Exam 12: A Firms Sources of Financing

What are the "five C's of credit"?

A balloon payment

You Make the Call-Situation 2 Carter Dalton is well on his way to starting a new venture-Max, Inc. He has projected a need for $350,000 in initial capital. He plans to invest $150,000 himself and either borrow the additional $200,000 or find a partner who will buy stock in the company. If Dalton borrows the money, the interest rate will be 6 percent. If, on the other hand, another equity investor is found, he expects to have to give up 60 percent of the company's stock. Dalton has forecasted earnings of about 16 percent in operating income on the firm's total assets.

Small business owners sometimes accept higher levels of debt because doing so permits them to retain all of the stock and full ownership.

A _____ mortgage would likely be used to secure financing for mobile construction office.

A primary source of financing for most smaller companies is

What are the four basic factors that determine how a firm is financed?

Equity investors cannot demand more than

Venture capital companies

List two methods of selling common stock, and discuss each method.

The return on the owner's investment (equity) is a better measure of performance than

What are the tradeoffs between profitability, risk, and control that should be considered when choosing between debt and equity?

Prospective entrepreneurs will usually acquire their initial financing from

Generally, as long as a firm's operating income return on its assets in greater than the cost of debt, the owners' return on equity investment will decrease as the firm uses more debt.

Though not as common as using personal savings, one of the more often used sources of financing is

To retain control and avoid accountability to those with a minority equity position in the firm, small business owners are often reluctant to give away any of the company's ownership.

Private placement

If a firm finances with equity rather than with debt, it will bear no interest expense and thus yield greater net income.

Term loans are generally used to finance equipment with a useful life _____ the loan's term.

If the firm's rate of return on its assets is _____ than the cost of borrowing, then the owners' rate of return on equity will _____ as the firm uses _____ debt