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MGTA05 Notes (Section B-C).docx

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Management (MGT)
Iris Au

Section B Equity Financing Financial Burden on the Firm -equity funding expensive, so why not rely on debt financing? ->long-term loans and bonds carry fixed interest rates and represent a fixed promise to pay, regardless of economic changes. If a firm defaults on its obligations, it may lose assets and go into bankruptcy -b/c of risk of default, debt financing appeals most strongly to companies in industries that have predictable profits and cash flow patterns Hybrid Financing -between debt and equity financing is the preferred stock -hybrid b/c contains features of corporate bonds and features of common stocks -like bonds, payments on preferred stocks are for fixed amounts -unlike bonds, preferred stocks never matures -like common stock, can be held indefinitely -dividends need not be paid if the company makes no profit -if dividends are paid, preferred shareholders receive them first in preference to dividends on common stock -a major advantage for the issuing corporation is flexibility -it secures funds for the firm without relinquishing control ->since preferred shareholders have NO voting rights ->it does not require repayment of principal or the payment of dividends in lean times Choosing Between Debt and Equity Financing -partly, financial planning is finding balance between debt and equity financing to meet the firm's long- term need for funds -mix of debt vs. equity provides the firm's financial base -> aka capital structure -most conservative strategy: 100% equity financing, 0% debt -most risky: 100% debt financing, 0% equity financing -greater debt financing is less expensive BUT increases risk that a firm will not be able to meet its obligations -equity is expensive source of capital but has no formal obligations for financial payouts -financial planners job to try and find a mix that will maximize shareholders' wealth Indexes of Financial Risk -published indexes for various investments help measure amount of financial risk associated with them -financial managers often rely on these to determine how particular investments compares with other opportunities in terms of stability -bonds below investment grade called junk bonds ->high default rates, high yields The Risk-Return Relationship -when developing plans for raising capital, financial managers must be aware of the different motivations of individual investors -investor motivations determine who is willing to buy a given company's stocks or bonds -everyone who invests money is expressing a personal preference for safety vs. risk -investors give money to firms, expect to receive future cash flows -investors usually expect to receive higher payments for higher uncertainty -> high risk, high reward -do not expect large returns for secure investments ->low risk, low reward -each investment has a risk-return relationship -thus, financial planners try to gain access to the greatest funding at the lowest possible cost -by gauging investors' perceptions of their riskiness, a firm's managers can estimate how much it must pay to attract funds to their offerings -a company can reposition itself on the risk continuum by improving its record on dividends, interest payments, and debt repayment C1: The Links Among Small Business, New Venture Creation, and Entrepreneurship -the terms small business, new venture, and entrepreneurship are closely linked, but distinct Small Business -when defining a small business, various measures might be used such as : ->number of people the business employs ->company's sales revenue ->size of investment required ->type of ownership structure -individuals are classified as self-employed if they are working owners of a business, if they work for themselves but do not have a business, or work without pay in a family business -majority of businesses in Canada have no employees (just the owner), and are not incorporated -small business: an owner-managed business with <100 employees The New Venture/Firm -3 criteria to determine when a new firm comes into existence:  when it was formed  whether it was incorporated  if it sold goods and/or services -a business is considered new if it has become operational within the previous 12 months, if it adopts any of the main organizational forms (proprietorship, partnership, corporation, or co-operative), and if it sells goods or services -new venture (or new firm): a recently formed commercial organization that provides goods and/or services for sale Entrepreneurship -entrepreneurship: the process of identifying an opportunity in the marketplace and accessing the resources needed to capitalize on that opportunity -entrepreneur: someone who recognizes the seizes opportunities -small business are usually independently owned and influenced by unpredictable market forces ->as a result, they often provide an environment to use personal attributes that have come to be associated with entrepreneurs (ie creativity) -entrepreneurship occurs in a wide range of contexts, not just small or new firms -people who exhibit entrepreneurial characteristics and create something new within an existing firm or organization are called intrapreneurs -a key difference between intrapreneurs and entrepreneurs is that intrapreneurs typically don't have to concern themselves with getting the resources needed to bring the new product to market since their employer provides the resources -starting a business from scratch usually involves dealing with a great deal of uncertainty, ambiguity, and unpredictability The Role of Small and New Businesses in the Canadian Economy Small Businesses -close to 98% of all businesses in Canada are small (<100 employees) -private sector: generally refers to the part of the economy that is made up of companies and organizations that are not owned or controlled by the government -GDP (gross domestic product): refers to the market value of all final goods and services produced within a country in a given period of time The Entrepreneurial Process -entrepreneurial process is like a journey ->to get to destination (start-up of a new venture), one must identify a business opportunity and access the resources needed to capitalize on it. -3 key process elements-the entrepreneur, the opportunity, and resources -after start-up of a venture, next phase of development results in one of the following: growth, stability, decline, or demise (ceasing to exist) The Entrepreneur -entrepreneur is at heart of the entrepreneurial process, thus researchers have paid attention to identifying personal characteristics of entrepreneurs -personal characteristics often have less impact on a person's actions than the situation a person is in -who a person is = not important, what is: what a person does -2 main things that entrepreneurs need to do: identify an opportunity and access resources Identifying Opportunities -identifying opportunities involves generating ideas for new (or improved) products, processes, or services, screening those ideas so that the one that presents the best opportunity can be developed, and then developing the opportunity Idea Generation: -typically, generating ideas involves abandoning traditional assumptions about how things work or ought to be, and seeing what others do not -if prospective new product, process, or service can be profitably produced and is attractive relative to other potential venture ideas, it might present an opportunity -most ventures do NOT emerge from a deliberate search for viable business ideas -most emerge from events relating to work or everyday life -next most emerge from personal interest/hobby or a chance happening Screening: -among generating so many ideas, screening is a key-part in the entrepreneurial process -less 'dead-end' ideas mean more time and effort devoted to realistic ones -the following are characteristics of good ideas (the more of these an idea has, the greater the opportunity):  The Idea Creates or Adds Value for the Customer: A product or service that creates or adds value for the customer is one that solves a significant problem, or meets a significant need in new or different ways  The Idea Provides a Competitive Advantage that Can Be Sustained: A competitive advantage exists when potential customers see the product or service as better than that of competitors. Sustaining a competitive advantage involves maintaining it in the face of competitors' actions or changes in the industry  The Idea is Marketable and Financially Viable: While it is important to determine if there are enough customers willing to buy the product, also important is to determine whether sales will lead to profits. Estimating the market demand requires an initial understanding of who the customers are, what their needs are, and how the product will satisfy their needs better than competitors'. It also requires understanding of key competitors who can provide similar products. Sales forecast must be prepared. A sales forecast is an estimate of how much of a [product will be purchased by the prospective customers for a specific period of time. Total sales revenue is estimated by multiplying the units expected to be sold by selling price. The sales forecast forms the foundation for determine the financial viability of a venture and resources needed to start it. Determining financial viability involves preparing financial forecasts, which are 2-3 year projections of a venture's future financial position and performance. They typically consist of an estimate of start-up costs, a cash budget, an income statement, and a
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