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Chapter    17

          Financial Management
Learning Objectives

1   Define finance and explain the role of       5   Identify sources of short-term
    financial managers.                              financing for business operations.

2   Describe the components of a financial       6   Discuss long-term financing options.
    plan and the financial planning process.
                                                 7   Describe mergers, acquisitions,
3   Outline how organizations manage their           buyouts, and divestitures.
    assets.

4   Compare the two major sources of funds
    for a business, and explain the concept of
    leverage.
The Business Function of Finance

s   Finance– planning, obtaining, and
    managing the company’s funds in order to
    accomplish its objectives
    s   Maximizing overall worth
    s   Meeting expenses
    s   Investing in assets
    s   Increasing profits to shareholders
The Role of the Finance Manager
s   Implement the firm’s financial plan
s   Determine the most appropriate source of funds
s   Many CFOs are members of the board of directors
Risk-Return Tradeoff

s   The process of maximizing the wealth of the
    firm’s shareholders by striking the optimal
    balance between risk and return.
Financial Planning
s   Financial Plan– the inflows and outflows and
    sources of funds.
s   Financial plans are built by answering the
    following questions:
      s   What funds will the firm require during the planning
          period?
      s   When will it need additional funds?
      s   Where will it obtain the necessary funds?
s   Financial plans are based on the forecasts of
    costs and expected sales activities for a given
    period.
Managing Assets


ound financial management requires assets
to be managed and acquired.
  s   What a firm owns
  s   Use of funds
Short-Term Assets

s   Cash

s   Marketable Securities

s   Accounts Receivable

s   Inventory
Capital Investment Analysis

s   Long-lived assets
s   Produce economic benefit for more than
    one year
s   Substantial investments

s   Capital Investment Analysis
    s   Expansion: new assets
    s   Replacement: upgrading assets
Managing International Assets
s   Today’s firms have facilities and assets
    worldwide.

s   Sales occur outside of the home country.

s   International assets require the management
    of activities to reduce the financial risk of
    exchange rates.
    s   Balance
Sources of Funds and Capital
    Structure

s   Debt Capital– funds obtained through
    borrowing.

s   Equity Capital– investment in the firm in
    exchange for ownership.
Leverage and Capital Structure

s   Goal: increasing
    the rate of return
    on funds invested
    by borrowing funds
Mixing Short and Long-Term Funds
s   Short-term funds
    s   Current liabilities
    s   Less expensive
    s   Volatile interest rates
s   Long-term funds
    s   Long-term debt and
        equity
    s   Used for long-term
        assets
Dividend Policy
s   Dividends are cash payments to
    shareholders.
    s   Highest dividend yielding stocks

s   Financial managers must make decisions
    regarding their dividend policy.
    s   Should we pay a dividend?
    s   When should it be paid?
Short-Term Funding Options

s   Trade Credit

s   Short-term Loans

s   Commercial Paper
Sources of Long-Term Financing
s   Public Sale of Stocks and Bonds

s   Private Placements

s   Venture Capitalists

s   Private Equity Funds

s   Hedge Funds
Mergers, Acquisitions, Buyouts, and
    Divestitures
s   Financial managers evaluate mergers,
    acquisitions, and other opportunities.
    s   Leveraged buyouts
    s   Divestiture
        s   Sell-off/Spin-off
Chapter 17: Financial Management

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Chapter 17: Financial Management

  • 1. Chapter 17 Financial Management
  • 2. Learning Objectives 1 Define finance and explain the role of 5 Identify sources of short-term financial managers. financing for business operations. 2 Describe the components of a financial 6 Discuss long-term financing options. plan and the financial planning process. 7 Describe mergers, acquisitions, 3 Outline how organizations manage their buyouts, and divestitures. assets. 4 Compare the two major sources of funds for a business, and explain the concept of leverage.
  • 3. The Business Function of Finance s Finance– planning, obtaining, and managing the company’s funds in order to accomplish its objectives s Maximizing overall worth s Meeting expenses s Investing in assets s Increasing profits to shareholders
  • 4. The Role of the Finance Manager s Implement the firm’s financial plan s Determine the most appropriate source of funds s Many CFOs are members of the board of directors
  • 5. Risk-Return Tradeoff s The process of maximizing the wealth of the firm’s shareholders by striking the optimal balance between risk and return.
  • 6. Financial Planning s Financial Plan– the inflows and outflows and sources of funds. s Financial plans are built by answering the following questions: s What funds will the firm require during the planning period? s When will it need additional funds? s Where will it obtain the necessary funds? s Financial plans are based on the forecasts of costs and expected sales activities for a given period.
  • 7. Managing Assets ound financial management requires assets to be managed and acquired. s What a firm owns s Use of funds
  • 8. Short-Term Assets s Cash s Marketable Securities s Accounts Receivable s Inventory
  • 9. Capital Investment Analysis s Long-lived assets s Produce economic benefit for more than one year s Substantial investments s Capital Investment Analysis s Expansion: new assets s Replacement: upgrading assets
  • 10. Managing International Assets s Today’s firms have facilities and assets worldwide. s Sales occur outside of the home country. s International assets require the management of activities to reduce the financial risk of exchange rates. s Balance
  • 11. Sources of Funds and Capital Structure s Debt Capital– funds obtained through borrowing. s Equity Capital– investment in the firm in exchange for ownership.
  • 12. Leverage and Capital Structure s Goal: increasing the rate of return on funds invested by borrowing funds
  • 13. Mixing Short and Long-Term Funds s Short-term funds s Current liabilities s Less expensive s Volatile interest rates s Long-term funds s Long-term debt and equity s Used for long-term assets
  • 14. Dividend Policy s Dividends are cash payments to shareholders. s Highest dividend yielding stocks s Financial managers must make decisions regarding their dividend policy. s Should we pay a dividend? s When should it be paid?
  • 15. Short-Term Funding Options s Trade Credit s Short-term Loans s Commercial Paper
  • 16. Sources of Long-Term Financing s Public Sale of Stocks and Bonds s Private Placements s Venture Capitalists s Private Equity Funds s Hedge Funds
  • 17. Mergers, Acquisitions, Buyouts, and Divestitures s Financial managers evaluate mergers, acquisitions, and other opportunities. s Leveraged buyouts s Divestiture s Sell-off/Spin-off