1. Financing a Business Chapter 16 Chapter 16 Financing a Business
©2008 Thomson/South-Western

2. Lesson 16.1 Types of Business Capital
Goals
Explain three methods of financing a business.
Describe the differences in equity financing based on the ownership structure of a business.
Chapter 16
Financing a Business

3. Methods of Obtaining Capital
Equity capital — owners’ personal contributions to the business
Retained earnings — profits not taken out of the business but saved for use by the business
Debt capital — money that others loan to a business
Chapter 16
Financing a Business

4. Sources of Start-Up Capital
Chapter 16
Financing a Business

5. Lesson 16.2 Raising Capital Through Stock Sales
Goals
Differentiate between common and preferred stock.
Describe factors that affect the value of a company’s stock.
Chapter 16
Financing a Business

6. Types of Stock
Common stock — gives holders the right to participate in managing the business by voting on basic issues at annual meetings and electing board of directors; holders can also share in profits
Preferred stock — gives holders first claim on corporate dividends if the company earns a profit, and priority over common stockholders if the company fails
Chapter 16
Financing a Business

7. Value of Stock
Par value — arbitrary dollar value assigned to shares of stock when they are issued
Market value — price at which stock is actually bought and sold
Book value — value calculated by dividing the corporation’s net worth by the total number of shares outstanding
Chapter 16
Financing a Business

8. Distribution of Corporate Profits
Chapter 16
Financing a Business

9. Lesson 16.3 Short- and Long-Term Debt Financing
Goals
Differentiate between short-term and long-term debt.
Explain the factors that businesses should consider when choosing debt financing.
Describe several sources from which businesses can obtain additional capital.
Chapter 16
Financing a Business

10. Debt Capital Short-term debt capital Long-term debt capital
Funds obtained from banks
Line of credit
Promissory note
Funds obtained from other sources
Trade credit
Long-term debt capital
Term loans (long-term notes)
Bonds
Chapter 16
Financing a Business

11. Obtaining Capital Factors in selecting a method of obtaining capital:
Cost of capital
Interest rates
Power of contributors to influence operations
Chapter 16
Financing a Business

12. Main Sources of Outside Capital
Investment banks — organizations that help businesses raise large sums of capital through sale of stocks and bonds
Stock options — rights granted by a corporation that allows current stockholders to buy additional shares when issued at a fixed price for a specific period of time
Venture capital — financing obtained from an investor or investment group that lends large sums of money to promising new or expanding small companies
Chapter 16
Financing a Business