MGMT 1 Lecture Notes - Lecture 1: Merage Family, Promissory Note, Debenture
Course CodeMGMT 1
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Paul Merage School of Business
Intro to Business Management
Course code: 38001
Final: Thursday of finals week
Lecture: OBTAINING LONG-TERM FINANCING
OBTAINING LONG-TERM FINANCING
● In setting long-term financing objectives, financial managers generally ask three
o What are our organization’s long-term goals and objectives?
o What funds do we need to achieve the firm’s long-term goals and objectives?
o What sources of long-term funding (capital) are available, and which will best fit
● Firms need long-term capital to purchase expensive assets such as plant and equipment,
to develop new products, or perhaps finance their expansion.
● The board of directors and top management usually make decisions about long-term
financing, along with finance and accounting executives.
● Long-term funding comes from two major sources: debt financing and equity financing.
● Debt Financing
o Borrowing money the company has a legal obligation to repay.
o Debt Financing by Borrowing from Lending Institutions
▪ Long-term loans are usually due within 3-7 years but may extend to 15-20
▪ Term-loan agreement – a promissory note that requires the borrower to
repay the loan with interest in specified monthly or annual installments.
● Advantage: the interest is tax-deductible.
▪ Since the repayment period can be quite long, lenders assume more risk
and usually require collateral, which may be real estate, machinery, etc.
▪ Lenders may also require certain restrictions to force the firm to act
▪ Interest rate is based on the adequacy of the collateral, the firm’s credit
rating, and the general level of market interest rates.
▪ Risk/return trade-off – the principle that the greater the risk a lender
takes in making a loan, the higher interest rate required.
o Debt Financing by Issuing Bonds
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