Introduction to Finance



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R.Miltcher - Introduction to Finance

Size and Age of the Firm 
A company’s size and age and its stage in the fi nancial 
life cycle may infl uence management’s short-term/long-term fi nancing mix decisions. A new 
company’s only source of funds may be the owner and, possibly, his or her friends. Some long-
term funds may be raised by mortgaging real estate and buying equipment on installment, 
and some current borrowing may be possible to meet seasonal needs. As a business grows, it 
has more access to short-term capital from fi nance companies and banks. Further along, its 
growth and good record of profi tability may enable a business to arrange longer-term fi nan-
cing with banks or other fi nancial agencies, such as insurance companies. At this stage in its 
fi nancial development, it may expand its group of owners by issuing stock to people other than 
the owner and a few friends.
Growth and Profitability 
A company’s growth prospects aff ect fi nancing decisions. 
If a company is growing faster than it can generate funds from internal sources, it must con-
sider a plan for long-term fi nancing. Even if it can fi nance its needs in the current situation 
from short-term sources, it may be unwise to do so. Sound fi nancial planning calls for raising 
long-term funds at appropriate times. A fi rm that is generating cash profi ts will need less out-
side fi nancing than one that is less profi table. The internally generated cash fl ows can help pay 
bills in a timely manner, thus requiring less short-term fi nancing.
Some examples of ratios of current liabilities to total assets are presented in 
Figure 16.6

Google has a low amount of short-term fi nancing as it is fl ush with cash from recent stock 
off erings from its profi ts. Con Ed, a regulated utility, has an asset base that is mainly fi xed so 
it uses little short-term fi nancing. McDonald’s, which relies on long-term facility leases or 
franchisee funds for fi nancing its stores, also has a low amount of current liabilities. Amazon 
has a high amount of short-term fi nancing in Figure 16.6; it is well-known for its focus on 
its just-in-time (JIT) inventory and product delivery environment. It has little long-term debt 
fi nancing as it relies mainly on short-term fi nancing for its large amount of current assets. 
Interestingly, Sears’ ratio of short-term fi nancing to total assets has been rising. Stock mar-
ket analysts have warned about Sears’ debt load, and as of late 2015 its bond credit rating 
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
P
ercent
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Amazon
Apple
AT&T
Consolidated Edison
Sears
Walgreens
Wal-Mart
ExxonMobil
Microsoft
McDonald’s
Google
Current Liabilities Divided by Total Assets

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