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Chapter 5: Financing The AgribusinessI. IntroductionFinancing is used to describe the way in which firms provide funds neededto acquire assets.FinancingPrimary source is ownersComplete pro forma and/or historical balance sheets, income statements andcash flow statementsa. Indicate to investors or lenders the ability of thebusiness to generate a profitb. Ability to pay back the moneyFinancingRate of return required by investors or lenders will depend on risk involvedRisk is the likelihood that a business or investment will fail, not make as muchmoney as was anticipated, or lose moneyFinancingBusinesses with higher degrees of risk must offer investors or lenders higherpotential returns to compensate them for the riskII. Types of assetsCurrent assets & Non-current assetsA. Current assets (can be converted to cash quickly) include such accountsas cash, inventory, and accounts receivableTypes of assetsB. Non-current assets (useful life exceeds one operating period)are vehicles, farm machinery, equipment in the processing facility,irrigation wells, breeding livestock, buildings, land and orchardsIII. Long-term versus short-term financingLength of financing should approximate expected productive life of the assetIt is expected that all investments will pay for themselves through revenues theygenerate and ultimately add to the profits of the businessLong vs short term financingFor long-term assets the period for repayment of the debt is usually somewhatless than the estimated life of the assetLong vs short term financingPermanent working capital is the minimum level of working capital or the smallestamount of current assets that the firm expects to maintain1. Should be met through long-term financing2. Equity capital or unsecured debt capital is oftensource of financingLong vs short term financingTemporary working capital needs are financed through short-term loans andsupplies of inventory1. Ensures that the firm makes use of funds onlywhen it needs them
2. Funds do not remain idle for long periods of timeIV. Equity versus debt capitalEquity capital is funds put into or retained in the business by the owners1. Cash, land, equipment or other assets2. Retained earnings3. Payment for the use of equity capital is not mandatoryEquity versus debt capitalCommon sources of debt capital are short-term or long term loans, mortgageeson buildings and equipment, issuing long term bonds and accounts payableEquity versus debt capitalCommon sources of debt capital1. Requires that interest be paid for the use of the funds - exceptaccounts payable, taxes payable, and accrued interest which are typicallyon time2. Principle amount of debt must be repaid over a specifiedperiod of timeEquity versus debt capitalBusiness' capitalization structure - combination of debt capital and ownershipcapitalEquity versus debt capitalEquity Capital1. Depends on the form of business ownership - corporationshave stock,proprietorships and partnerships have contributed capitalEquity versus debt capital2. Stock represents ownership in a corporation by ashareholdera. Corporation states how many shares of stock may beissuedb. Corporation determines the "par" or "stated value of thestock at the time of issueEquity versus debt capital3. Stock can be issued with a variety of voting rights, dividend privileges,and claims to assets upon liquidationEquity versus debt capital4. Common Stocka. Voting rights - elect members to a board of directors.Authorize new stock and vote on majormanagement changesb. Dividend payments are variable and are paid afterinterest and preferred stock dividendsEquity versus debt capital4. Common Stock
c. Claims on assets - paid after debt-holders andpreferred stockholdersEquity versus debt capital5. Preferred stocka. Voting rights - noneb. Dividend payments are fixed and regular, are cumulativeand paid after interestc. Claims on assets are paid after debt-holdersEquity versus debt capital6. Stocks of public corporations can be brought and sold on public stockexchangesEquity versus debt capitalDebt Capital - bond issue, loan, or mortgages represents a debt of thecorporation which must be repaid1. Does not dilute the ownership of the corporation2. Interest payments are taxed deductibleEquity versus debt capital3. Insolvency can occur when a company cannot meet itsfinancial obligations as they occurEquity versus debt capital4. Bonds are sold by the corporationa. Payment schedule for both the principle andinterest is fixedb. Bonds require no collateral - assets of the firm aresecurityc. Bondholders have preferential claim on assetsEquity versus debt capital5. Mortgage is a type of long-term debt that is secured by a long-termasset such as land or buildinga. If the borrower defaults, the lender can claim thesecured assetb. Lender retains title to the secured assetEquity versus debt capital6. Long - term loans and mortgages are usually amortized overa period of yearsa. Fixed payment loansb. Delayed payment loansc. Graduated payment and interest rates that fluctuate withmarketinterstEquity versus debt capital7. Short-term capital are loans and credit provided bysuppliersa. Line of credit with ban or supplier allows firm to barrow orreceive supplies up to a specified level
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Chapter 5: Financing the Agribusiness I. Introduction Financing Is
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