9 Finance - · PDF file©2015 Cengage Learning. All Rights Reserved. ......
Transcript of 9 Finance - · PDF file©2015 Cengage Learning. All Rights Reserved. ......
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9 Finance: Acquiring and Using Funds to
Maximize Value
Identify the goal of financial management
and explain the issues financial managers
confront as they seek to achieve this goal
Describe the tools financial managers use to
evaluate their company’s current financial
condition and develop financial plans
Evaluate the major sources of funds
available to meet a firm’s short-term and
long-term financial needs
2
9-1
9-2
9-3
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9Identify the key issues involved in
determining a firm’s capital structure
Describe how financial managers acquire
and manage current assets
Explain how financial managers evaluate
capital budgeting proposals to identify the
best long-term investment options for their
company
3
Finance: Acquiring and Using Funds to
Maximize Value
9-4
9-5
9-6
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Financial Management: An Overview
4
•Funds a firm uses to acquire its assets and finance its operations
Financial capital
•Functional area of business responsible for finding the best sources of funds and the best ways to use them
Finance
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Financial Needs: Evaluation and Planning
5
•Comparing values of key accounts listed on a firm’s financial statements
Financial ratio analysis
•Use of debt in a firm’s capital structure
Financial leverage
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Key Financial Ratios
6
Ratio name Type How it is computed
Current Liquidity
• Measures ability to pay short-
term liabilities as they come due
Current Assets/Current
Liabilities
Inventory
turnover
Asset management
• Measures how effectively a firm
is using its assets to generate
revenue
Cost of Goods Sold/Average
Inventory
Average
collection
period
Asset management
• Measures how effectively a firm
is using its assets to generate
revenue
Accounts
Receivable/(Annual Credit
Sales/365)
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Key Financial Ratios
7
Ratio name Type How it is computed
Debt-to-
assets
Leverage
• Measures the extent to which
a firm relies on debt to meet
its financing needs
Total Debts/Total Assets
Return on
equity
Profitability
• Compares the amount of
profit to some measure of
resources invested
Net Income – Preferred
Dividend/Average Common
Stockholders Equity
Earnings
per share
Profitability
• Compares the amount of
profit to some measure of
resources invested
Net Income – Preferred
Dividend/Average Number of
Common Shares Outstanding
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Planning Tools
• Projection showing how a firm’s budgeted sales and costs will affect expected net income
Budgeted income statement
• Projected statement forecasting:•Types and amounts of assets a firm will need to implement future
plans
•Amount of additional financing required to acquire these assets
Budgeted balance sheet
• Detailed forecast of future cash flows
• Helps identify periods of temporary shortages or surpluses of cash
Cash budget
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Funds and Finance: An Overview
•Granted by sellers when they deliver goods and services to customers without requiring immediate payment
•Spontaneous financing: Granted when the company places its orders without requiring any special arrangements
Trade credit
•Cash owed to a firm during credit sales, shown in accounts receivable on the company’s balance sheet
•Factor: Purchases the accounts receivables of other firms at a discount
Factoring
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Funds and Finance: An Overview
•Line of credit: Pre-approved credit up to a specified limit if the firm maintains an acceptable credit rating
•Revolving credit agreement: Bank makes a formal, legally binding commitment to provide the agreed-upon funds
Short-term bank loans
•Promissory notes issued by large corporations
Commercial paper
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Funds and Finance: An Overview
■ Direct investments from owners
■ Retained earnings: Profits that a firm
reinvests
■ Long-term debt
Term loans
• Covenant: Restriction lenders impose on
borrowers as a condition of the loan
■ Corporate bond
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Reality TV Video Slide
12©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
http://www.cengage.com/introbusiness/book_content/9781285187822_kelly/videos/09startupjunkies.html
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© iStockphoto.com / DNY59
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■ In your opinion, why did Earth Class Mail seek venture capital funding before seeking venture debt financing from a bank?
■ Describe the major advantage and the major disadvantage for Earth Class Mail in seeking additional financing through venture debt funding rather than additional venture capital investment.
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Capital Structure
■ Mix of equity and debt financing a firm
uses to meet its permanent financing
needs
Equity financing: Funds provided by the
owners of a company
Debt financing: Funds provided by lenders
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Debt Financing
Advantages
• Interest payments a firm makes on debts are a tax-deductible expense
• Firm acquires additional funds without:
• Making stockholders invest more
• Sale of stock to new investors
Disadvantages
• Required interest payments:
• Take up most of a firm’s earnings in a bad financial situation leading to bankruptcy
• Covenants hamper a firm’s flexibility
• Restrictions on dividends make it difficult for the firm to raise money
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Equity Financing
Advantages
•More flexible and less risky than debt financing
•Does not impose:
•Required payments
•Covenants
Disadvantages
•Does not yield tax benefits
•Existing owners might not want a firm to issue more stock
•Firm forgoes the opportunity to use financial leverage
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Exhibit 9.3 - How Financial Leverage Affects the Return
on Equity
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Dodd-Frank Act
■ Monitors financial markets to identify
and respond to emerging risks
Places limitations on risky financial
strategies such as heavy reliance on
leverage
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Web-link: Implementing the Dodd-Frank Wall Street
Reform and Consumer Protection Act
■ The web-link provides references to all
the rules that have been proposed or
adopted in connection with the Dodd-
Frank Act
http://www.sec.gov/spotlight/dodd-
frank.shtml
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Current Assets Handling
•Safe and highly liquid assets that are listed with cash holdings on a balance sheet
Cash equivalents
•Short-term marketable IOUs issued by the U.S. federal government
U.S. Treasury bills (T-bills)
•Pools funds from many investors to purchase safe and highly liquid securities
Money market mutual funds
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Current Assets Handling
■ Key elements of managing credit sales
Set credit terms
Establish credit standards
Appropriate collection policy
■ Firms keep inventories low to reduce
costs and improve efficiency
21
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How to Evaluate Budget Proposals
22
• Used to evaluate long-term investment proposals
Capital budgeting
• Principle that a dollar received today is worth more than a dollar received in the future
Time value of money
• Interest-earning deposit requiring funds to remain deposited for a fixed term
Certificate of deposit (CD)
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How to Evaluate Budget Proposals
23
• Amount of money invested today at a given rate of interest would grow to become some future amount in a specified time
Present value
• Higher discount rate computed for present values of cash flows of risky projects
Risk-return tradeoff
• Sum of the present values of expected future cash flows from an investment, minus the cost of that investment
Net present value (NPV)
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Exhibit 9.5 - Decision Rule for Capital Budgeting
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Identify the goal of financial management
and explain the issues financial managers
confront as they seek to achieve this goal
Describe the tools financial managers use to
evaluate their company’s current financial
condition and develop financial plans
Evaluate the major sources of funds
available to meet a firm’s short-term and
long-term financial needs
25
9-1
9-2
9-3
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Identify the key issues involved in
determining a firm’s capital structure
Describe how financial managers acquire
and manage current assets
Explain how financial managers evaluate
capital budgeting proposals to identify the
best long-term investment options for their
company
26
9-4
9-5
9-6