MODULE-4-CAPITAL-FINANCING PDF

Chapter 4. CAPITAL FINANCING ©2017 Batangas State University 181  Introduction Business run on money. Capital is more the just money. Capital financing refers to methods you use to raise money in launching your business. Your busi...

Chapter 4. CAPITAL FINANCING ©2017 Batangas State University 181  Introduction Business run on money. Capital is more the just money. Capital financing refers to methods you use to raise money in launching your business. Your business can have several types of capital such as financial, human and even natural capital. Financial capital keep your business running. After you start earning a profit, some of your capital comes from your revenues. If your business starting small or you have deep pockets, you may be able to survive with your own resources. In this chapter, we were able to determine the types of business organization, the types of bonds and its application. 182 ©2017 Batangas State University  Learning Objectives Explain the advantages and disadvantages of different types of business organizations Discuss the classification of bonds 183 ©2017 Batangas State University  Financing Equity and Borrowed Capital Equity capital or ownership funds are those supplied and used by the owners of an enterprise in the expectation that a profit will be earned. Borrowed funds or capital are those supplied by others on which a fixed rate of interest must be paid and the debt must be repaid at a specific time. 184 ©2017 Batangas State University  Types of Business Organizations A. Individual Ownership The individual ownership or sole proprietorship is the simplest form of business organization, wherein a person uses his or her own capital to establish a business and is the sole owner. 185 ©2017 Batangas State University  Types of Business Organizations Advantages of the Individual Ownership 1. It is easy to organize. 2. The owner has full control of the enterprise. 3. The owner is entitled to whatever benefits and profits that accrue from the business. 4. It is easy to dissolve. 186 ©2017 Batangas State University  Types of Business Organizations Disadvantages of the Individual Ownership 1. The amount of equity capital which can be accumulated is limited. 2. The organization ceases upon the death of the owner. 3. It is difficult to obtain borrowed capital, owing to the uncertainty 4. The liability of the owner for his debts is unlimited. 187 ©2017 Batangas State University  Types of Business Organizations B. The Partnership A partnership is an association of two or more persons for the purpose of engaging in a business for profit. 188 ©2017 Batangas State University  Types of Business Organizations Advantages of the Partnership 1. More capital may be obtained by the partners pooling their resources together. 2. It is bound by few legal requirements as to its accounts, procedures, tax forms and other items of operation. 3. Dissolution of the partnership may take place at any time by more agreement of partners. 4. It provides an easy method whereby two or more persons of differing talents may enter into business, each carrying those burdens that he can best handle. 189 ©2017 Batangas State University  Types of Business Organizations Disadvantages of the Partnership 1. The amount of capital that can be accumulated is definitely limited. 2. The life of the partnership is determined by the life of the individual partners. When any partner dies, the partnership automatically ends. 3. There may be serious disagreement among the individual partners. 4. Each partners is liable for the debts of the partnership. 190 ©2017 Batangas State University  Types of Business Organizations C. The Corporation A corporation is a distinct legal entity, separate from the individuals who own it, and which can engage in almost any type of business transaction in which a real person could occupy himself or herself. 191 ©2017 Batangas State University  Types of Business Organizations Advantages of the Corporation 1. It enjoys perpetual life without regard to any change in the person of its owners, the stockholders. 2. The stockholders of the corporation are not liable for the debts of the corporation. 3. It is relatively easier to obtain large amount of money for expansion, due to its perpetual life. 4. The ownership in the corporation is readily transferred. 5. Authority is easily delegated by the hiring of managers. 192 ©2017 Batangas State University  Types of Business Organizations Disadvantages of the Corporation 1. The activities of a corporation are limited to those stated in its charter. 2. It is relatively complicated in formation and administration. 3. There is a greater degree of governmental control as compared to other types of business organizations. 193 ©2017 Batangas State University  Source of Capital for Business Organization Capitalization of a Corporation The capital of a corporation is acquired through the sale of stock. There are two principal types of capital stock: common stock and preferred stock. 194 ©2017 Batangas State University  Source of Capital for Business Organization Common Stock Common stock represents ordinary ownership without special guarantees of return. Common stockholders have certain legal rights, among which are the following: 1. Vote at stockholder's meeting. 2. Elect directors and delegates to them power to conduct the affairs of the business. 3. Sell or dissolve the corporation. 4. Make and amend the by laws of the corporation. 5. Subject to government approval, amend, or change the charter or capital structure. 6. Participate in the profits. 7. Inspect the books of the corporation. 195 ©2017 Batangas State University  Source of Capital for Business Organization Preferred Stock Preferred stock are guaranteed a define dividend on their stocks. In case the corporation is dissolved, the assets must be used to satisfy the claims of the preferred stockholders before those of the holders of the common stock. Preferred stockholders usually have the right to vote in meetings, but not always. 196 ©2017 Batangas State University  Financing with Bonds A bond is a certificate of indebtness of a corporation usually for a period not less than ten years and guaranteed by a mortgage on certain assets of the corporation or its subsidiaries. Bonds are issued when there is need for more capital such as for expansion of the plant or the services rendered by the corporation. The face or par value of a bond is the amount stated on the bond. When the face value has been repaid, the bond is said to have been retired or redeemed. The bond rate is the interest rate quoted on the bond. 197 ©2017 Batangas State University  Financing with Bonds Classification of Bonds 1. Registered bonds. The name of the owner of this bond is recorded on the record books of the corporation and interest payments are sent to the owner periodically without any action on his part. 2. Coupon Bonds. Coupon bond have coupon attached to the bond for each interest payment that will come due during the life of the bond. The owner of the bond can collect the interest due by surrendering the coupon to the offices of the corporation or at specified banks. 198 ©2017 Batangas State University  Financing with Bonds Methods of Bond Retirement 1. The corporation may issue another set of bonds equal to the amount of bonds due for redemption. 2. The corporation may set up a sinking fund into which periodic deposits of equal amount are made. The accumulated amount in the sinking fund is equal to the amount needed to retire the bonds at the time they are due. 199 ©2017 Batangas State University  Financing with Bonds Methods of Bond Retirement 200 ©2017 Batangas State University  Financing with Bonds Examples 201 ©2017 Batangas State University  Financing with Bonds 202 ©2017 Batangas State University  Financing with Bonds 203 ©2017 Batangas State University  Financing with Bonds 204 ©2017 Batangas State University  Financing with Bonds 205 ©2017 Batangas State University  Financing with Bonds 206 ©2017 Batangas State University  Chapter Test 207 ©2017 Batangas State University