Definition of financing decision

financing decision

a judgment made regarding the method
of raising funds that will be used to make acquisitions; it
is based on an entity’s ability to issue and service debt and
equity securities

financing decision

decision as to how to raise the money to pay for investments in real assets.

Financing decisions

decisions concerning the liabilities and stockholders' equity side of the firm's balance
sheet, such as the decision to issue bonds.

Adjusted present value (APV)

The net present value analysis of an asset if financed solely by equity
(present value of un-levered cash flows), plus the present value of any financing decisions (levered cash
flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of
other investment tax credits are calculated separately. This analysis is often used for highly leveraged
transactions such as a leverage buy-out.

Corporate finance

One of the three areas of the discipline of finance. It deals with the operation of the firm
(both the investment decision and the financing decision) from that firm's point of view.

Investments

As a discipline, the study of financial securities, such as stocks and bonds, from the investor's
viewpoint. This area deals with the firm's financing decision, but from the other side of the transaction.

Asset allocation decision

The decision regarding how an institution's funds should be distributed among the
major classes of assets in which it may invest.

Asset-based financing

Methods of financing in which lenders and equity investors look principally to the
cash flow from a particular asset or set of assets for a return on, and the return of, their financing.

Back-to-back financing

An intercompany loan channeled through a bank.

Bridge financing

Interim financing of one sort or another used to solidify a position until more permanent
financing is arranged.

Cost of lease financing

A lease's internal rate of return.

Debtor-in-possession financing

New debt obtained by a firm during the Chapter 11 bankruptcy process.

Decision tree

Method of representing alternative sequential decisions and the possible outcomes from these decisions.

Federal Financing Bank

A federal institution that lends to a wide array of federal credit agencies funds it
obtains by borrowing from the U.S. Treasury.

Investment decisions

decisions concerning the asset side of a firm's balance sheet, such as the decision to
offer a new product.

Managerial decisions

decisions concerning the operation of the firm, such as the choice of firm size, firm
growth rates, and employee compensation.

Multi-option financing facility

A syndicated confirmed credit line with attached options.

Mutually exclusive investment decisions

Investment decisions in which the acceptance of a project
precludes the acceptance of one or more alternative projects.

Net financing cost

Also called the cost of carry or, simply, carry, the difference between the cost of financing
the purchase of an asset and the asset's cash yield. Positive carry means that the yield earned is greater than
the financing cost; negative carry means that the financing cost exceeds the yield earned.

Off-balance-sheet financing

financing that is not shown as a liability in a company's balance sheet.

Planned financing program

Program of short-term and long-term financing as outlined in the corporate
financial plan.

Production payment financing

A method of nonrecourse asset-based financing in which a specified
percentage of revenue realized from the sale of the project's output is used to pay debt service.

Security selection decision

Choosing the particular securities to include in a portfolio.

Threshold for refinancing

The point when the WAC of an MBS is at a level to induce homeowners to
prepay the mortgage in order to refinance to a lower-rate mortgage, generally reached when the WAC of the
MBS is 2% or more above currently available mortgage rates.

CASH FLOWS FROM FINANCING ACTIVITIES

A section on the cash-flow statement that shows how much cash a company raised by selling stocks or bonds this year and how much was paid out for cash dividends and other finance-related obligations.

financing activities

One of the three classes of cash flows reported in the
statement of cash flows. This class includes borrowing money and paying
debt, raising money from shareowners and the return of money to
them, and dividends paid from profit.

decision making

the process of choosing among the alternative
solutions available to a course of action or a problem
situation

decision variable

an unknown item for which a linear programming
problem is being solved

investment decision

a judgment about which assets will be
acquired by an entity to achieve its stated objectives

make-or-buy decision

a decision that compares the cost of
internally manufacturing a component of a final product
(or providing a service function) with the cost of purchasing
it from outside suppliers (outsourcing) or from another
division of the company at a specified transfer price

outsourcing decision

see make-or-buy decision

preference decision

the second decision made in capital project evaluation in which projects are ranked according to their impact on the achievement of company objectives

screening decision

the first decision made in evaluating capital
projects; it indicates whether a project is desirable based
on some previously established minimum criterion or criteria
(see also preference decision)

special order decision

a situation in which management must determine a sales price to charge for manufacturing or service jobs outside the company’s normal production/service market

capital budgeting decision

decision as to which real assets the firm should acquire.

decision tree

Diagram of sequential decisions and possible outcomes.

Cash Flow Provided or Used from Financing Activities

Cash receipts and payments involving
liability and stockholders' equity items, including obtaining cash from creditors and repaying
the amounts borrowed and obtaining capital from owners and providing them with a return on,
and a return of, their investments.

Asset-Based Financing

Loans granted usually by a financial institution where the asset being financed constitutes the sole security given to the lender.

Debt Financing

Raising loan capital through the creation of debt by issuing a form of paper evidencing amounts owed and payable on specified dates or on demand.

Export Financing

A range of financing products (loans. guarantees, letters of credit, insurance etc.) in support of a variety of activities which help Canadian firms expand into new export markets.

Financing Instruments

This is a generic term that refers to the many different forms of financing a business may use. For example - loans, shares, and bonds are all considered financing instruments.

Project Financing

Debt finance, usually non-recourse, provided by financial institutions for the development and construction of a new project.

Seed Financing/Capital

Generally, refers to the first contribution of capital toward the financing requirements of a start-up business.

Refinancing (Credit Insurance)

Extending the maturity date or increasing the amount of existing debt or both. Also, revising a payment schedule, usually to reduce the monthly payments and often to modify interest charges.

Financial planning

The process of evaluating the investing and financing options available to a firm. It
includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in
the form of a financial plan, and then comparing future performance against that plan.

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