Financial Management

Chapter

17

LO 17.1 Define finance, and explain the role of financial managers.

LO 17.2 Describe the parts of a financial plan and the financial planning process.

LO 17.3 Outline how organizations manage their assets.

LO 17.4 Compare the two major sources of funds for a business, and explain the concept of leverage.

Learning Objectives

LO 17.5 Identify sources of short-term financing for business operations.

LO 17.6 Discuss long-term financing options.

LO 17.7 Describe mergers, acquisitions, buyouts, and divestitures.

Finance: The business function of planning, obtaining, and managing the company’s funds to accomplish its objectives as effectively and efficiently as possible Maximizing overall worth Meeting expenses Investing in assets Increasing profits to shareholders

Financial Management

Financial managers: The executives who develop and carry out their firm’s financial plan and decide on the most appropriate sources and uses of funds

The Role of the Financial Manager

Risk-return trade-off: the process of maximizing the wealth of the firm’s shareholders by striking the right balance between risk and return.

The Role of the Financial Manager

Financial plan: a document that specifies the funds needed by a firm for a period of time, the timing of cash inflows and outflows, and the most appropriate sources and uses of funds

Financial plans are built by answering the following questions:

What funds will the firm require during the planning period? When will the firm need additional funds? Where will the firm obtain the necessary funds?

Based on the forecasts of production costs, purchasing needs, plant/equipment expenses, and sales activities for a given period.

Financial Planning

Sound financial management requires assets to be managed and acquired effectively and efficiently.

Assets What a firm owns Use of funds

Managing Assets

Also known as current assets Cash Marketable securities Accounts receivable Inventory

Short-Term Assets

All of the following are short-term assets except

a. inventory.b. accounts receivable. c. equipment. d. cash.

Test Your Knowledge

All of the following are short-term assets except

a. inventory.b. accounts receivable. c. equipment. d. cash.

Answer: C

Test Your Knowledge

Long-lived assets Produce economic benefit for more

than one year Substantial investments

Capital investment analysis Expansion: new assets Replacement: upgrading assets

Capital Investment Analysis

Today’s firms have facilities and assets worldwide.

Sales occur outside of the home country.

International assets require the management of activities to reduce the financial risk of exchange rates.

Managing International Assets

Debt capital consists of funds obtained through borrowing.

Equity capital consists of funds provided by the firm’s owners when they reinvest their earnings, make additional contributions, liquidate assets, issue shares to the general public, or raise capital from outside investors.

Sources of Funds and Capital Structure

Goal: increasing the rate of return on funds invested by borrowing funds

Leverage and Capital Structure Decisions

Short-term funds Current liabilities Less expensive Volatile interest

rates Long-term funds

Long-term debt and equity

Used for long-term assets

Mixing Short and Long-Term Funds

Dividends are periodic cash payments to shareholders. Highest dividend yielding stocks

Financial managers must make decisions regarding their dividend policy. Should we pay a dividend? When should it be paid?

Dividend Policy

Trade credit

Short-term loans

Commercial paper

Short-Term Funding Options

Trade credit is a source of long-term financing.

a. Trueb. False 

Test Your Knowledge

Trade credit is a source of long-term financing.

a. Trueb. False Answer: B

Test Your Knowledge

Public sale of shares and bonds

Private placements

Venture capitalists

Private equity funds

Hedge funds

Sources of Long-Term Financing

Why would a firm prefer to sell its bonds through private placement rather than an initial public offering?

a. Firms typically receive more favorable repayment terms from private holders. b. There are more buyers for private placements than publicly traded bonds.c. It is often cheaper for the firm to sell securities privately.d. Private placements reduce the risk of default.

 

Test Your Knowledge

Why would a firm prefer to sell its bonds through private placement rather than an initial public offering?

a. Firms typically receive more favorable repayment terms from private holders. b. There are more buyers for private placements than publicly traded bonds.c. It is often cheaper for the firm to sell securities privately.d. Private placements reduce the risk of default.

  Answer: C

Test Your Knowledge

Financial managers evaluate mergers, acquisitions, and other opportunities by comparing costs and benefits. Tender offer Leveraged buyouts (LBOs) Divestiture

Selloff Spinoff

Mergers, Acquisitions, Buyouts, and Divestitures