Ch.

8 Financing a Business
Name: Hannah Godbehere Period: 3 Date: 9/17/20
In your own words, define the 8 terms below. Also, give examples of each one.
1. Initial public offering: A company’s flotation on the stock market.

2. Common stock: Shares entitling their holder into dividends that vary in amount & may
even be missed, depending on the fortunes of the company.

3. Preferred stock: A form of stock which may have any combination of features not
possessed by common stock including properties of both equity & a debt instrument + is
generally considered a hybrid instrument.

4. Stock market: A stock exchange.

5. Yield: The income returned on an investment such as on the internet, received from
holding a security, and the yield is usually expressed as an annual percentage rate based
on the investment cost, current market value, or face value.

6. Balance sheet: The financial statement of a company which includes assets, liabilities,
equity, capital, total debt, etc. at a point in time. Includes the assets on one side &
liabilities on the other. It’s the amount that the company owes to its’ creditors.

7. Income statement: A financial statement that shows a company’s revenues + expenses

over a period of time.

8. Retained earnings: The amount of net income left-over for the business after it has paid
out the dividends to its’ shareholders.

In the space below, write a short paragraph that includes the terms common stock, preferred
stock and stock market. Your paragraph should include how the terms are related.
- In order to raise funds corporations will sell stocks. Some are preferred stocks, but most
are common stocks (hence the ‘common’ in the name). Both and most stocks are usually
traded on either the NYSE or NASDAQ stock markets.
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Microductor, Inc., the new computer chip manufacturer, is making waves in the world of
microprocessors. Its new Octavium Processor is 8-times faster than the industry leader. To get
the money to pay researchers and buy the equipment it needs for the Octavium chip, Microductor
is using several strategies.
Fill in the blanks using the answers, in bold, located at the bottom of this page.
First of all, Microductor sold corporate bonds in the financial markets. Bonds are a form of
I.O.U (loan). As a result, Microductor will pay interest to the bondholders each year until the
principal is due in 15 years. Bonds are an example of long-term loans.
Because Microductor is a young, growing tech company, it often needs extra cash to meet its
payroll or to buy basic supplies. The best sources for these short term loans, that must be paid
back within a year, are banks and finance companies.
Businesses like Microductor also may get new capital by selling stock thus becoming an IPA.
This is called secondary market because a share of stock is a share in the ownership of a
company. Microductor issued 1 million new shares of stock. Some of the new stockholders
hope the firm will earn a good profit and pay dividends.
However, most stockholders think that the company will be successful so they can sell their
stock for more than they paid originally. As a business grows, the value of its stock tends to
appreciate or increase. Microductor is traded on NASDAQ. This is and example of a equity
financing. NASDAQ and NYSE are the most well -known stock markets. They are examples of
organized exchanges that trade stocks. They are regulated by the Securities & Exchange
Commission (SEC). Regardless, even if the value of stocks fall, some traders, nicknamed bears,
can still make a profit.
Investors in Microductor are likely to study its 2 main financial statements: the balance sheet and
the income statement. The former is like a snapshot of a business showing its assets v. liabilities.
The difference between these is the net worth.
Cash on hand, inventories, and plant and equipment are examples of assets.
Accounts payable and long-term debt are examples of liabilities. The income statement is like a
movie. It shows, over a period of time, how much a business has made or lost.
dividends bears corporate net worth long-term
banks and finance companies increase equity financing
Securities and Exchange Commission (SEC) IOU or loan IPO
assets vs. liabilities common interest secondary market

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In the previous chapter, you selected a business and created a simplified business plan. Now, you
will refine that idea, focusing on how much start-up money will be needed and how to obtain it.
1. What type of business did you select in Ch. 7?
- A sole proprietorship.
2. Are you operating as retail, a warehouse, or from home? Explain.
- From home b/c I’ll be shipping the inventory out.
3. Will you lease the property? You will probably be required to pay first and last months
rent and a security deposit. Here are your options:
a. A building beachside will rent for about $15 a square foot.
b. A spot in the mall or shopping center will cost about $10 a square foot.
c. A building remotely located will rent for about $5 a square foot. However, will your
clients drive a long way to see you?
d. Running the business out of your home, really costs zero. However, is it something
you can operate from home?
e. Can you afford to buy a building or is that too much for a start-up?
- This would be too much for a start-up business.

4. You should already have a list of necessary equipment.

a. Are you going to rent it, buy it or do you already own it?
- I already own it.
b. Estimate how much this equipment will cost.
- It differentiates from month to month. Generally, $25-$50 a month.
5. When thinking about labor costs, consider the following:
a. Hours of operation - when will you open and close?
- Open pretty much 24/7 since it’s online.
b. What hours will you personally work?
- It will vary from day to day but probably 20 a week.
c. Operate the business part-time until you can afford to go full-time!
- I would consider this.
d. Will you have to hire any workers? Make of list of jobs and people required.
- I wouldn’t necessarily have to hire anyone but t would be nice to have a few
employees.

e. How much are you going to pay these workers? Skilled employees will expect a
competitive salary and benefits too.
- It would be split if they’re helping me to get the inventory and how much time they
put in.
f. Can you do everything yourself?
- Yes, I could do it all by myself.

g. Can you hire people as needed (sub-contractors)?

- Yes, this would be the smartest thing to do in my case.

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6. Everyday costs of electricity, insurance, etc. add up. Consider the following list of
expenses and estimate how much they will be monthly.
 Expense Cost Expense Cost Expense Cost
Advertising $0 Auto $0 Utilities $15
Printing $5 Depreciation $0 Dues $

Cleanings $0 Officesupplies $5 Repairs $

Loans $0 Telephone $0 Internet $0
Let’s assume that to obtain the necessary start-up capital needed to cover the expenses for the
first year of being in business equals $25,000-$50,000. Where are you going to obtain such
financing? Remember, the success rate in business is 50/50. Banks are aware of this statistic.
7. Here are some options for financing your business:
a. Are you able to use your own savings? Explain.
- Yes I’m able to use my own savings if I can separate and/or deduct that from my
profit each month.
- You could use your own money if you keep track of it and keep separate the
money, you’re putting into the business from personal versus money put away
strictly for the business.
- Yes, that’s what I was already thinking.

b. Are you able to get assistance from family members/friends? If yes, do they expect
any return on their investment like interest or partnership?
- Yes, you can get assistance from family and/or friends. They would more than
likely expect a return or pay-back of the money they invested.

c. Short-term loans from banks or suppliers must be paid back within a year. Will they
offer you such programs? Explain.
- Probably not since it’s an online business through another selling site and it’s
new.

d. Long-term loans are paid back in more than a year, such as a car loan or mortgage.
Will you be eligible or able to get such a loan? Explain.

- You might because if you’re not paying, they can take it away from you because
they have collateral.

e. Investors are always looking for the next great idea, but they want a big return for
their investment. Think of the tv show Shark Tank. Would they be interested in your
business idea? Explain.
- No, because it’s not a new idea and I don’t think I would need any help from
investors.

f. Small Business Administration (SBA) was created to assist start-up businesses with
mentoring and financial assistance programs. Would it be wise for you to contact
such an organization? Explain.
- It could be, but I don’t think I would need assistance from the SBA because it’s
again, a business ran through another website.
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The two most important financial documents are the balance sheet and income statement. The
balance sheet examines a firm’s assets and liabilities on a specific date. The difference being the
net worth. The income statement looks at the financial picture of a firm over a 26-week period.
Examples for Disney are available in the green JA textbook on pages 131 and 132. To help you
answer the questions below, use the statements for Advanced Discount Auto Parts from page 65
of the JA Study Guide. All dollar answers are in $1,000 increments, but you don’t have to worry
about adding the zeros to all of the answers.
Questions 1-9 relate to the balance sheet.
1. This balance sheet is a snapshot picture of the financial condition of the firm on Nov.
30th
2. The total assets for the firm were $657,077
3. Of this amount, current assets totaled $256,696
4. This means that fixed assets totaled $400,315
5. Total liabilities of the firm were $366,840
6. Of the company’s assets, the amount that would be called the net worth, after paying all
the debt, of the stockholders was $657,011
7. The current liabilities amount to $94,443
8. Has the company purchased capital resources? Explain
- Yes, b/c they bought land & other equipment.
9. Why are inventories a large part of the assets?
- Because it’s usually, (if not always) necessary to run a business.
Questions 10-13 relate to the income statement
10. The starting date for the income statement is
- June 1st

11. The total expenses for the firm are $104,419

12. If 16,692,000 shares were outstanding as of No. 30, the per share net income was $0.80
13. Gross profit margin is found by dividing the gross profit of $116,974 by the sales figure
of 106,264. This equals 41%.
Anything greater than 30% is considered good.
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What is your financial condition? Without getting too complicated, make a list of everything you
own; round your numbers to the nearest dollar – no decimals please! In another column, estimate
your liabilities.

Assets Dollar Value Liabilities Dollar

Amount
Airpods $200 $0 S200

Clothes $400 $0 $400

Phone $800 $10 $810

$ $

$ $

$ $

$ $

1. The total value of my assets is $1,400

2. My liabilities add up to $10
3. My net worth is assets – liabilities = $1,390

When you establish your career, what do you think your net worth will be? Explain.
- I think when I establish my career my net worth will be around roughly $2,000
b/c I think I’ll have a lot of assets & a lot of liabilities too since my parents won’t
be paying for my stuff anymore.