Corporate Finance For Dummies. Michael Taillard
to be careful when using online sources because some of them don’t verify their accuracy, and you definitely don’t want to be misled or lied to. Here are just a few sources you can trust:
EDGAR: This is the SEC’s database website, which provides easy access to a huge number of financial reports by public companies listed in the U.S. Check it out at http://www.sec.gov/edgar.shtml.
Investopedia: This online encyclopedia focuses exclusively on issues related to corporate finance and investing. Go to http://www.investopedia.com for more details.
University websites: Many university websites publish beginner’s guides, course supplements, and other information useful for people with a range of understanding in corporate finance. These resources can be difficult to find on the websites themselves, though, so your best bet is to find them using a search engine. Just type a search for the concept you’re researching; if any of the websites have an .edu domain, then that’s probably a good reference.
Publisher websites: Many book publishers, particularly for textbooks, provide supplementary information and resources on their websites.
Print sources
A number of different print sources are also available to help you learn more about corporate finance:
Books: The one you’re reading right now is a great place to start! You’ll also find several other books in the For Dummies series. You can also check out some of my other books (search for Michael Taillard). If you’re looking for more, ask your librarian to help point you in the right direction. Particularly, librarians at universities can be extremely helpful because they have lots of books geared to students who are studying the same things as you.
Magazines: CFO, Kiplinger, Global Finance, Public Finance, Money, Strategic Finance, and so many others can be great resources. The topic of corporate finance seems to sell a lot of magazines.
Journals: Academic and professional journals are an amazing source of information and are particularly nice because the work is all peer-reviewed for accuracy and legitimacy. The problem is they also tend to include extremely advanced information — not for the beginner!
Financial reports: All financial reports made by companies publicly listed in the United States are available for free on request or at many libraries.
Human sources
Finding the right people to talk to about corporate finance can be difficult, especially when the people who talk the most are the ones who know the least and the ones who know the most are the hardest to find. Here are a few tips to help you get the best, most useful information from the finance people you talk to:
Never trust someone giving you a stock tip!
Understand the nature of the person’s job, and if they keep trying to give you information outside of that job, don’t trust them.
Make sure the person you’re talking to has credentials of some sort.
Chapter 3
Pitching Your Story for Money
IN THIS CHAPTER
One of the first, and most challenging, goals for a corporation is to acquire things of value, starting with cash. Using that cash, the company then purchases other things such as equipment, supplies, and so on. This chapter explores the different ways that corporations raise money, who the magical money-fairies are, and how to present your story to them in a way that pleases them.
Raising Capital
Everything that makes up a corporation and everything a corporation owns, including the building, equipment, office supplies, brand value, research, land, trademarks, and everything else, are considered assets. Believe it or not, when you start a corporation, that company’s assets aren’t just included in a Welcome Letter; you have to go out and acquire them. Generally speaking, you start off with cash, which you then use to purchase other assets. For most new companies, this cash consists of a combination of the following:
The owner’s own money: This money is considered equity because the owner can still claim full possession over it.
Small loans, such as business and personal loans from banks, business and personal lines of credit, and government loans: The money obtained through loans is considered a liability because the corporation has to pay it back at some point. In other words, these loans are a form of debt.
The combination of these two funding sources brings me to the explanation of the most fundamental equation in corporate finance:
Assets = Liabilities + Equity
The total value of assets held by a company is equal to the total liabilities and total equity held by the company. Because the total amount of debt a company incurs goes into purchasing equipment and supplies, increasing debt through loans increases a company’s liabilities and total assets. As owners contribute their own funding to the company’s usage, the total amount of company equity increases along with the assets. Note: Capital, assets, money, and cash are basically all the same thing at this point; after a company raises the original capital, or cash, it exchanges that cash for more useful forms of capital, such as erasable markers.
Unlike liabilities, equity represents ownership in the company. So, if a company owns $100,000 in assets and $50,000 was funded by loans, then the owner still holds claim over $50,000 in assets, even if the company goes out of business, requiring the owner to give the other $50,000 in assets back to the bank. For corporations, the equity funding varies a bit, however, because the owners of a corporation are the stockholders. The equity funding of corporations comes from the initial sale of stock, which exchanges shares of ownership for cash to be used in the company.
The rest of this chapter discusses the two main ways businesses raise capital.
Diving into Debt
Regardless