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Financial
Management
CHAPTER
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18
Nickels
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McGraw-Hill/Irwin
Understanding Business, 8e
McHugh
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McHugh
1-1
18-1
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Finance & Managers
• What is Financial
Management?
• Finance
• Financial Manager
• Importance of
Finance
18-2
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THE ROLE OF FINANCE AND FINANCIAL MANAGERS
Learning goal 1
Describe the importance of finance and financial management to
an organization, and explain the responsibilities of financial
managers.
The Importance of Understanding Finance
WHAT IS FINANCIAL MANAGEMENT?
18-3
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FINANCIAL PLANNING
Learning goal 2
Outline the financial planning process,
and explain the three key budgets in the financial plan.
Forecasting Financial Needs
Working with the Budget Process
Establishing Financial Controls
18-4
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THE NEED FOR OPERATING FUNDS
Learning goal 3
Explain the major reasons why firms need operating funds, and
identify various types of financing that can be used to obtain
those funds.
Managing Day-by-Day Needs of the Business
Controlling Credit Operations
Acquiring Needed Inventory
Making Capital Expenditures
Alternative Sources of Funds
18-5
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V. OBTAINING SHORT-TERM FINANCING
Learning goal 4
Identify and describe different sources of short-term financing.
Trade Credit
Family and Friends
Commercial Banks
Different Forms of Short-Term Loans
Factoring Accounts Receivable
Commercial Paper
Credit Cards
VI. OBTAINING LONG-TERM FINANCING
Learning goal 5
Identify and describe different sources of long-term financing.
Debt Financing
Equity Financing
Making Decisions on Using Financial Leverage
18-6
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THE ROLE OF FINANCE AND FINANCE MANAGERS
Learning goal 1
Describe the importance of finance and financial management to an
organization, and explain the responsibilities of financial
managers.
WHAT IS FINANCIAL MANAGEMENT?
FINANCE
is the function in a business that acquires funds for the firm and
manages those funds within the firm.
FINANCIAL MANAGEMENT
is the job of managing a firm’s resources so it can meet its goals
and objectives.
18-7
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What Financial Managers Do
18-8
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THE ROLE OF FINANCE AND FINANCE MANAGERS
The role of an ACCOUNTANT is like that of a skilled
technician who takes measures of a company’s health and writes
a report.
FINANCIAL MANAGERS
are managers who make recommendations to top executives
regarding strategies for improving the financial strength of a firm.
A manager can’t make sound financial decisions without
understanding accounting information.
Most organizations designate a manager in charge of financial
operations, generally the
CHIEF FINANCIAL OFFICER (CFO.)
18-9
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Need for Operating Funds
• Manage Daily Operations
• Controlling credit operations
• Acquire Inventory
• Capital Expenditures
18-10
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CHIEF FINANCIAL OFFICER (CFO.)
In large and medium-sized companies, the CFO is responsible for
both accounting and finance functions.
Financial management could also be assigned to the company
TREASURER or VICE PRESIDENT OF FINANCE.
A COMPTROLLER
is the chief accounting officer.
Two key responsibilities of the financial manager are to obtain
funds and to control the use of those funds.
The need for careful financial management remains an ONGOING
CHALLENGE in a business throughout its life.
18-11
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Most Important
Skills Needed by CFOs
People Development
10%
19%
Building Relationships
Communication Skills
26%
Creativity
27%
38%
Objectivity
51%
Leadership
Strategic Planning
55%
Analytical Thinking
75%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Source: CIO Enterprise
18-12
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Non-Finance
Functions of CFOs
Business Development
60%
P & L Responsibility
53%
MIS
49%
Reengineering
39%
Revenue Growth
25%
HR & Admin.
18%
Other Skills
5%
Sales
Marketing
2%
1%
0%
10%
20%
30%
40%
50%
60%
70%
Source: CIO Enterprise
18-13
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The need for careful financial management remains an ONGOING
CHALLENGE in a business throughout its life.
The most common ways for firms to FAIL FINANCIALLY are:
UNDERCAPITALIZATION, or not enough funds to start with
Poor CASH FLOW, or cash in minus cash out
INADEQUATE EXPENSE CONTROL
THE IMPORTANCE OF UNDERSTANDING FINANCE
The text describes a small organization called Parsley Patch, begun
with a $5,000 investment.
The company initially sold its product through gourmet stores.
18-14
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Financial Planning
Short-term
Forecasting
Capital
Budget
Feedback
Financial
Plan
Long-term
Forecasting
Operating
Budget
Financial
Controls
Cash
Budget
Feedback
18-15
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Why Firms Need Funds
Short-Term Funds
• Meeting monthly
expenses
• Unanticipated
emergencies
• Cash-flow problems
• Expanding current
inventory
• Temporary
promotional
programs
Long-Term Funds
• New product
development
• Replacing capital
expenditure
• Mergers or
acquisitions
• Expansion into new
markets
• Building new
facilities
18-16
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When the owners expanded into the health-food market, sales
soared.
However, neither woman understood cash flow procedures nor
how to control expenses, and profits did not materialize.
They eventually hired a CPA and an experienced financial
manager, and soon they earned a comfortable margin on
operations.
This company’s experience illustrates the importance of
UNDERSTANDING FINANCE BEFORE starting a business.
Financial understanding is also important to any one who wants
to start a business or make an investment.
18-17
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WHAT IS FINANCIAL MANAGEMENT?
Financial managers are responsible for:
Buying merchandise on credit (accounts payable)
Collecting payment from customers (accounts receivable)
Making sure the company doesn’t lose too much money on bad
debts
These functions are especially critical to small and medium-sized
companies.
Financial managers must keep up with opportunities and prepare
for change.
Financial managers also handle TAX MANAGEMENT.
18-18
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As tax laws change, finance specialists must carefully analyze the
TAX IMPLICATIONS of various decisions.
Businesses of all sizes constantly manage taxes.
It is the INTERNAL AUDITOR, usually a member of the firm’s
finance department, who checks on the journal, ledgers, and
financial statements to make sure that all transactions are
properly treated.
Without such audits, accounting statements would be less
reliable.
It is important that internal auditors be OBJECTIVE and CRITICAL of
any improprieties.
18-19
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FINANCIAL PLANNING
learning goal 2
Outline the financial planning process, and explain the three key
budgets in the financial plan.
Financial planning is a key responsibility of the financial
manager.
It involves analyzing short-term and long-term MONEY FLOWS to
and from the firm.
The overall objective of financial planning is to OPTIMIZE PROFITS
and make the BEST USE OF MONEY.
STEPS IN FINANCIAL PLANNING:
FORECASTING both long-term and short-term financial needs
DEVELOPING BUDGETS to meet those needs
18-20
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Budget Process
• Financial Plan- Financial Statements
• Types of Budgets
• Capital
• Cash
• Operating (Master)
• Financial Controls- Feedback
18-21
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ESTABLISHING FINANCIAL CONTROL
to see how well the company is following the financial plans
FORECASTING FINANCIAL NEEDS
A SHORT-TERM FORECAST
is a forecast that predicts revenues, costs, and expenses for a
period of one year or less.
A CASH FLOW FORECAST
is a forecast that predicts cash inflows and outflows in future
periods, usually months or quarters.
The inflows and outflows of cash are based on expected sales
revenues and on various costs and expenses.
A firm often uses its past financial statements as a basis for
projecting expected sales and various costs and expenses.
expectations, and, on the basis of
18-22
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A LONG-TERM FORECAST
is a forecast that predicts revenues, costs, and expenses for a
period longer than 1 year, sometimes extending 5 or 10 years into
the future.
This forecast is crucial to the company’s long-term strategic
plan.
The long-term financial forecast gives managers an overview of the
income or profit potential with different strategic plans.
WORKING WITH THE BUDGET PROCESS
A BUDGET
is a financial plan that sets forth management’s expectations,
and, on the basis of those expectations, allocates the use of
specific resources throughout the firm.
18-23
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those expectations, allocates the use of specific resources
throughout the firm.
The KEY FINANCIAL STATEMENTS form the basis for the budgeting
process.
A budget becomes the primary GUIDE for the financial operations
and financial needs.
There are SEVERAL BUDGETS in a company:
The CAPITAL BUDGET
is a budget that highlights a firm’s spending plans for major
asset purchases that often require large sums of money.
The CASH BUDGET
estimates a firm’s projected cash inflows and outflows that the
firm can use to plan for any cash shortages or surpluses during a
given period.
18-24
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The OPERATING BUDGET (MASTER BUDGET)
is the budget that ties together all of a firm’s other budgets; it is
the projection of dollar allocations to various costs and expenses
needed to run or operate the business, given projected revenues.
Financial planning often determines:
What long-term investments are made
When specific funds will be needed
How the funds will be generated
The final step in financial planning is to
ESTABLISH FINANCIAL CONTROLS.
18-25
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ESTABLISHING FINANCIAL CONTROLS
FINANCIAL CONTROL
is a process in which a firm periodically compares its actual
revenues, costs, and expenses to its projected ones.
Most companies hold monthly financial reviews to ensure
financial control.
These controls provide FEEDBACK to show which accounts are
varying from the financial plans.
Financial adjustments to the plan may be needed.
18-26
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THE NEED FOR OPERATING FUNDS
learning goal 3
Explain the major reasons why firms need operating funds, and
identify various types of financing that can be used to obtain
these funds.
Businesses continually need operating funds.
Financial requirements of a business change as businesses grow or
venture into new markets.
All organizations need funds for CERTAIN OPERATIONAL NEEDS:
Managing day-by-day needs of the business
Controlling credit operations
Acquiring needed inventory
Making capital expenditures
MANAGING DAY-BY-DAY NEEDS OF THE BUSINESS
Funds must be made available to meet DAILY CASH
EXPENDITURES without endangering the firm’s financial health.
18-27
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Money has TIME VALUE—$200 today is more valuable that $200 a
year from today.
Financial managers try to keep cash expenditures to a minimum
and invest in interest-bearing accounts.
Efficient cash management is particularly important to small firms.
CONTROLLING CREDIT OPERATIONS
Making credit available helps keep current customers happy and
attracts new ones.
If a firm offers credit, as much as 25% OF A COMPANY’S ASSETS
can be tied up in ACCOUNTS RECEIVABLE.
18-28
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Some of its available funds are needed to pay for the goods or
services already sold.
Efficient collection procedures can include providing cash or
quantity discounts.
Financial managers need to scrutinize the
CREDIT HISTORY of all credit customers.
It is possible to minimize the cost of accounts receivable by
ACCEPTING BANK CREDIT CARDS such as MasterCard or Visa.
ACQUIRING NEEDED INVENTORY
Providing the inventory that customers expect, the business ties
up a significant amount of funds.
A sound inventory policy helps managers use firm’s available
funds to maximizing profitability.
18-29
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Sources of Funds
Short-Term
• Trade Credit
• Promissory Notes
• Family/Friends
• Banks, etc.
• Secured Loan
• Unsecured Loan
• Factoring
• Commercial Paper
• Credit Cards
Long-Term
• Debt
• Term-Loan
• Bonds
• Secured
• Unsecured
• Equity
• Stock
• Retained Earnings
• Venture Capital
18-30
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JUST-IN-TIME INVENTORY
may help reduce the funds companies must tie up in inventory.
CAPITAL EXPENDITURES
are major investments in either tangible long-term assets such as
land, buildings, and equipment or intangible assets such as
patents, trademarks, and copyrights.
Purchasing major assets uses a huge portion of the organization’s
funds.
The firm should weigh all possible options before committing a large
portion of its available resources.
Financial managers must evaluate the appropriateness of capital
expenditures.
The financial manager has to decide how to finance operations.
18-31
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ALTERNATIVE SOURCES OF FUNDS
Two questions that need answers:
How much money is needed?
What is the appropriate source?
METHODS OF RAISING MONEY
DEBT FINANCING
refers to funds raised through various forms of borrowing that
must be repaid; these funds can be short-term or long-term.
EQUITY FINANCING
is funds raised from
18-32
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operations within the firm or through the sale of ownership in the
firm.
SHORT-TERM VERSUS LONG-TERM FUNDS
SHORT-TERM FINANCING
refers to borrowed capital that will be repaid within one year.
LONG-TERM FINANCING
refers to borrowed capital that will be repaid over a specific time
period longer than one year.
18-33
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Identify and describe several sources of short-term financing.
Everyday operation of the firm requires management of shortterm financial needs.
Firms need to borrow short-term funds to
FINANCE INVENTORY or MEET BILLS.
Short-term financing can be either secured or unsecured.
TRADE CREDIT.
Trade credit, the most widely used source of short-term funding, is
the LEAST EXPENSIVE and MOST CONVENIENT form of shortterm financing.
TRADE CREDIT
is the practice of buying goods and services now and paying for
them later.
The invoice term “2/10, NET 30” means that the buyer can:
Take a 2% discount for paying within 10 days
18-34
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The total bill is due (net) in 30 days if the discount is not taken.
Taking the discount is, in effect, saving 36%
Such discounts can REDUCE THE COST OF FINANCING.
If the business has a poor credit rating or history of slow
payment, the supplier may insist on a promissory note.
A PROMISSORY NOTE
is a written contract with a promise to pay a supplier a specific
sum of money at a definite time.
18-35
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FAMILY AND FRIENDS
This source may be convenient, but it can also create problems.
It is better not to borrow from friends and relatives.
Fewer entrepreneurs today rely on family and friends for funding.
If you borrow from family or friends, it is best to:
Agree on specific loan terms
Put the agreement in writing
Arrange for repayment in the same way you would a bank loan
COMMERCIAL BANKS
Banks are highly SENSITIVE TO RISK
and hesitate to make small business loans.
A promising venture may be able to get a bank loan.
18-36
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Almost half of small business financing is through commercial
banks.
The person in charge of finance should keep in
CLOSE TOUCH WITH THE BANK
and visit the banker periodically.
The business should try to anticipate the need for cash and arrange
financial early.
DIFFERENT FORMS OF SHORT-TERM LOANS
A SECURED LOAN
is a loan backed by something valuable, such as property.
18-37
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The item of value is called
COLLATERAL.
Accounts receivable are often used as collateral for a loan–
known as PLEDGING.
INVENTORY, such as raw materials, can be used as collateral for a
loan.
An UNSECURED LOAN
is a loan that’s not backed by any specific assets.
These are the most difficult to get.
Only highly regarded customers are approved.
LINE OF CREDIT
is a given amount of unsecured short-term funds a bank will lend
to a business, provided the funds are readily available.
A line of credit is NOT GUARANTEED to a business.
It can, however, speed the borrowing process.
As businesses become more financially secure, the amount
of credit may be increased.
18-38
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REVOLVING CREDIT AGREEMENT
is a line of credit that is guaranteed by the bank.
COMMERCIAL FINANCE COMPANIES
are organizations that make short-term loans to borrowers that
offer tangible assets as collateral.
These NON-DEPOSIT-TYPE ORGANIZATIONS (nonbanks) are
willing to accept higher degrees of risk than commercial banks.
Interest rates charged are usually higher than banks.
18-39
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FACTORING ACCOUNTS RECEIVABLE
FACTORING
the process of selling accounts receivable for cash, is relatively
expensive.
A FACTOR
is a market intermediary that agrees to buy the accounts
receivable from the firm at a discount for cash.
The factor then collects and keeps the money that was owed the
firm.
The cost of factoring depends on the discount rate of the factor.
Despite the high cost, factoring is very popular among small
businesses, especially in the clothing and furniture businesses.
Factoring is not a loan—it is the sale of an asset.
This may be the only option for small firms who cannot
qualify for a bank loan.
Factoring charges are much lower if the company assumes
the risk of those accounts who are slow to pay or don’t pay at all.
18-40
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COMMERCIAL PAPER
COMMERCIAL PAPER consists of unsecured promissory notes
in amounts of $100,000 and up that mature (come due) in 270
days or less.
ONLY FINANCIALLY STABLE FIRMS are able to sell commercial
paper.
Companies can get short-term funds quickly and at a lower interest
rate than bank loans.
It also creates an opportunity for investors.
18-41
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CREDIT CARDS
About half of all small businesses finance their start-up with credit
cards.
Credit cards provide a readily available line of credit, but they are
extremely risky and costly.
Because of their risk and cost, credit cards should be used only as
a last resort.
OBTAINING LONG-TERM FINANCING
learning goal 5
Identify and describe several sources of long-term financing.
The FINANCIAL PLAN specifies the amount of funding that will be
needed over various time periods and the most appropriate
sources of those funds.
In setting long-term financing objectives, the firm generally asks
THREE MAJOR QUESTIONS:
What are the organization’s long-term GOALS
18-42
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AND OBJECTIVES?
What are the FINANCIAL REQUIREMENTS needed to achieve
these goals and objectives?
What SOURCES of long-term capital are available, and which best fit
our needs?
LONG-TERM CAPITAL is used to buy fixed assets such as plant and
equipment and to finance any expansions of the organization.
These financing decisions involve high-level management.
Long-term financing comes from two sources:
DEBT FINANCING or EQUITY FINANCING.
18-43
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DEBT FINANCING
DEBT FINANCING involves borrowing money, which creates a legal
obligation to repay the amount borrowed.
DEBT FINANCING BY BORROWING MONEY FROM LENDING
INSTITUTIONS.
Long-term loans are usually repaid within 3 to 7 years, but may
extend to 15 or 20 years.
A TERM-LOAN AGREEMENT
is a promissory note that requires the borrower to repay the loan in
specified installments.
A major advantage is that interest paid on a long-term debt is TAX
DEDUCTIBLE.
LONG-TERM LOANS are often more expensive than short-term
loans because larger amounts of capital are borrowed and the
repayment date is less secure.
18-44
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expensive than short-term loans because larger amounts of capital
are borrowed and the repayment date is less secure.
Most long-term loans require some form of COLLATERAL.
Lenders will also often require certain RESTRICTIONS on a firm’s
operations.
The cost of financing involves the RISK/ RETURN TRADE-OFF, the
principle that the greater the risk a lender takes in making a loan,
the higher the interest rate required.
18-45
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Who Can Issue Bonds?
1. Federal, state, and local
governments
2. Federal government agencies
3. Corporations
4. Foreign governments and
corporations
18-46
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DEBT FINANCING BY ISSUING BONDS
If an organization can’t get long-term financing from a lending
institution, it may issue bonds.
A BOND is a company IOU, a binding contract through which an
organization agrees to specific terms with investors in return for
investors lending money to the company.
INDENTURE TERMS
are the terms of agreement in a bond issue.
Investors in bonds measure the RISK involved in purchasing a bond
with the RETURN (interest) the bond promises to pay.
A SECURED BOND
is a bond issued with some form of collateral; such as real estate,
equipment, or other pledged assets.
An UNSECURED BOND
is a bond backed only by the reputation of the issuer; also called
a debenture bond.
18-47
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EQUITY FINANCING
EQUITY FINANCING comes from the firm’s owners.
It involves selling OWNERSHIP in the firm in the form of stock, or
using retained earnings the firm has reinvested in the business.
A business can also seek equity financing from venture capital.
EQUITY FINANCING BY SELLING STOCK
One way to obtain needed funds is to sell OWNERSHIP SHARES
(STOCK) in the firm to the public.
Purchasers of stock become OWNERS.
The first time a company offers to sell its stock to the general
public is called an INITIAL PUBLIC OFFERING (IPO).
Companies can only issue stock for public purchase if they meet
requirements set by the Security and Exchange Commission
(SEC.)
EQUITY FINANCING FROM RETAINED EARNINGS
RETAINED EARNINGS is the profit the company keeps and
reinvests in the firm.
This is a MAJOR SOURCE OF LONG-TERM FUNDS.
18-48
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Sources of Equity Financing
Internal
Sources
Retained
Earnings
Owner
Contributions
Sale of
Partnerships
Equity
Capital
External
Sources
Venture
Capital
Public Sale of
Stock
18-49
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only by the reputation of the issuer; also called a debenture bond.
EQUITY FINANCING
EQUITY FINANCING comes from the firm’s owners.
It involves selling OWNERSHIP in the firm in the form of stock, or
using retained earnings the firm has reinvested in the business.
A business can also seek equity financing from venture capital.
EQUITY FINANCING BY SELLING STOCK
One way to obtain needed funds is to sell OWNERSHIP SHARES
(STOCK) in the firm to the public.
Purchasers of stock become OWNERS.
The first time a company offers to sell its stock to the general
public is called an INITIAL PUBLIC OFFERING (IPO).
Companies can only issue stock for public purchase if they meet
requirements set by the Security and Exchange Commission
(SEC.)
EQUITY FINANCING FROM RETAINED EARNINGS
RETAINED EARNINGS is the profit the company keeps and
reinvests in the firm.
18-50
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Retained earnings are the most popular type of financing because:
The company saves interest payments, dividends, and underwriting
fees.
There is no new ownership created.
Many organizations can’t use this type of financing because they
don’t have enough retained earnings.
EQUITY FINANCING FROM VENTURE CAPITAL
The hardest time for a business to raise money is when it is just
starting or in the earliest stages of expansion.
18-51
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VENTURE CAPITAL
is money that is invested in new or emerging companies that are
perceived as having great profit potential.
The venture capital industry began as an alterative investment
vehicle for wealthy families.
The venture capital industry grew rapidly in the 1980s.
Venture capital investment increased during the 1990s, especially in
high-tech centers.
In the early 2000s problems in the economy and in the technology
industry resulting in a decrease in VC financing.
The venture capital firm wants part ownership of business and
expects a higher-than-average return on their investment.
18-52
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Venture Capitalists
• Finance new and rapidly growing companies
• Purchase equity securities
• Assist in the development of new products or
services
• Add value to the company through active
participation
• Take higher risks with the expectation of
higher rewards
• Have a long-term orientation
Source: NVCA.com
18-53
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Financing a firm’s long-term needs involves a high degree of risk.
MAKING DECISIONS ON USING FINANCIAL LEVERAGE
LEVERAGE
is raising needed funds through borrowing to increase a firm’s
rate of return.
While debt increases the risk of the firm, it also enhances the firm’s
profitability.
COST OF CAPITAL
is the rate of return a company must earn in order to meet the
demands of its lenders and expectations of its equity holders.
If the firm earns more than the interest payments on the funds
borrowed, stockholders earn a HIGHER RATE OF RETURN than if
equity financing were used.
It is up to each firm to determine exactly what a PROPER BALANCE
between debt and equity financing is.
18-54
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LEVERAGE RATIOS
are a way to compare leverage relative to other firms in the
industry.
The average debt of a large industrial corporation ranges between
33 and 40% of its total assets.
Small business debt varies considerably.
The next chapter looks at stocks, bonds, and other investment
topics.
18-55
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Women CFOs
• As of May 2006, 35 of the 500 largest
companies in the US had a female CFO
• Five largest companies with female
CFO: Citigroup, Home Depot, Verizon,
Marathon Oil, and Medco Health
Solutions
• Top 3 reasons that helped women
achieve their current position:
Supportive boss, Supportive spouse, and
culture of the organization
Source: cfo.com, June 1, 2006
18-56
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Where CFOs Get
Their Financial Information
Magazines
9%
Radio
5%
Don't Know
1%
Internet
11%
Television
12%
Newspaper
47%
Colleagues
15%
Source: USA Today
18-57
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Financial Managers:
Ask Your Clients
1. What are the client's goals in areas like
lifestyle, retirement, saving for college
education and their health care as well as that
of their dependents?
2. When do they want to reach their goals?
3. What steps have they already taken toward
achieving their goals?
4. How do they feel about taking investment
risks for a potential higher rate of return?
5. How involved do they want to be in
monitoring their progress toward their goals?
Source: Fpanet.org
18-58
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Daily Profits Of Companies
With The Highest Revenue
•
•
•
•
•
•
Wal-Mart - $24.8 Million
ExxonMobil - $58.9 Million
General Motors - $10.5 Million
Ford - $1.4 Million
General Electric - $41.1 Million
ChevronTexaco - $19.8 Million
Source: World Feature Syndicate, 2005
18-59
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IPO
Summer of 2006
• 89 companies filed plans to raise money
through IPO – looking to raise $16.3 billion
• 17 companies withdrew their plans to proceed
with their IPO – were hoping to raise $3.89
billion
• Withdrawing – Go Daddy Group and PNY
Technologies
• Filing – Double-Take Software and
Hansen Medical
Source: redherring.com, August 18, 2006
18-60
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Google IPO
•
•
•
•
•
Launched – August 2004
IPO Price -- $ 85 per share
Seeking to raise $2.7 billion
Unusual auction-style offering
With IPO, the company must
shed light on the inner workings
• Key competitors – Yahoo and Microsoft
• As of March 31, 2004 Google employed
about 1,900 employees
Source: cnet news.com, April 30, 2004; Forbes, September 17, 2004
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*
*
*
Making Use of Leverage
Leverage- Selling Bonds
Equity- Sale of Stock
Common Stock
Bonds (@10%)
$ 50,000
$450,000
Common Stock
Bonds (@10%)
$500,000
0
Funds Raised
$500,000
Funds Raised
$500,000
Earnings
Less: Bond Interest
$ 125,000
$ 45,000
Earnings
$ 125,000
Total Earnings
$ 80,000
Total Earnings
$ 125,000
Return to
=
Stockholders
$80,000
$50,000
= 160%
Return to
=
Stockholders
$125,000
$500,000
= 25%
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