Finance Lecture:

1

• Finance Lecture
• Interest Rates
• Types of Financing
• Starting a Small Business

2
Financing the Enterprise

• Where can existing companies obtain the money
  they need to operate and grow?

Cost of Capital average rate of interest a firm
pays on its combination of debt and equity

• Interest
• Cost of Opportunity

Capital Structure the financing mix of a firm
3
Debt Versus Equity Financing

• Debt Financing
• creditor lends money to a debtor in exchange for
  repayment with interest at some future date
• Equity Financing
• company sells shares of ownership in the
  enterprise, called stock

4
Debt Versus Equity Financing

• Companies must
• Consider whether the financing is for the short
  or long term
• Analyze the cost of financing including interest,
  fees, and other charges
• Evaluate their need for ownership control

5
Debt versus Equity
6
Types of Securities Investments

• Stocks
• Bonds
• Options
• Futures
• Commodities

7
Corporate Bond Ratings
8
U.S. Government Securities
Treasury Bills Short-term debt securities issued
by the federal government also referred to as
T-bills Treasury Notes Debt securities issued by
the federal government that are repaid within 1
to10 years after issuance Treasury Bonds Debt
securities issued by the federal government that
are repaid more than 10 years after issuance U.S.
Savings Bonds Debt instruments sold by the
federal government in a variety of amounts
(usually at 50 discount)
9
Mutual Funds
Mutual Fund Financial organization pooling money
to invest in diversified blends of stocks, bonds,
or other securities Money-Market Funds Mutual
funds that invest in short-term securities and
other liquid investments

• Growth Funds
• Income Funds
• Balanced Funds

• Sector Funds
• International Funds
• Index Funds

10
Securities Markets
Primary Market Market where firms sell new
securities issued publicly for the first time
initial public offerings (IPOs) Secondary
Market Market where subsequent owners trade
previously issued shares of stocks and
bonds Stock Exchanges Secondary markets where
traders buy and sell stocks and bonds in physical
locations Auction Exchanges Centralized
marketplaces where securities are traded by
specialists on behalf of investors
11
Auction Dealer Exchanges
Dealer Exchanges Decentralized marketplaces
where securities are bought and sold by dealers
out of their own inventories Market
Makers Registered representatives who trade
securities from their own inventories on dealer
exchanges, making a ready market for buyers and
sellers Over-the-Counter (OTC) Market Network
of dealers who trade securities on computerized
linkups rather than a trading floor
12
Raising Capital at Can Go

• Why does Can Go need to raise long-term capital
  from outside sources?
• What are two sources of financing they are
  considering?

13
The Changing Nature of Securities Exchanges
NYSE
New York Stock Exchange
NASDAQ
National Association of Securities Dealers
Automated Quotations
14
NYSE

• http//www.nyse.com
• When were circuit breakers introduced and what do
  they do?
• How many trading posts and trading booths are on
  the trading floor?
• What is Stock Watch?

15
Good Investing Websites

• Financial data filed with the SEC
• http//www.freeedgar.com
• Morningstar mutual fund reports
• http//www.morningstar.net
• Bond prices and market performance
• http//www.investinginbonds.com
• Investorama links to research and analysis
• http//www.investorama.com
• Bloomberg
• http//www.bloomberg.com
• Smart Money
• http//www.smartmoney.com

16
How to Analyze Financial News
Market Indexes Measures of market activity
calculated from the prices of a selection of
securities

• General direction of stock prices
• Timing
• Price/earnings ratios

17
Market Indexes

• DJIA Dow Jones Industrial Average
• Standard Poors 500 Stock Average
• Wilshire 5000 Index
• NASDAQ Composite Index
• Japans Nikkei 225 Index
• United Kingdoms FT-SE 100 Index
• Germanys DAX

18
How to Analyze Financial News
Bull Market
Bear Market
Rising stock market
Failing stock market
19
Stock Markets Ups and Downs
20
Understanding Banking Securities

• The Federal Reserve System
• U.S. Treasury Securities
• Stocks
• Security Exchanges

21
The Functions of the Federal Reserve System

• Created in 1913/1914established system of 12
  district banks
• Commonly known as the Fed
• Most powerful financial institution in the U.S.
• Serves as central bank

• Three main functions
• Influencing the U.S. money supply
• Supplying currency
• Clearing checks

22
Tools for Influencing the Money Supply
Reserve Requirement Percentage of a bank's
deposit that must be set aside an on which banks
may not earn interest Discount Rate Interest
rate the Federal Reserve charges on loans to
commercial banks Prime Interest Rate
(Prime) Lowest interest rate banks offer on
short-term loans to preferred borrowers Open-Marke
t Operations Federal Reserves purchase or sale
of government bonds on the open market Selective
Credit Controls Federal Reserve's power to set
credit terms on various types of loans
23
Influencing the Money Supply
To INCREASE money supply
To DECREASE money supply
Decrease
Increase
Lower
Raise
Buy
Sell
Fewer
More
24
Understanding theWorld of Small Business
Small Business

• Independently owned and operated
• Not dominant in its field
• Fewer than 500 employees
• Relatively small annual sales

25
Key Issues in Starting New Businesses
Before starting a business you should know

• What you want to accomplish
• How to find the money you need
• How to register and insure your business
• Where to go for help
• Who your customers are and how to reach them

26
Small Business Advisor

• http//www.isquare.com (Biz FAQs)
• If you are a small business with no employees, do
  you need to get a federal identification number
  from the IRS?
• What is DBA?
• Where can you find out the minimum hourly wage
  for your state and why is this information
  important? (Department of Labor site)

27
The Importance of Preparing a Business Plan

• Business Plan
• A written document that provides an orderly
  statement of a company's goals and how it intends
  to achieve those goals

• Helps determine need for outside financing
• Helps determine necessary steps to realize goals
• Helps persuade lenders that project is viable

28
Formal Business Plan
A formal business plan should include

• Summary
• Company Industry
• Products or Services
• Market
• Management
• Marketing Strategy

• Design Development Plans
• Operations Plan
• Overall Schedule
• Critical Risks Problems
• Financial Information
• Exit Strategy

29
Why Businesses Fail

• Failure to establish timeframe
• Inadequate financing
• Inability to find customers/clients
• Lack of managerial skills

30
Financing a New Business

• Difficult to obtain conventional financing
  (banks) because of higher risks
• Private Financing Assistance
• Small Business Administration Assistance

31
Private Financing Assistance

• Venture Capitalists
• Investment specialists who provide money to
  finance new businesses or turnarounds in exchange
  for a portion of the ownership, with the
  objective of making a considerable profit on the
  investmentalso called VCs

Angel Investors Wealthy individuals who put
their own money into startups with the goal of
eventually selling their interest for a large
profit
Credit Card Financing Credit card companies
dont care how the money is spent as long as the
bill is paid. Interest rates make this a high
cost option
32
Small Business Association Assistance

• To get an SBA-backed loan apply to a regular bank
  that works with the SBA
• SBA guarantees to repay 85-90 percent of loan if
  you default
• Average SBA loan is 100,000-175,000
• Most SBA loans have longer repayment terms than
  conventional banks (9 years versus 2 or 3)
• Small Business Investment Companies (SBICs)
• Minority Enterprise Small Business Investment
  Companies (MESBICs)
• http//www.sba.gov