> > > > > > > >
Financing and Investing Through Securities Markets
Chapter 18
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.
Identify sources of short-term financing for business operations.
Discuss long-term financing options.
Describe mergers, acquisitions, buyouts, and divestitures.
Learning
Goals1
2
3
4
5
6
7
The Business
Function of
Finance
• 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 Role of the
Finance Manager
• Implement the firm’s financial plan.
• Determine the most appropriate source of funds.
• Many CFOs are members of the board of directors.
Risk-Return Trade-
off
The process of maximizing the wealth of the firm’s
shareholders by striking the optimal balance between risk
and return.
Financial
Planning
• Financial Plan – the inflows and outflows and sources of funds.
• Financial plans are built by answering the following questions:
1) What funds will the firm require during the planning period?
2) When will it need additional funds?
3) Where will it obtain the necessary funds?
• Financial plans are based on the forecasts of costs and expected sales activities for a given period.
Managing Assets
Sound financial management requires assets to be managed and acquired
What a firm owns Use of funds
Sound financial management requires assets to be managed and acquired
What a firm owns Use of funds
Short-term
Assets
Cash
Marketable Securities
Accounts Receivable
Inventory
Capital
Investment
Analysis• Long-lived assets
• Produce economic benefit for more than one year
• Substantial investments
• Capital Investment Analysis– Expansion: new assets – Replacement: upgrading assets
Managing
International
Assets
• 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.
Sources of Funds
and Capital
Structure
Debt Capital –funds obtained through borrowing.
Equity Capital – investment in the firm in exchange
for ownership.
Leverage and
Capital Structure
Decisions
Goal: increasing the rate of return on funds invested by borrowing funds.
Mixing Short-Term
and Long-Term
Funds
• Short-term funds– Current liabilities– Less expensive– Volatile interest rates
• Long-term funds– Long-term debt and equity– Used for long-term assets
Dividend Policy
• Dividends are cash payments to shareholders.
• Financial Managers must make decisions regarding their dividend policy.
– Should we pay a dividend?
– When should it be paid?
Short-term
Funding Options
Trade Credit
Short-term Loans
Commercial Paper
Trade Credit
Short-term Loans
Commercial Paper
Sources of Long-
Term Financing
Public Sale of Stocks and Bonds
Private Placements
Venture Capitalists
Private Equity Funds
Hedge Funds
Mergers, Acquisitions,
Buyouts and
Divestitures
Financial managers evaluate mergers, acquisitions, and other opportunities.
– Leveraged buyouts
– Divestiture
• Sell-off/Spin-off