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By the end of this section, you will be able to:
  • Describe financial capital and how it relates to profits
  • Discuss the purpose and process of borrowing, bonds, and corporate stock
  • Explain how firms choose between sources of financial capital

Firms often make decisions that involve spending money in the present and expecting to earn profits in the future. Examples include when a firm    buys a machine that will last 10 years, or builds a new plant that will last for 30 years, or starts a research and development project. Firms can raise the financial capital they need to pay for such projects in four main ways: (1) from early-stage investors; (2) by reinvesting profits; (3) by borrowing through banks or bonds; and (4) by selling stock. When owners of a business choose sources of financial capital, they also choose how to pay for them.

Early stage financial capital

Firms that are just beginning often have an idea or a prototype for a product or service to sell, but few customers, or even no customers at all, and thus are not earning profits. Such firms face a difficult problem when it comes to raising financial capital: How can a firm that has not yet demonstrated any ability to earn profits pay a rate of return to financial investors?

For many small businesses, the original source of money is the owner of the business. Someone who decides to start a restaurant or a gas station, for instance, might cover the startup costs by dipping into his or her own bank account, or by borrowing money (perhaps using a home as collateral). Alternatively, many cities have a network of well-to-do individuals, known as “angel investors,” who will put their own money into small new companies at an early stage of development, in exchange for owning some portion of the firm.

Venture capital firms make financial investments in new companies that are still relatively small in size, but that have potential to grow substantially. These firms gather money from a variety of individual or institutional investors, including banks, institutions like college endowments, insurance companies that hold financial reserves, and corporate pension funds. Venture capital firms do more than just supply money to small startups. They also provide advice on potential products, customers, and key employees. Typically, a venture capital fund invests in a number of firms, and then investors in that fund receive returns according to how the fund as a whole performs.

The amount of money invested in venture capital fluctuates substantially from year to year: as one example, venture capital firms invested more than $48.3 billion in 2014, according to the National Venture Capital Association . All early-stage investors realize that the majority of small startup businesses will never hit it big; indeed, many of them will go out of business within a few months or years. They also know that getting in on the ground floor of a few huge successes like a Netflix or an Amazon.com can make up for a lot of failures. Early-stage investors are therefore willing to take large risks in order to be in a position to gain substantial returns on their investment.

Questions & Answers

how does interest rate affect aggregate output
kelvin Reply
what is Keynesian theory
need a curves for typical isoquost and isoquant
what is isoquant
isoquat is a curve shows differnt combinations of two inputs which can produce same level of output
examples of giffen goods
then what isoquost
, if the price of an essential food staple, such as rice, rises it may mean that consumers have less money to buy more expensive foods, so they will actually be forced to buy more rice.
that's an example
majid Khan that's the wrong definition of isoquant
you are defining isocost
isocost curve is a locus of points that shows the different combinations of commodities purchased by a consumer with a fixed budget
The change in fiscal policy leads to an increased level of output and interest rates is because an increase in government expenses directly affects aggregate demand. A decline in taxes result in more disposable income, consequently leading to a rise in consumption expenditure.
dats for kelvin
dats d answer for the audio how does interest rate affect aggregate output
question not audio
u are right joker
explain the nature of economics
Matilda Reply
interpret micro economic issues
ito ang dami ng producto na nais handa at kanyang ibenta ng isang prodyuser
Jomar Reply
i dont understand
even I also don't understand ..this language.. vn I converse everybody say farzana ur language is not understood by all user? now no one there is question about it?
he is saying that "this is the amount of product it wants to be ready and sells by a producer"
I Merr has knowledge,which is the economiccircuit role in a society
What is diminishing returns?
Shadrach Reply
explain competitive demand
the demand that are compiting for sale. the buyer can substitute one for another good
the demand where commodities fight for the market. in this type of demand, commodities can be substituted for the most suitable one subject to ( price, consumers choice, consumers income etc)
Demand is said to be competitive when a commodity that is needed to satisfy wants in place of another similar goods. increase in price of a commodity X will result in increase in demand of the substitute (commmodity Y).
examples of giffen goods are garri (cassava), maize
yusuf Reply
what is Public Finance?
kweku Reply
it's basically the field of economics that deals with the government's involvement in the economy; from spending to maybe interest rate manipulation, etc.
examples of giffen goods
i want to get the solutions of problems how i get kindly give guidance
Syeda Reply
please give some suggestions about getting solutions of all chapters...
hard work
and the grace of God
knowledge skills
Syeda Economics is difficult. No all fields are difficult
what is Keynesian
Keynesian economics is the theory proposed by Keynes( an economist). He proposed to manipulate demand side factors to bring economy out of depression in 1930s.
whose totaly oppossid the government intervention and give importance to agreegad demand
Good afternoon my fellow forum brothers and sisters
Abdullahi Reply
no just want to know true God
Good afternoon!!
hey is there somebody single n young like me bcoz I'm looking for
what is facing trade offs
Nancy Reply
It is giving up a commodity to purchase another commodity
for example, when we have two commodities like chicken and turkey you can trade off of give up chicken to purchase turkey
that can also be called foregone goods
it like opportunity cost
it's like trade by batter
Do you transform into thesecourses, in french people?
I can just speak french andI can just speak french and no english
what is elastic
Tida Reply
elastic is the change in to price and change in demand
Is the percentage change in quantity demand and quantity supply.
Or percentage change in price of demand and supply
Robert Mensah you are explaining elasticity of demand
robert i think he talk about elastic releated to elasticity of price a proportionate change in price over qd
can anyone explain what happrn her i don't understand anything
is the percentage change in demand as price change
sometimes price is elastic,inelastic
price elasticity is different from price being elastic
elasticity is not always the percentage change in demand as a result of changes in price. there's income elasticity and cross elasticity so it's not necessarily always price
elastic is when a change in price of a commodity results in a relatively a larger proportion change in the quantity demand of the commodity
what is inelastic
Tida Reply
price is said to be inelastic when it is less than 1
what is national income accounting
Aisha Reply
National income is the income earned by all factors of production..
So this benefits the workers or the businesses?
Like whose income are we talking about here
what is multiplier
Good & services manufactured in a country with in one year is calld national income
incom earned by using of sources of production is national income while i dont know the accounting insuch
neil and aisha can u explain the turm accounting in such question
I think when we include accounting national income accounting is the measurement of total goods and services produced in an economy in a given period of time
what is mutual funds
Khalid Reply
it is a combination of financial securities such as treasury bills , bonds etc in one managed by an institution that individuals and firms invest in for profit. it is usually a long term investment and is seen as a low risk investment because the financial instruments invested in, are diversified.
A mutual fund is a professional managed investment that pools money from many investors to invest.
could you please recommend me any book to understand game theory
Prtj Reply

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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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