chapter 16 the future of business: the essentials gitman & mcdaniel 2nd edition the future of...

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THE FUTURE OF BUSINESS: The Essentials

Gitman & McDaniel2nd Edition

THE FUTURE OF BUSINESS: The Essentials

Gitman & McDaniel2nd Edition

Chapter

Understanding Financial Management and Securities Markets

Understanding Financial Management and Securities Markets

Prepared byDeborah Baker

Texas Christian University

Prepared byDeborah Baker

Texas Christian University

16

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 2Ch

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1 How do finance and the financial manager affect the firm’s overall strategy?

2 What types of short-term and long-term expenditures does a firm make?

3 What are the main sources and costs of unsecured and secured short-term financing?

4 What are the key differences between debt and equity, and what are the major types and features of long-term debt?

Learning Goals


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5 When and how do firms issue equity, and what are the costs?

6 How do securities markets help firms raise funding, and what securities trade in the capital markets?

7 What are the major U.S. securities exchanges and how are they regulated?

8 What are the current trends in financial management and the securities markets?

Learning Goals (continued)


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1

Owners’ investmentOwners’ investmentBorrowed FundsBorrowed Funds

Cash SalesCash Sales

Purchase ofFixed Assets

Purchase ofFixed Assets

Payment ofDividends

Payment ofDividends

Purchase ofInventory

Purchase ofInventory

Payment of Expenses

Payment of Expenses

Collection ofAccounts Receivable

Collection ofAccounts Receivable

Sale ofFixed Assets

Sale ofFixed Assets

How Cash Flows Through a Business


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1

Key Key ActivitiesActivities

Key Key ActivitiesActivities

Financial PlanningFinancial Planning

Investment(spending money)

Investment(spending money)

Financing(raising money)

Financing(raising money)

The Financial Manager’s Responsibilities


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1

Social IssuesSocial Issues

Market ConditionsMarket Conditions

General Economic ConditionsGeneral Economic Conditions

Interest RatesInterest Rates

Changing Patterns of Market DemandChanging Patterns of Market Demand

Risk and Return Factors


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How Organizations Use Funds2

Short-TermExpenses

Short-TermExpenses Operating expensesOperating expenses

Long-TermExpendituresLong-Term

ExpendituresInvestment in long-

lived assetsInvestment in long-

lived assets

Support currentselling and

production activities

Support currentselling and

production activities

Expansion, assetreplacement, new

product development

Expansion, assetreplacement, new

product development


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Short-Term Expenses2

ManageManageCurrent Current AssetsAssets

ManageManageCurrent Current AssetsAssets

Cash ManagementCash Management

Accounts Receivable Accounts Receivable

InventoryInventory


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Cash Management2

Surplus CashSurplus Cash

Marketable Securities

Marketable Securities

Certificatesof Deposit

Certificatesof Deposit

TreasuryBills

TreasuryBills

CommercialPaper

CommercialPaper


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Cash Management2

Key Key StrategiesStrategies

Key Key StrategiesStrategies

Collect money owed to the firmCollect money owed to the firm

Pay money owed to others Pay money owed to others

Minimize funds tied up in inventory

Minimize funds tied up in inventory


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Long-Term Expenditures2

CapitalCapitalExpendituresExpenditures

CapitalCapitalExpendituresExpenditures MachineryMachinery

BuildingsBuildings

LandLand

EquipmentEquipment

Information SystemsInformation Systems


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3

RaisingRaisingFundsFunds

RaisingRaisingFundsFunds

Borrow Money(Debt)

Borrow Money(Debt)

Sell Ownership Shares(Equity)

Sell Ownership Shares(Equity)

Retain Earnings(Profits)

Retain Earnings(Profits)

Obtaining Short-Term Financing


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3

Bank LoansBank Loans •Lines of credit•Revolving credit agreement

•Lines of credit•Revolving credit agreement

TradeCreditTradeCredit Seller extends credit to the buyer Seller extends credit to the buyer

CommercialPaper

CommercialPaper

Unsecured short-term debt issuedby a financially strong corporationUnsecured short-term debt issuedby a financially strong corporation

Unsecured Short-Term Loans


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3 Secured Short-Term Loans

SecuredLoans

SecuredLoans

Borrower pledges specific assets as collateral, such as

accounts receivable or inventory.

Borrower pledges specific assets as collateral, such as

accounts receivable or inventory.

FactoringFactoring Firm sells its accounts receivable to a

factor, such as a commercial bank or commercial finance company.

Firm sells its accounts receivable to a factor, such as a commercial bank or commercial finance company.


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Debt versus Equity Financing4


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Debt Financing4

BondsBonds Long-term debt obligations issuedby corporations and governments.Long-term debt obligations issuedby corporations and governments.

Term LoansTerm Loans A business loan with a maturity of more than one year.

A business loan with a maturity of more than one year.

Mortgage LoansMortgage Loans A long-term loan made againstreal estate as collateral.

A long-term loan made againstreal estate as collateral.


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Equity Financing5

Venture CapitalVenture Capital

Preferred Stock Preferred Stock

Dividends & Retained EarningsDividends & Retained Earnings

Selling Common StockSelling Common Stock


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Securities Markets6

SecuritiesSecurities

Debt(a loan to the issuer)

Debt(a loan to the issuer)

Equity(ownership in

issuing organization)

Equity(ownership in

issuing organization)

PrimaryMarket

PrimaryMarket

SecondaryMarket

SecondaryMarket


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Securities Markets6

Help companies raise long-term financing,

a process calledunderwriting

Help companies raise long-term financing,

a process calledunderwriting

InvestmentBankers

InvestmentBankers

A person (account executive)

licensed to buy and sell securities on

behalf of clients

A person (account executive)

licensed to buy and sell securities on

behalf of clients

StockbrokerStockbroker


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6Moody’s and Standard & Poor’s Bond

Ratings


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Securities Exchanges7

Types ofTypes ofSecuritiesSecuritiesMarketsMarkets

Types ofTypes ofSecuritiesSecuritiesMarketsMarkets

Over-the-Counter MarketOver-the-Counter MarketOver-the-Counter MarketOver-the-Counter Market

Organized Stock ExchangesOrganized Stock ExchangesOrganized Stock ExchangesOrganized Stock Exchanges


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U.S. Stock Exchanges7

American Stock ExchangeAmerican Stock Exchange(AMEX)(AMEX)

American Stock ExchangeAmerican Stock Exchange(AMEX)(AMEX)

New York Stock ExchangesNew York Stock Exchanges(NYSE)(NYSE)

New York Stock ExchangesNew York Stock Exchanges(NYSE)(NYSE)


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Global Trading and Foreign Exchanges7

NYSENASDAQ

NYSENASDAQ

LondonLondon

TorontoToronto

MontrealMontreal

ParisParis SydneySydney

ZurichZurich

Buenos AiresBuenos Aires

TokyoTokyo

FrankfurtFrankfurt Hong KongHong Kong

TaiwanTaiwan


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Regulation of Securities Markets7

Securities andExchange

Commission

Securities andExchange

Commission

The main federal government agency responsible for

regulating the U.S. securities industry.

The main federal government agency responsible for

regulating the U.S. securities industry.

Insider TradingInsider Trading The use of information that is

not available to the general public to make profits on securities transactions.

The use of information that is not available to the general public to make profits on securities transactions.

Circuit BreakersCircuit Breakers

Measures that, under certain conditions, stop trading in thesecurities markets to limit theamount the market can drop in

one day.

Measures that, under certain conditions, stop trading in thesecurities markets to limit theamount the market can drop in

one day.

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