1.4 Finance

R&D, Marketing and Production decisions require money. The Finance Department must ensure all company activities are funded. While it is possible to fund activities entirely from cash flow, it is unlikely to happen in the early years. The company will need to turn to the capital markets. The company has three outside sources of money:

• Stock: New stock issues are limited to 20% of the company's outstanding shares.
• Current Debt: These are one year bank notes. The company can borrow year after year, but interest rates fluctuate. Banks are willing to lend amounts up to 75% of the company's account receivable, plus 50% of its inventory.
• Bonds (Long Term Debt): These are 10 year notes. While bonds carry an interest rate 1.4% higher than the current debt rate in the year they are issued, the rate is locked in– it will not fluctuate. Bondholders are willing to lend amounts up to 80% of the value of the company's assembly lines.

Other Finance Department activities include:

• Dividend: The company can choose to issue dividends, which tend to (but do not always) increase the price per share;
• Retire Stock: The company can buy back stock to reduce shares outstanding;
• Retire Bonds: The company can choose to retire bonds before they come due.

If the company runs out of money during the year, emergency loans are issued by a lender of last resort, affectionately known as Big Al. Big Al will automatically keep the company afloat with a loan for whatever amount needed. Big Al charges a 7.5% penalty in addition to the company's current debt rate. Emergency loans convert to current debt at the beginning of the following year. Emergency loans have an adverse effect on stock price.

Accounts receivable and accounts payable finance decisions are made on the Marketing spreadsheet.