23

the stated annual interest rate for a bond

When money is tight, interest rates tend to

move upward.

When money is loose, interest rates tend to

decline.

coupon rate

Interest Amount Cost of Bond

Basis Points

1/100 of a percentage point

Current Yield (%) =

Question:

How to determine the cost of bond? The cost of bond

here refers to the current price or value of bonds.

We’ll take a look at some examples.

Slide 24

Issuing Bonds


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Bond Ratings

bond rating

a measure of the quality and safety of a

company’s debt

Slide 25

Types of Stock

Common Stock

common stock

an equity security representing ownership

in a corporation

has voting rights

dividend

a portion of company profits

Equity Financing

Slide 26


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Preferred Stock

preferred stock

the second main class of stock issued by

corporations

has priority over common stock in dividend payment

less risky than common stock

par value

the minimum price for which a share can be issued

has no relationship to the market value of a stock

cumulative preferred stock

requires that unpaid dividends due to low earnings

will build up until paid to preferred stockholders

convertible preferred stock

allows an exchange into common shares Slide 27

Issuing Stock

Intial Public Offering (IPO)

initial public offering (IPO)

when a company offers stock to outside

investors for the first time

public offering

issuing additional shares of stock by a

company

When an IPO occurs, an organization goes

from being privately held to being publicly

held.

Slide 28


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Slide 29

During the IPO process, this document

presents the legal and financial information

about the company issuing the stock.

issue price (subscription price)

the price set for stock sold during an IPO

prospectus

Slide 30

Issuing Stock


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where newly issued securities are bought

and sold

secondary market

the location where securities are traded

after they are initially offered in the primary

market

primary market

Slide 31

Issuing Stock

Stock Market Transactions

Types of Stockbrokers

stockbroker

a licensed specialist in the buying and

selling of stocks and bonds

commission

the fee brokers receive for negotiating

sales

Stock and Bond Market

Slide 32


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provides information about securities you

may want to buy

discount broker

places orders and offers limited research

and other services

charges lower commissions than full-

service brokers

full-service broker

Slide 33

Types of Stockbrokers

Stock Exchanges

stock exchanges

businesses where securities are bought

and sold

over-the-counter (OTC)

a network where securities transactions

occur using telephones and computers

rather than on the floor of an exchange

Slide 34


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Changing Stock Values

market value

the price at which a share of stock can be

bought and sold

Questions:

How to price a stock or predict stock price, and

then estimate the market value of a firm? Let’s

take a look at some examples.

Slide 35

Slide 36


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commonly reported indicators of stock

value

The Dow Jones Industrial Average

Standard & Poor’s 500

stock split

the proportional division of a number of

stock shares into a larger number

stock market indexes

involves selling a stock not actually owned

when a lower price is expected

quite risky

selling short

Slide 37

Stock Selection Actions

Investment Analysis Process

Observe and analyze economic and social

trends.

Determine affected industries.

Identify companies in affected industries.

Decide whether to buy, sell, or hold the

stock of those companies.

Slide 38


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Inflation

Interest Rates

Consumer Spending

Employment

Economic Factors

Slide 39


Societal changes and other factors can

have a positive or negative influence on

various types of companies.

Market Trends

bull market

rising stock values

bear market

declining stock market prices

Industry Trends

Slide 40



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(Dividend per Share) (Market Price per

Share)

Price-Earnings Ratio (P/E)

the relationship between a stock’s selling

price and its earnings per share

Dividend Yield =

Slide 41


Moody’s Handbook of Common Stocks

Value Line

Standard & Poor’s Encyclopedia of Stocks

Stock Information Sources

Slide 42



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Mutual Funds

mutual fund

an investment fund set up and managed

by companies that receive money from

many investors

Slide 43

Types of Mutual Funds

Some main types of mutual funds include

aggressive growth stock funds

income funds

international funds

sector funds

bond funds

balanced funds

Slide 44


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Mutual Fund Values

net asset value (NAV)

The value of each share is based on the

total value of all investments made by the

mutual fund company.

Slide 45

finance business activities - · pdf file · 2013-12-16chapter 7 short-term...

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