Financial Management

Chapter

17

Define finance and explain the role of financial managers.

Describe the components of a financial plan and the financial planning process.

Outline how organizations manage their assets.

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

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Learning Objectives

Identify sources of short-term financing for business operations.

Discuss long-term financing options.

Describe mergers, acquisitions, buyouts, and divestitures.

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Finance– planning, obtaining, and managing the company’s funds in order to accomplish its objectives Maximizing overall worth Meeting expenses Investing in assets Increasing profits to shareholders

The Business Function of Finance

Implement the firm’s financial plan Determine the most appropriate source of funds Many CFOs are members of the board of directors

The Role of the Finance Manager

The process of maximizing the wealth of the firm’s shareholders by striking the optimal balance between risk and return.

Risk-Return Tradeoff

Financial Plan– the inflows and outflows and sources of funds.

Financial plans are built by answering the following questions:

What funds will the firm require during the planning period?

When will it need additional funds? Where will it obtain the necessary funds?

Financial plans are based on the forecasts of costs and expected sales activities for a given period.

Financial Planning

Sound financial management requires assets to be managed and acquired.

What a firm owns Use of funds

Managing Assets

Cash

Marketable Securities

Accounts Receivable

Inventory

Short-Term Assets

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. Balance

Managing International Assets

Debt Capital– funds obtained through borrowing.

Equity Capital– investment in the firm in exchange for ownership.

Sources of Funds and Capital Structure

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

Leverage and Capital Structure

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 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

Public Sale of Stocks and Bonds

Private Placements

Venture Capitalists

Private Equity Funds

Hedge Funds

Sources of Long-Term Financing

Financial managers evaluate mergers, acquisitions, and other opportunities. Leveraged buyouts Divestiture

Sell-off/Spin-off

Mergers, Acquisitions, Buyouts, and Divestitures