VII. Write the summary of the text

VI. Identify the primary uses of cash in an organization.

VI. Explain how the financial manager can generate additional revenue from excess funds.

VIII. Check the summary of the text written by one of the students and if it is necessary comment on the mistakes.

Text B: Debt and Equity Capital

So far we have focused on half of the definition of finance - the reasons organizations need funds and how they use them. But of equal importance to the firm's financial plan is the choice of the best sources of needed funds. Sources fall into two major categories: debt and equity. Debt capital represents funds obtained through borrowing. Equity capital consists of funds from several sources:

1. Revenues from day-to-day operations and from earnings invested in the firm.

2. Additional contributions by the firm's owners.

3. Contributions by venture capitalists, who invest in the firm in return for a share of ownership.

4. Stock issues to the general investor public.

5. Cash obtained by liquidating some of the firm's assets.

A large portion of the firm's day-to-day cash needs is generated from operating revenues. Sales, rentals, and other forms of revenue produce cash inflows that may be used to pay bills and operating expenses. In companies emphasizing growth as a major organizational objective, owners may choose to invest earnings in the firm to finance future growth rather than withdraw profits in the form of bonuses or dividends, A growth-oriented company typically distributes less than 10 percent of its annual earnings in the form of dividends. On the other hand, mature companies pay out as much as 80 percent of their profits in the form of dividends to stockholders.

As pointed out earlier, cash needs vary from one time period to the next, and funds generated from daily operations may not be sufficient at all times to cover required funds.

In addition to variations in the timing of cash inflows and outflows during the year, there are other reasons for needing extra funds. Newly formed firms require substantial funds to finance purchases of equipment, train a work force, make lease payments on buildings, and buy needed raw materials and component parts. Even established firms may not be able to generate sufficient funds from operations to cover all costs of a major expansion into new geographic areas or a significant investment in new equipment and facilities. In all of these instances, the financial manager must evaluate the potential advantages and drawbacks of seeking funds by borrowing.

The alternative to borrowing is equity capital, which may be raised in several ways. The financial manager's job includes determining the most cost-effective balance between equity and borrowed funds and the proper blending of short- and long-term funds.

In contrast to equity capital, which has no maturity date, debt capital has a specific date when it must be repaired. Lenders also have a prior claim on assets and a prior claim on income paid in the form of interest. Owners have only a residual claim on assets and income after lenders have been paid. Lenders, unlike owners, have no voice in the management of the firm unless interest payments have not been made.

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