Financing a Business Two Sources of Cash Debt Equity Commercial Loans Bonds Leasing Trade Credit Equity Personal Savings Private Investors Venture Capitalist Stocks Retained Earnings

Debt Financing Commercial Loans Bonds Leasing Trade Credit

Equity Financing Personal Savings Private Investors Venture Capitalist Stocks Retained Earnings

Stocks Common Stock Preferred Stock Options No fixed maturity No obligation of payment of dividends Right to vote for the directors Preferred Stock An obligation to receive dividends Convertible to Common Stock Options Strike price = stock price on date option is granted A claim on the Equity ownership that will dilute the ownership position.

Which Is Best? Risk Costs Control of the Company Debt more risky than Equity Costs Equity is more costly than debt financing Publicly-traded companies have higher costs associated with complying with accounting regulations. Control of the Company Equity financing usually requires giving up some management control of the business.

Debt Leverage Long-term Debt to Total Capitalization Long-term Debt to Total Capitalization = Non-current liabilities Total Capitalization Total Capitalization = Long-term Debt + Owners’ Equity Highly (Debt) Leveraged companies will have wider swings in Earnings Per Share (EPS) Fewer owners to share the wealth when business is good Interest payment have a bigger effect on Net Income when business is poor