Posted - Acquiring Financial Capital

Posted - Acquiring Financial Capital - Owner Issues:...

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Unformatted text preview: Owner Issues: Acquiring Financial Capital Acquiring You are the single owner of a sheep farm on a small island . . . One day you make a sweater from the wool. People like it and start asking if they can buy one. You want to make more sweaters but don’t have the $20,000 to invest in the needed machinery. What form of business ownership is this? 3. 4. 5. 0% 0% 0% 0% 0% Ca n’ tt el l 2. Sole Proprietorship Limited Partnership General Partnership Corporation Can’t tell So le Pr op rie to Lim ... it e d Pa rt ne Ge ... ne ra lP ar tn e. .. Co rp or at io n 1. How should we get the $20,000 to buy the machinery? Debt Financing Ge ta 0% Se ll St oc k 0% pa rtn er 0% di re ct l.. . 0% .. selling ownership Bo rr ow 4. a. 3. fro m 2. Borrow from a bank. Loan Borrow directly from Direct Borrowing a friend. or Bond Get a partner Equity or Sell Stock Bo rr ow 1. What information will the bank want to know about you before it makes the loan? How much profit do you make? How much cash do you have to pay your bills? Income Statement: Sales – Expenses = Profits Cash Statement: Cash from Operations +/­ Investments +/­ Financing Can’t pay with profits – Very important and underrated statement What you own an who you owe it to? Balance Sheet: Assets = Liabilities + Equity What you own = owed others + owed to yourself Types of Financing Companies typically secure financing two ways: → issuing ownership shares (equity) Take a partner Form a corporation and sell share Riskier (paid last) therefore usually more expensive Generate profits internally (Net Income = Retained Earnings) → borrowing money (debt) Get a loan Sell bonds Hierarchy of Investor Claims or “Who gets paid back first” Risk / Return Secured Debt (has an asset as collateral) Unsecured Debt (on “good name”) Preferred Stock 1. 2. 3. • • • Trade Off Less Less Risky Return Paid a dividend before any common stock dividends are paid. No voting rights. Can be convertible to common stock. Common Stock 1. • • Entitled to a share of residual profit Riskiest investment so usually most expensive financing. More Risky More Return Review the following slides for the exam that were not covered in class. Equity as a Source of Capital Stock is the equity ownership of a corporation. A share is a portion of a corporation’s stock. Owners of shares are shareholders. Also called: Stockholders Investors Owners Voting rights: shareholders elect board of directors. Limited liability: limitation on the liability of owners. ­ The most owners can lose is their investment. Common stock is the residual ownership of the firm (keep what is left). Characteristics of Stock Stock ownership: ­ Public corporation: shares can be bought and sold in public securities markets ­ Private corporation: a firm with few owners; shares cannot be bought and sold publicly. Debt as a Source of Capital Debt as a Source of Capital Debt Debt Debt: the amount borrowed by one party (debtor) from another party (creditor). Amount borrowed is the principal and compensation and compensatio for use of the funds is the interest. Debt may be backed by specific property (secured) or backed by the general credit­worthiness of the borrower (unsecured). Can be in the form of loans or bonds. Debt as a Source of Capital Debt as a Source of Capital Debt Debt The good and bad of using debt: 1. Tax deductibility of interest (+) 2. Debt does not dilute control of the firm (+) 3. Lower cost of funds (+) 4. Increases probability of financial distress (­) 5. Uses up potential debt capacity (­) Bonds Bonds Bonds • • Corporations and governments borrow money by issuing bonds. A bond’s denomination is the amount of indebtedness (par value). • • Corporate bonds are typically $1,000 (also called the principal). Interest is paid on the amount borrowed until the funds are repaid. A bond’s maturity can vary. ­ Bonds with maturities over 30 years are rare. • Components of Corporate Governance State Charter State Charter Owners Top Management* President, CEO, CFO, etc. Employees •Middle Management, •1st level managers •Employees Shareholders Shareholders The “Corporation” Board of Directors Board of Directors Management Management Employees Employees Note: Management hired by the Board are usually considered Owners. Separation of Ownership and Control Precorporate Period Corporate Period Shareholders Shareholders Owners Owners Managers Managers Board of Board of Directors Directors Management Management Do you remember which stakeholder views do these represent? The Agency Problem Agent acts for the principal Problems with agency relationship ­ Excessive “perks” ­ Shirking ­ Agents act in own best interest Efforts to Improve Corporate Governance Changes in boards of directors » “Outside” directors - Non employed by the company » “Independent” directors - Not employed by the company - Not doing business with the company - No relatives working for the company » Stronger board committees » Diversity Establish board committees » Audit » Nominating » Compensation Efforts to Improve Corporate Governance Building a better board » Define the role of the board » Have explicit financial goals » Widen the talent pool for directors » Encourage constructive dissent Financing & Risk Q&A Any Q’s? I have a couple? Make sure to re­read the article for the exam. Reading 6.14 – A Primer on Sarbanes-Oxley A Primer on SOX 1. 2. 3. 1. Public Company Accounting Oversight Board (PCAOB, but called “Peek­a­Boo”) Auditor independence Corporate Governance “Independent” “Outside” directors on audit committee Financial expert on audit committee CEO and CFO certification Enhanced Financial Disclosures • • • 1. 2. 3. 4. 5. Non­GAPP EBITDA accounting & off­balance sheet transactions Sales of stock disclosures 404 Internal controls certification Stock Analyst Conflict of Interest Commission Resources and Authority Studies& Reports Increased penalties and Whistle Blower Protection New Sentencing Guidelines & Penalty Enhancements Efforts to Improve Corporate Governance Sarbanes­Oxley Act of 2002 Provisions: » Limits non-auditing services of auditors » Enhances financial disclosure » CEOs and CFOs certify financials » Protects whistle-blowers » Code of ethics disclosure Government regulation to protect owners by providing more complete, transparent information about the financial health of publicly traded companies. Issues Surrounding Compensation CEO Pay Controversy » Whether CEO pay is tied to performance » Overall level of CEO pay ...
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