Page 453 - Business Principles and Management

C HAPTER 16 A SSESSMENT
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CHAPTER CONCEPTS

• Businesses can obtain capital in three ways: selling ownership shares
in the company (equity or owner capital), keeping profits in the com-
pany (retained earnings), and borrowing money from others (debt
capital). Equity capital is the investment owners have in a business.
When equity financing is used to raise capital, owners give up some
ownership rights regarding decision making and sharing of profits.
• For corporations, common and preferred stock are shares of owner-
ship. Retained earnings are profits that have not been distributed to
stockholders but may be used to help firms through times when prof-
its or cash flow are low and to fund expansion and improvement plans.
• Debt capital consists of either short- or long-term loans, such as notes
and bonds, which must be paid back with interest to the lenders. Types
of debt financing include loans obtained through banks, business credit
cards, open lines of credit, and using factors. Debt financing creates a
legal obligation to pay back the lenders, usually on a fixed schedule.

• Large sums of outside capital can be obtained through initial public
offerings (IPOs) and from venture capitalists. Firms desiring rapid
growth often use these sources. Large firms hire investment bankers
with special expertise to assist in obtaining those types of capital.

REVIEW TERMS AND CONCEPTS

Write the letter of the term that matches each definition. Some terms will
not be used.
1. Business owners’ personal contributions to the business
2. Price at which stock is actually bought and sold
3. Short-term form of financing obtained by buying goods and services
a. bond that do not require immediate payment
b. book value 4. Contract that allows the use of an asset for a fee paid on a schedule,
c. common stock
d. debt capital such as monthly
e. equity capital 5. Financing obtained from an investor or investment group that lends
f. investment bank large sums of money to promising new or expanding small companies
g. lease 6. Medium-term or long-term financing used for operating funds or
h. line of credit the purchase or improvement of fixed assets
i. long-term debt 7. Stock that gives holders first claim on corporate dividends if a
j. market value company earns a profit
k. par value 8. Profits that the owners do not take out of the business but instead
l. preferred stock save for use by the business
m. promissory note 9. Debt that must be repaid with interest within a year
n. retained earnings 10. Organization that helps a business raise large sums of capital
o. short-term debt through the sales of stocks and bonds
p. stock option
q. term loan 11. Right granted by a corporation that allows current stockholders to
r. trade credit buy additional shares when issued at a fixed price for a specific
s. venture capital period of time
12. Figure calculated by dividing the corporation’s net worth by the
total number of shares outstanding

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