Financing- provide funding for a Risk - is the chance that an

particular need Debt Financing- investment’s actual return will be

borrowing money and not giving up different than expected
ownership Equity Financing- raise Total risk= systematic +
capital by selling stock to investors for non-systematic risk - Total volatility of
ownership interests an investment measured by standard
Sources of Short-Term Funds 1. deviation (σ)
Advances from stockholders/owners Primary Assumptions - Investors are
little to no interest; depends on the risk averse
availability of funds 2. Credit Minimizing Risk - Investor has to have
cooperatives- provides lending services a diversified portfolio - Diversification
to members 3. Banks- provides several is a risk management technique that
loan products 4. Credit Cards- high combines a wide variety of investments
interest rates 5. Lending companies- within a portfolio to reduce risk
dedicated to lending; more lenient than Simple Interest – the charging interest
banks 6. Pawnshops- funds in rate r based on a principal P over T
exchange for collateral 7. Informal number of period.
lending sources- paid per month; Compound Interest - the interest in
monthly interest of 20% the first compounding period is added
Factors to consider in sourcing on the principal, which will then be the
short-term funds 1. Cost (interest)- basis for the interest to be computed for
informal lending (⅚) is the most the next period.
expensive 2. Availability of short-term Compounding Frequency - the
fundsinformal lending sources is most number of times interest is computed
available due to no requirements 3. on a certain principal in one year.
Risk- if the company defaults, lenders Future Value - the amount to which an
may foreclose its properties despite investment will grow after earning
what the source of fund is 4. Flexibility- interest.
ability of the company to access funds Present Value - the amount you must
5. Restrictions (debt covenants)- require invest today if you want to have a
minimum deposit balance certain amount of cash flow in the
Sources of long-term funds 1. Equity future
investors- common stockholders (share Single Amount (Lump Sum) - a single
ownership and voting rights); preferred cash outflow is made, and the total
stockholders (no voting rights and are receipts will be at a single future date.
first to receive dividends) 2. Internally Annuity - periodic stream of equal
generated funds- not all profits are cash flow at equal time intervals
distributed to stockholders 3. Banks- Mixed Stream - unequal periodic cash
provide long-term loans depending on flows that reflect no pattern
the nature of the need 4. Bonds- debt Loan- money lent at an interest rate for
investment where investor loans money a certain period
to an entity 5. Lending companies Bond- a fixed-income instrument that
Institution’s primary consideration in represents a loan
approving loan applications 1. Effective interest method-
Character- willingness to repay the loan distinguishes two types of interest rate,
(Interview, Fully filled out loan the nominal rate or the stated rate and
application form, NBI clearance, Police effective rate or the market rate
Clearance, etc.) 2. Capacity- ability to Capital Budgeting- process of
generate cash flows (Income evaluating and selecting long-term
documents- Certificate of employment, investments
Audited financial statements, Income Capital budgeting serves three
tax return, etc.) 3. Collateral- security important purposes for companies:
pledged for payment of the loan (Copy 1. Accountability – Companies that
of TCT, Tax declaration, Building plan, invest in projects without adequate
etc.) 4. Capital- a customer’s financial research can quickly 2.Measurability –
resources (– Statement of Assets and Capital budgeting provide a way to
Liabilities, Audited financial statements, quantitatively measure the
etc.) 5. Condition- current economic or effectiveness and long-term viability is.
business conditions 3. Resource Allocation – Companies
Regardless of purpose, all capital have limited capital
projects share the following Types of capital projects
characteristics: 1. Cost reduction – These projects do
1. Large Initial Outflow – There is not generate revenues; 2. Business
typically a large outflow of resources at Expansion – These projects increase
the beginning of the projects 2. Gradual the scope of a company’s operations 3.
Inflows – The company expects to Equipment replacement – These
realize benefits from the project, 3. projects involve deciding whether to
Irreversibility – Projects usually involve retire or replace existing equipment or
the acquisition of fixed assets to keep existing assets in place 4.
4. Risk – Because of the time lag, all Equipment selection - These types of
capital projects are subject to risk projects involve the company choosing
Payback Method - This is the simplest between two mutually exclusive
method used in capital budgeting alternatives. 5. Lease or buy - The
Net Present Value - This method is decision of whether to lease or to invest
more sophisticated than the payback in an asset
method A project's internal rate of return (or
time-adjusted rate of return) is the
discount rate which produces an NPV
of zero