Why finance?
This is another term for money in finance.
capital
two basic types of financing
-equity financing
-debt financing
What type of financial instrument is a bond?
It is a debt that must be repaid to the investor or lending institution.
What is the stock market?
The stock market is where people buy and sell shares (i.e. pieces) of companies based on how much they think those shares will be worth in the future.
The term for any item with an economic value that could be converted into cash
an asset
In financing business operations, a company relies almost entirely on short-term financing. (True or False)
False
All corporations receive their starting capital by:
a) selling bonds
b) purchasing stocks
c) purchasing shares
d) selling stock
d) selling stock
What must a corporation pay first - interest payments on its loans or dividends to its shareholders?
interest payments
What happens if shareholders are not happy with a company's performance and start selling their shares on the market?
This will drive the value of the shares (i.e. stock) down.
a) the verb to describe the act of giving money to a company or individual who will eventually pay it back plus interest
b) the verb to indicate a request for money by a company or individual that must be paid back, usually with interest
a) to lend
b) to borrow
Give three examples of assets.
equipment, land, buildings, inventory (goods), capital
A corporation may be forced to sell off assets if it does not:
a) pay dividends
b) share its profits with shareholders (stockholders)
c) make required payments to bondholders
d) sell sufficient bonds
c) make required payments to bondholders
the group of individuals who make managerial decisions for the corporation, such as when dividends will be paid
The Board of Directors
This term is used to describe when stocks reach their highest level, but it is very temporary because stock prices cannot continue to rise forever.
a bubble
another term for the original sum of money lent by an investor outside the corporation
principal
Compare the repayment period of short-term financing and long-term financing.
Short-term financing must be paid back in less than a year, while long-term financing can be repaid over a period of years.
Explain the difference between equity financing and debt financing.
Equity financing refers to funds (i.e. money/capital) invested by the owners (i.e. shareholders) of the corporation.
Debt financing refers to funds borrowed from sources outside the corporation. (i.e. from banks and other financial lenders)
Which financial instrument - stocks or bonds -is riskier and why?
Stocks are riskier as their value can fluctuate on the market and they can lose value, leaving the shareholder with stock worth less than the purchase price.
How is the NASDAQ different from the New York Stock Exchange?
The NASDAQ (founded in 1971) has no physical location. All share/stock trading occurs electronically.
the date by which a loan must be repaid in full to the lender (bondholder)
the maturity date
Name three ways that a company may use short-term financing.
- employee wages/salaries
- office expenses (rent, supplies, utilities (e.g. electricity, heating) etc.)
- insurance
- advertising
-inventory (goods for sale)
State the primary source of equity financing, as well as the primary source of debt financing.
equity financing = the sale of corporate stock to shareholders
debt financing = the sale of corporate bonds to sources outside the corporation
What are the advantages and disadvantages of both stocks and bonds?
+ Stocks can earn dividends when the company is doing well, stocks can increase in value, and stockholders can influence corporate management by electing board members;
- if a company is not doing well, dividends can be omitted at the discretion of the board members, and stocks can fall in value.
+ Interest payments on bonds must be paid when due, interest is tax-deductible and bonds do not decrease in value;
- Bondholders have no influence over corporate management, and bonds do not increase in value on the market.
CEOs may try to increase share/stock prices for short-term gain by buying back their own shares to decrease supply and artificially increase prices.
This negative practice impacts stakeholders. Name four different stakeholders in a company/corporation.
- employees
- customers
- the corporation itself
- the environment
- society
the situation a business finds itself in when it cannot raise enough capital to meet its obligations (paying employees, expenses, etc.) or pay its debts as they come due
insolvency