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BUSI 1110 Chapter 16

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by

Brad Anderson

on 1 August 2013

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Transcript of BUSI 1110 Chapter 16

Chapter 16 - Financial decisions & risk management
Brad Anderson
Agenda
Sources & uses of cash
The principle of leverage
Risk management
Short term
Sources of cash
Uses of cash
Trade credit
Secured short-term loans
Unsecured short-term loans
A/R; inventory as collateral
E.g. lines of credit; revolving credit; commercial paper
Cash from operations
Operating expenses
Payroll
Inventory
Etc.
Servicing current liabilities
e.g. accounts payable
Long term
Equity
Issuing stock
Retained earnings
Long-term loans
Bonds
Debt financing
Sources of cash
Hybrid - Preferred shares
Major expansions
Fixed assets
Uses of cash
PP&E
Sources & Uses of cash
The principle of leverage
A business opportunity
Requires $100,000
Estimated 15% return/year
Finance out of savings
Finance 50% out of savings
Finace 50% with debt
At 12% interest
OR
Expected revenue
Interest
Net income
$100,000 x 15% = $15,000
$0
$15,000
Finance out of savings
$15,000
$50,000 x 12% = $6000
$9,000
50% Debt financing
BUT
Net income
Owner`s investment
ROI
$15,000
$100,000
15%
Finance out of savings
$9,000
$50,000
18%
50% Debt financing
Risk Management
On your own time ...
...Perform the same exercise, but now assume your new business only generates an 8% return
Read the hand out & discuss the questions at the end
Full transcript