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Profits as a source of financial capital

If firms are earning profits (their revenues are greater than costs), they can choose to reinvest some of these profits in equipment, structures, and research and development. For many established companies, reinvesting their own profits is one primary source of financial capital. Companies and firms just getting started may have numerous attractive investment opportunities, but few current profits to invest. Even large firms can experience a year or two of earning low profits or even suffering losses, but unless the firm can find a steady and reliable source of financial capital so that it can continue making real investments in tough times, the firm may not survive until better times arrive. Firms often need to find sources of financial capital other than profits.

Borrowing: banks and bonds

When a firm has a record of at least earning significant revenues, and better still of earning profits, the firm can make a credible promise to pay interest, and so it becomes possible for the firm to borrow money. Firms have two main methods of borrowing: banks and bonds.

A bank loan for a firm works in much the same way as a loan for an individual who is buying a car or a house. The firm borrows an amount of money and then promises to repay it, including some rate of interest, over a predetermined period of time. If the firm fails to make its loan payments, the bank (or banks) can often take the firm to court and require it to sell its buildings or equipment to make the loan payments.

Another source of financial capital is a bond. A bond    is a financial contract: a borrower agrees to repay the amount that was borrowed and also a rate of interest over a period of time in the future. A corporate bond    is issued by firms, but bonds are also issued by various levels of government. For example, a municipal bond is issued by cities, a state bond by U.S. states, and a Treasury bond    by the federal government through the U.S. Department of the Treasury . A bond specifies an amount that will be borrowed, the interest rate that will be paid, and the time until repayment.

A large company, for example, might issue bonds for $10 million; the firm promises to make interest payments at an annual rate of 8%, or $800,000 per year and then, after 10 years, will repay the $10 million it originally borrowed. When a firm issues bonds, the total amount that is borrowed is divided up. A firm seeks to borrow $50 million by issuing bonds, might actually issue 10,000 bonds of $5,000 each. In this way, an individual investor could, in effect, loan the firm $5,000, or any multiple of that amount. Anyone who owns a bond and receives the interest payments is called a bondholder    . If a firm issues bonds and fails to make the promised interest payments, the bondholders can take the firm to court and require it to pay, even if the firm needs to raise the money by selling buildings or equipment. However, there is no guarantee the firm will have sufficient assets to pay off the bonds. The bondholders may get back only a portion of what they loaned the firm.

Questions & Answers

what are the shapes of an indifference curve?
Ovensi Reply
division of labour is simply the breaking of job functions so that each individual is engage to one set or the other for easy delivery
EMMANUEL Reply
What is division of labor
peter Reply
it is also simply the breaking down of work into various part so that each individual is entitle to one for easy delivery
EMMANUEL
it is the simplifying of tasks into smaller easily workable divisions where each person specialises on what they understand better
cabs
ok
EMMANUEL
thanks for your briefing and time
EMMANUEL
what are the sources of monopoly power?
Winnerman Reply
the first source, are informations
amine
political power and influence in monetary institutions
Shahul
what is imperfect competition ?
SHAH Reply
the situation in which elements of monopoly ( R&D, EOS and stability of prices etc.) allow individual producers or consumers to exercise some control over market prices
Ghulam
how to find shut down
Sowmya Reply
where p is less than avc
Koushik
s
Shahul
which is the best public finance economics text book?
Shahul
hello
shafiullah
hello
Shahul
Yes hi
Pov
....
SHAH
what are the alternatives various of economic system
olaleye Reply
what is microeconomics
Ayedun
Micro-economics refers to the branch of economics which deals with smaller unit or element of the economy.
Amadu
or Is the study of individual economic unit in a economy..
Neriel
micro economis is the studay of how Households and firms make decision and they interecr it.
mahad
what is financial intermediaries?
Imran Reply
financial intermediaries are those who are link between borrowers and lenders for.eg bank... Bank is a financial intermediary
Ajit
tnx a lot of u
Imran
most welcome
Ajit
why do you here ? why do you want to learn economics
Ajit
والله العظيم انا ماعاوز اتعلمها
انا باخدها غصب عني في الكليه حضرتك
لس كدااا
I am student of ecnomics ,
Imran
Imran
Abdi
yes Abdi temam
Imran
am good too see you
Abdi
tnx why not
Imran
b/c im student
Abdi
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Imran
ok
Abdi
OK
Ajit
what is the law of dimis
Toyin Reply
what is the feature of public ownership of production factors
Toyin
what is the demand for commodity that posses identical utilities called
Toyin
law of diminishing utility...as the quantity consumed of a commodity increases,the utility derived from each successive unit goes on decreasing... condition___ consumption of other commodities remaining the same.
Malik
sorry it's...Law of diminishing marginal utility
Malik
demand for commodities that posses identical utilities? The commodities having identical utilities are perfect substitutes...and the demand for such type of commodities is called "Competitive Demand".
Malik
thanks
Toyin
Why many people can't differentiate Economists and financial analysts
Hatimu
what is the function of the central bank in an economic?
Toyin
the central bank may lend some money to banks if necessary
konglan
what economics
Toyin Reply
Is this a question?
Tala
is the study of how societies allocate and manage their scare resources
Neriel
What is populatiin
Azer Reply
Population is a number of people living in a particular area within a particular time
Rabby
Population is the number of people living in a particular geographical area within a particular time
Rabby
how does this chat work
Dalaya
ya the ideas are good thanks friends
South
so what's the next question?
South
what is demand schedule
Toyin Reply
is a tabular representation of the quantity demanded of a particular product at a particular price over a given period of time
Loveth
thanks
Toyin
you are welcome
Loveth
ok
Hassan
What is Monetary Mass
Acha Reply
who is product of traditional economy
jamal Reply
what is elasticity
Suqlain Reply
change in quantity due to change in its price
sj
degree of responsiveness of quantity demanded or supplied due to price.change
Loveth

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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