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Chapter 18 - Financial Management
18-21
critical thinking
exercise 18-2
EXTENDING CREDIT
This exercise explores the advantages and disadvantages of
accepting credit cards. (See complete exercise on page 18.71
of this manual.)
Chapter 18 - Financial Management
2. Purchasing major assets uses a huge portion of
the organization’s funds.
4. The financial manager has to decide how to fi-
nance operations.
1. Two questions that need answers:
2. METHODS OF RAISING MONEY
a. DEBT FINANCING refers to funds raised
through various forms of borrowing that
years.)
Chapter 18 - Financial Management
PPT 18-26
Using Alternative Sources of Funds
• Debt Financing -- The
funds raised through various
forms of borrowing that must
be repaid.
• Equity Financing -- The
funds raised from within the
firm from operations or
through the sale of ownership
in the firm (such as stock).
USING ALTERNATIVE
SOURCES of FUNDS
Alternative
Sources of
Funds
18-26
LG3
(See complete PowerPoint slide notes on page 18.53.)
PPT 18-27
Short- and Long-Term Financing
• Short-Term Financing --
Funds needed for a year or
less.
• Long-Term Financing --
Funds needed for more than
a year.
SHORT and LONG-TERM
FINANCING
18-27
LG3
Alternative
Sources of
Funds
(See complete PowerPoint slide notes on page 18.53.)
TEXT FIGURE 18.5
Why Firms Need Funds
(Text page 504)
PPT 18-28
Why Firms Need Financing
(See complete PowerPoint slide notes on page 18.53.)
progress
assessment
(Text page 504)
PPT 18-29
Progress Assessment
(See complete PowerPoint slide notes on page 18.54.)
Chapter 18 - Financial Management
learning goal 4
1. Trade credit, the most widely used source of
2. TRADE CREDIT is the practice of buying goods
a. The buyer can take a 2% discount for pay-
discount is not taken.
6. A PROMISSORY NOTE is a written contract
C. FAMILY AND FRIENDS
Chapter 18 - Financial Management
PPT 18-30
Types of Short-Term Financing
(See complete PowerPoint slide notes on page 18.54.)
1. This source may be convenient, but it can also
create problems.
2. It is better not to borrow from friends and rela-
tives.
3. Fewer entrepreneurs today rely on family and
friends for funding.
friends, it is best to:
a. Agree on specific loan terms
CLOSE TOUCH WITH THE BANK and visit the
1. A SECURED LOAN is a loan backed by collat-
Chapter 18 - Financial Management
PPT 18-31
Types of Short-Term Financing
(See complete PowerPoint slide notes on page 18.55.)
PPT 18-32
Difficulty of Obtaining Short-Term
Financing
(See complete PowerPoint slide notes on page 18.55.)
SPOTLIGHT ON
small
business
(Text page 507)
PPT 18-33
Exploring the
Financing
Universe
• Peer-to-peer lending sites like Lending Club
match small businesses with lenders and receive
a fee for their services.
• Lendio claims to have developed a technology
that matches business owners with the right type
of business loan and lender.
• Lendio also offers services such as a business
plan makeover and website design for a fee.
EXPLORING the
FINANCING UNIVERSE
(Spotlight on Small Business)
18-33
(See complete PowerPoint slide notes on page 18.56.)
Chapter 18 - Financial Management
18-28
a. These are the most difficult to get.
3. LINE OF CREDIT is a given amount of unse-
ble.
a. These non-deposit-type organizations
Chapter 18 - Financial Management
PPT 18-34
Different Forms of Short-Term
Loans
(See complete PowerPoint slide notes on page 18.56.)
critical thinking
exercise 18-3
FINDING THE COST OF BANK
LOANS
This Internet exercise asks students to go online and research
the actual cost of a bank loan. (See complete exercise on page
18.72 of this manual.)
lecture link 18-4
THE NUMBERS SPEAK WHEN
DEALING WITH YOUR BANKER
Through ratio analysis the firm’s financial statement can tell
a banker a lot about the company’s financial health. (See the
complete lecture link on page 18.64 of this manual.)
PPT 18-35
Factoring
(See complete PowerPoint slide notes on page 18.57.)
Chapter 18 - Financial Management
ing and furniture businesses.
3. Factoring charges are much lower if the compa-
slow to pay or don’t pay at all.
4. Factoring is not a loan—it is the sale of an asset.
that mature (come due) in 270 days or less.
2. Only financially stable firms are able to sell
at a lower interest rate than bank loans.
4. During the recent credit crisis the Federal Re-
H. CREDIT CARDS
credit, but they are extremely risky and costly.
3. Because of their risk and cost, credit cards
PPT 18-36
Commercial Paper
(See complete PowerPoint slide notes on page 18.57.)
PPT 18-37
Credit Cards
(See complete PowerPoint slide notes on page 18.57.)
PPT 18-38
Ways to Raise Start-Up Capital
(See complete PowerPoint slide notes on page 18.57.)
progress
assessment
(Text page 509)
PPT 18-39
Progress Assessment
(See complete PowerPoint slide notes on page 18.58.)
Chapter 18 - Financial Management
learning goal 5
Identify and describe several sources of long-term financing.
GOALS AND OBJECTIVES?
b. What FUNDS are needed to achieve these
goals and objectives?
c. What SOURCES of long-term funding
2. LONG-TERM CAPITAL is used to buy fixed
assets such as plant and equipment and to fi-
management.
4. Long-term financing comes from two sources:
1. DEBT FINANCING involves borrowing money,
which creates a legal obligation to repay the
Chapter 18 - Financial Management
lecture link 18-5
MAKING PAYMENTS OVERSEAS
Some entrepreneurs have found creative ways of paying
and being paid overseas. (See complete lecture link on page
18.66 of this manual.)
PPT 18-40
Setting Long-Term Financing
Objectives
(See complete PowerPoint slide notes on page 18.58.)
PPT 18-41
The Five Cs of Credit
(See complete PowerPoint slide notes on page 18.58.)
PPT 18-42
Using Long-Term Debt Financing
(See complete PowerPoint slide notes on page 18.59.)
Chapter 18 - Financial Management
2. DEBT FINANCING BY BORROWING MONEY
FROM LENDING INSTITUTIONS.
a. Long-term loans are usually repaid within 3
to 7 years, but may extend to 15 or 20 years.
i. A TERM-LOAN AGREEMENT is a
promissory note that requires the bor-
Chapter 18 - Financial Management
bonus case 18-1
THE REBUILDING DECISION
A small veterinary clinic is hit by a tornado, ripping off the
roof. The partners must make a decision on how to recover.
(See the complete case, discussion questions, and suggested
answers beginning on page 18.77 of this manual.)
PPT 18-43
Using Debt Financing by Issuing
Bonds
• Indenture Terms -- The terms of
agreement in a bond issue.
• Secured Bond -- A bond issued
with some form of collateral (i.e.
real estate).
• Unsecured (Debenture) Bond
-- A bond backed only by the
reputation of the issuing company.
USING DEBT FINANCING
by ISSUING BONDS
18-43
LG5
Debt
Financing
(See complete PowerPoint slide notes on page 18.59.)
Chapter 18 - Financial Management
i. A BOND is a company IOU, a binding
contract through which an organization
Chapter 18 - Financial Management
18-37
PPT 18-44
Securing Equity Financing
(See complete PowerPoint slide notes on page 18.59.)
critical thinking
exercise 18-4
FINANCING OPTIONS
A company needs $1,000 to expand its product line. Which
financing option should it use? (See complete exercise on page
18.74 of this manual.)
Chapter 18 - Financial Management
3. EQUITY FINANCING FROM RETAINED EARN-
INGS
a. The profits the company keeps and reinvests
in the firm are called RETAINED EARN-
INGS.
money is when it is just starting or in the ear-
liest stages of expansion.
b. VENTURE CAPITAL (VC) is money that is
invested in new or emerging companies that
18-39
PPT 18-45
Want to Attract a Venture
Capitalist?
(See complete PowerPoint slide notes on page 18.60.)
Chapter 18 - Financial Management
18-40
are perceived as having great profit poten-
tial.
c. The venture capital industry began as an al-
3. COST OF CAPITAL is the rate of return a com-
pany must earn in order to meet the demands of
4. If the firm earns more than the interest payments
on the funds borrowed, stockholders earn a
nancing were used.
5. It is up to each firm to determine exactly what a
