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.
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?
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