chapter 15 money and the financial system fhf 16-2 chapter 14 accounting and financial statements...
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CHAPTER 15 Money and the Financial System
FHF
16-2
CHAPTER 14 Accounting and Financial Statements
Financing theFinancing theEnterpriseEnterprise
CHAPTER 16 Financial Management and Securities Markets
FHF
Working Capital ManagementWorking Capital ManagementWorking Capital ManagementWorking Capital Management
The management of short-term assets and liabilities
Current Assets: Short-term resources
• Cash
• Investments
• Accounts receivable
• Inventory
Current Liabilities: Short-term debts
• Accounts payable
• Accrued salaries
• Accrued taxes
• Short-term bank loans
16-3
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Transaction BalanceTransaction BalanceTransaction BalanceTransaction Balance
Cash kept on hand by a firm to pay normal daily expenses such as employee wages and bills for
supplies and utilities
16-4
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LockboxLockboxLockboxLockbox
An address, usually a commercial bank, at which a company receives
payments in order to speed collections from customers
16-5
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Electronic Funds TransferElectronic Funds TransferElectronic Funds TransferElectronic Funds Transfer
Frequently used to speed up collections
Also being used to pay bills online
Companies want to collect bills quickly and pay them slowly
• Paying electronically increases the speed of collections and disbursements to one day
• Checks are the slowest way to pay bills (generally 3-4 days)
16-6
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Investing Idle CashInvesting Idle CashInvesting Idle CashInvesting Idle Cash
Marketable Securities
Temporary investment of extra cash by organizations up to one year in U.S. Treasury bills, certificates of deposit, commercial paper, or eurodollar loans
Treasury Bills (T-bills)
Short-term debt obligations the U.S. government sells to raise money
Maturities between 1 week to 1 year
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Investing Idle CashInvesting Idle CashInvesting Idle CashInvesting Idle Cash
Commercial Certificates of Deposit (CDs)Issued by commercial banks and brokerages available in minimum amounts of $100,000, typically $1 million, and can be traded prior to maturity
Commercial PaperA written promise from one company to another to pay a specific amount of money
Restricted only to the largest and most respected companies
Eurodollar MarketA market for trading U.S. dollars in foreign countries
Any U.S. dollar-denominated deposit in non-U.S. bank is called eurodollar
16-8
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Accounts Receivable Accounts Receivable and Inventoryand Inventory
Accounts Receivable Accounts Receivable and Inventoryand Inventory
Occurs on the balance sheet after cash and marketable securities
Accounts Receivable Money owed to a business by credit customers
Companies often offer discounts for early payment and penalties for late payments
Optimizing Inventory Objective is to minimize firm’s investment in inventory without
experiencing production cutbacks
Radio frequency identification (RFID) technology helps firms track and optimize their inventories
16-9
FHF
Managing Current LiabilitiesManaging Current LiabilitiesManaging Current LiabilitiesManaging Current Liabilities
Accounts Payable
Money an organization owes to suppliers for goods and services
Trade Credit
• Credit extended by suppliers for the purchase of their goods and services
• The most important account payable and most widely used source of short-term financing
16-10
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Current Liabilities: Bank LoansCurrent Liabilities: Bank LoansCurrent Liabilities: Bank LoansCurrent Liabilities: Bank Loans
Line of Credit
An arrangement by which a bank agrees to lend a specified amount of money to an organization upon request
Similar to a credit card, but often for millions of dollars
Secured Loans
Loans backed by collateral that the bank can claim if the borrowers do not repay the debt
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Current Liabilities: Bank LoansCurrent Liabilities: Bank LoansCurrent Liabilities: Bank LoansCurrent Liabilities: Bank Loans
Unsecured LoansLoans backed only by the borrower’s good reputation and previous credit rating
Prime RateThe interest rate that commercial banks charge their best customers for short-term loans
Interest rates on commercial loans can be fixed or variable (floating-rate loan)
Floating rate loans are appealing when interest rates are falling, but not when they rise
16-12
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Non-Bank LiabilitiesNon-Bank LiabilitiesNon-Bank LiabilitiesNon-Bank Liabilities
Short-term loans from insurance companies, pension funds, money market funds, or finance companies
Factor
An organization that purchases accounts receivables at a discount and assumes responsibility for collecting the accounts
Taxes and Employees’ Wages
Debt obligations to the firm
Additional nonbank liabilities that must be efficiently managed to ensure maximum profitability
16-13
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Managing Long-Term Managing Long-Term (Fixed) Assets(Fixed) Assets
Managing Long-Term Managing Long-Term (Fixed) Assets(Fixed) Assets
Expected to last for many years• Production facilities (plants), offices and equipment
Tend to be high-cost, making financing critical• Organizations need the most high-tech, up-to-date facilities
and equipment they can afford in order to be competitive
Obtaining long-term financing can be difficult• Leasing is a way of obtaining assets without purchasing
them
16-14
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Capital BudgetingCapital BudgetingCapital BudgetingCapital Budgeting
The process of analyzing the needs of business and selecting the assets that will maximize its value• Not an exact process
Managers must be flexible as new information becomes available
Assets and projects must be continuously reevaluated
16-15
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Pricing Long-Term MoneyPricing Long-Term MoneyPricing Long-Term MoneyPricing Long-Term Money
Factors to Consider:
How much cash will be generated
Cost of financing
Supply of funds available for investment
Accurately identifying opportunities with the greatest potential for ROI
16-16
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Financing with Financing with Long-Term LiabilitiesLong-Term Liabilities
Financing with Financing with Long-Term LiabilitiesLong-Term Liabilities
Debts that will be repaid over a number of years• Long-term loans
• Bond issues
Companies must raise money in the form of lines of credit or loans
Relying too heavily on debt can be dangerous • Companies may not earn enough to cover interest payments
16-17
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BondsBondsBondsBonds
Common form of long-term debt
Sold by large companies to raise long-term funds• Like corporate IOUs
• Bondholders basically loan the issuer cash
Indenture: The bond contract specifying all terms of agreement between the bondholder and the issuing organization
• Specifies interest payments, maturity date, repayment methods, etc.
16-18
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Types of BondsTypes of BondsTypes of BondsTypes of Bonds
Unsecured Bonds
Debentures, or bonds, that are not backed by specific collateral
Most common type
Secured Bonds
Bonds that are backed by specific collateral that must be forfeited in the event the issuing firm defaults
Serial Bonds
A sequence of small bond issues of progressively longer maturity
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Types of BondsTypes of BondsTypes of BondsTypes of Bonds
Floating-Rate Bonds
Bonds with interest rates that change with current interest rates otherwise available in the economy
Junk Bonds
Special type of high interest rate bond that carries higher inherent risks
16-20
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Financing with Owner’s EquityFinancing with Owner’s EquityFinancing with Owner’s EquityFinancing with Owner’s Equity
Owner’s Equity is the owner’s investment in an organization
All money and assets owners have brought into an organization
16-21
FHF
Common StockCommon StockCommon StockCommon Stock
The most important source of capital for most new companies
Gives stockholders voting and control rights
Par Value: The amount printed on the stock certificate
Market Value: The price at which the stock is trading
Capital in Excess of Par: The difference between the market value and the par value
16-22
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Financing with Owner’s EquityFinancing with Owner’s EquityFinancing with Owner’s EquityFinancing with Owner’s Equity
Preferred Stock
Gives the stockholder preference in distribution of profits, but not voting and control rights
Is a safer investment than common stock
Retained Earnings
Earnings after expenses and taxes
Are reinvested in the assets of the firm and belong to the owners in the form of equity
The only long-term funds a company generates internally
16-23
FHF
When a Company Has Profits Left When a Company Has Profits Left OverOver
When a Company Has Profits Left When a Company Has Profits Left OverOver
Retained Earnings
Reinvested in the assets of the firms
Dividend Yield
The dividend per share divided by the stock price
Not all companies pay dividends
16-24
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Financing Through Issuing StockFinancing Through Issuing StockFinancing Through Issuing StockFinancing Through Issuing Stock
Primary Market
New issue (first-time sale of stock) or initial public offering (IPO– when a company offers stock for sale for the first time)
Raise cash for issuing corporation
Secondary Market
Stock exchanges and OTC markets
Investors trade securities with each other
Does not raise cash for corporation
16-25
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Investment BankingInvestment BankingInvestment BankingInvestment Banking
Is the sale of stocks and bonds for corporations
Helps companies raise funds by matching people and institutions who have money to invest with corporations needing resources
A way for corporations to obtain financing
Many investment banks now offer other banking services• “One-stop shopping”
16-26
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Securities MarketsSecurities MarketsSecurities MarketsSecurities Markets
Provide the mechanism for buying and selling securities
The Stock Market Dramatic shifts in structure of exchanges
NY Stock Exchange and NASDAQ now are for-profit businesses
Most exchanges are or are becoming electronic– making organized exchanges less centralized and faster
Over-the-Counter Market (OTC) A network of dealers all over the country and world
No central location
Small stocks, illiquid bank stocks and penny stocks
16-27
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Measuring Market PerformanceMeasuring Market PerformanceMeasuring Market PerformanceMeasuring Market Performance
How are investments performing relative to the whole market?
Performance measures make comparison possible• Index: Compares current stock prices with a base price
• Average: The average of certain stock prices, usually calculated with complicated formulas
Financial bubbles can be hard to recognize, even with performance measures
Investors must stay well informed of business news
16-28
FHF
Market Performance of Market Performance of Indonesia Capital Market (IDX)Indonesia Capital Market (IDX)
Market Performance of Market Performance of Indonesia Capital Market (IDX)Indonesia Capital Market (IDX)
16-29
Source: www.idx.co.id
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