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Profit retention
or internal financing, where the firms finances its growth through cash flows from operations, rather than distributing the cash to the other owners in the form of dividends.
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spontaneous financing
such as accounts payable , which increases automaticlly with increases in sales.
example: as a firm's sales grow it purchases more inventories and suppliers extend the firm more credit, which increases accounts payable.
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External financing
which comes from outside lenders and investors.
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Lenders
examples: bankers
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investors
examples: stockholders, partners, or sole proprietors.
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four basic factors that determine how a firm is financed
- 1) Firm's economic potential
- 2) the size and maturity of the company
- 3) the nature of its assets
- 4) the personal preferences of the owners with respect to the tradeoffs between debt and equity
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return on assets
rate of return on a firm's total assets invested, computed as operating income divided by total asset.
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differences between debt and equity
- high equity, owners must share control with other equity investors who buy the stock or make a large investment
- lower financial risk
- lower potential return on investment for the owner
- High debt owners maintain control without having to make a large investment.
- higher financial risk
- higher potential return on investment for the owners
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different sources of financing
- 1) personal savings, family and friends, credit cards
- 2) business suppliers, and asset based lenders
- 3)private equity investors
- 4) banks
- 5) Government
- 6) large companies and stock sales
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types of loans
- lines of credit
- term loans
- mortgages
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lines of credit
an informal agreement between a borrower and a bank as to the maximum amount of funds the bank will provide at any one time.
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term loans
Money loaned for a 5 to 10 year term, corresponding to the length of time the investment will bring in profit.
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Mortgages
represent long-term source of debt capital.
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chattel mortgage
a loan for which items of inventory or other movable property serve as collateral.
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real estate mortgage
a long-term loan with real property held as collateral.
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