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THE FUTURE OF BUSINESS: The Essentials
Gitman & McDaniel2nd Edition
THE FUTURE OF BUSINESS: The Essentials
Gitman & McDaniel2nd Edition
Chapter
Understanding Financial Management and Securities Markets
Understanding Financial Management and Securities Markets
Prepared byDeborah Baker
Texas Christian University
Prepared byDeborah Baker
Texas Christian University
16
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 2Ch
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1 How do finance and the financial manager affect the firm’s overall strategy?
2 What types of short-term and long-term expenditures does a firm make?
3 What are the main sources and costs of unsecured and secured short-term financing?
4 What are the key differences between debt and equity, and what are the major types and features of long-term debt?
Learning Goals
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5 When and how do firms issue equity, and what are the costs?
6 How do securities markets help firms raise funding, and what securities trade in the capital markets?
7 What are the major U.S. securities exchanges and how are they regulated?
8 What are the current trends in financial management and the securities markets?
Learning Goals (continued)
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1
Owners’ investmentOwners’ investmentBorrowed FundsBorrowed Funds
Cash SalesCash Sales
Purchase ofFixed Assets
Purchase ofFixed Assets
Payment ofDividends
Payment ofDividends
Purchase ofInventory
Purchase ofInventory
Payment of Expenses
Payment of Expenses
Collection ofAccounts Receivable
Collection ofAccounts Receivable
Sale ofFixed Assets
Sale ofFixed Assets
How Cash Flows Through a Business
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 5Ch
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1
Key Key ActivitiesActivities
Key Key ActivitiesActivities
Financial PlanningFinancial Planning
Investment(spending money)
Investment(spending money)
Financing(raising money)
Financing(raising money)
The Financial Manager’s Responsibilities
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 6Ch
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1
Social IssuesSocial Issues
Market ConditionsMarket Conditions
General Economic ConditionsGeneral Economic Conditions
Interest RatesInterest Rates
Changing Patterns of Market DemandChanging Patterns of Market Demand
Risk and Return Factors
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How Organizations Use Funds2
Short-TermExpenses
Short-TermExpenses Operating expensesOperating expenses
Long-TermExpendituresLong-Term
ExpendituresInvestment in long-
lived assetsInvestment in long-
lived assets
Support currentselling and
production activities
Support currentselling and
production activities
Expansion, assetreplacement, new
product development
Expansion, assetreplacement, new
product development
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 8Ch
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Short-Term Expenses2
ManageManageCurrent Current AssetsAssets
ManageManageCurrent Current AssetsAssets
Cash ManagementCash Management
Accounts Receivable Accounts Receivable
InventoryInventory
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Cash Management2
Surplus CashSurplus Cash
Marketable Securities
Marketable Securities
Certificatesof Deposit
Certificatesof Deposit
TreasuryBills
TreasuryBills
CommercialPaper
CommercialPaper
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Cash Management2
Key Key StrategiesStrategies
Key Key StrategiesStrategies
Collect money owed to the firmCollect money owed to the firm
Pay money owed to others Pay money owed to others
Minimize funds tied up in inventory
Minimize funds tied up in inventory
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Long-Term Expenditures2
CapitalCapitalExpendituresExpenditures
CapitalCapitalExpendituresExpenditures MachineryMachinery
BuildingsBuildings
LandLand
EquipmentEquipment
Information SystemsInformation Systems
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3
RaisingRaisingFundsFunds
RaisingRaisingFundsFunds
Borrow Money(Debt)
Borrow Money(Debt)
Sell Ownership Shares(Equity)
Sell Ownership Shares(Equity)
Retain Earnings(Profits)
Retain Earnings(Profits)
Obtaining Short-Term Financing
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3
Bank LoansBank Loans •Lines of credit•Revolving credit agreement
•Lines of credit•Revolving credit agreement
TradeCreditTradeCredit Seller extends credit to the buyer Seller extends credit to the buyer
CommercialPaper
CommercialPaper
Unsecured short-term debt issuedby a financially strong corporationUnsecured short-term debt issuedby a financially strong corporation
Unsecured Short-Term Loans
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3 Secured Short-Term Loans
SecuredLoans
SecuredLoans
Borrower pledges specific assets as collateral, such as
accounts receivable or inventory.
Borrower pledges specific assets as collateral, such as
accounts receivable or inventory.
FactoringFactoring Firm sells its accounts receivable to a
factor, such as a commercial bank or commercial finance company.
Firm sells its accounts receivable to a factor, such as a commercial bank or commercial finance company.
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Debt versus Equity Financing4
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Debt Financing4
BondsBonds Long-term debt obligations issuedby corporations and governments.Long-term debt obligations issuedby corporations and governments.
Term LoansTerm Loans A business loan with a maturity of more than one year.
A business loan with a maturity of more than one year.
Mortgage LoansMortgage Loans A long-term loan made againstreal estate as collateral.
A long-term loan made againstreal estate as collateral.
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Equity Financing5
Venture CapitalVenture Capital
Preferred Stock Preferred Stock
Dividends & Retained EarningsDividends & Retained Earnings
Selling Common StockSelling Common Stock
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Securities Markets6
SecuritiesSecurities
Debt(a loan to the issuer)
Debt(a loan to the issuer)
Equity(ownership in
issuing organization)
Equity(ownership in
issuing organization)
PrimaryMarket
PrimaryMarket
SecondaryMarket
SecondaryMarket
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Securities Markets6
Help companies raise long-term financing,
a process calledunderwriting
Help companies raise long-term financing,
a process calledunderwriting
InvestmentBankers
InvestmentBankers
A person (account executive)
licensed to buy and sell securities on
behalf of clients
A person (account executive)
licensed to buy and sell securities on
behalf of clients
StockbrokerStockbroker
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6Moody’s and Standard & Poor’s Bond
Ratings
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Securities Exchanges7
Types ofTypes ofSecuritiesSecuritiesMarketsMarkets
Types ofTypes ofSecuritiesSecuritiesMarketsMarkets
Over-the-Counter MarketOver-the-Counter MarketOver-the-Counter MarketOver-the-Counter Market
Organized Stock ExchangesOrganized Stock ExchangesOrganized Stock ExchangesOrganized Stock Exchanges
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U.S. Stock Exchanges7
American Stock ExchangeAmerican Stock Exchange(AMEX)(AMEX)
American Stock ExchangeAmerican Stock Exchange(AMEX)(AMEX)
New York Stock ExchangesNew York Stock Exchanges(NYSE)(NYSE)
New York Stock ExchangesNew York Stock Exchanges(NYSE)(NYSE)
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Global Trading and Foreign Exchanges7
NYSENASDAQ
NYSENASDAQ
LondonLondon
TorontoToronto
MontrealMontreal
ParisParis SydneySydney
ZurichZurich
Buenos AiresBuenos Aires
TokyoTokyo
FrankfurtFrankfurt Hong KongHong Kong
TaiwanTaiwan
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Regulation of Securities Markets7
Securities andExchange
Commission
Securities andExchange
Commission
The main federal government agency responsible for
regulating the U.S. securities industry.
The main federal government agency responsible for
regulating the U.S. securities industry.
Insider TradingInsider Trading The use of information that is
not available to the general public to make profits on securities transactions.
The use of information that is not available to the general public to make profits on securities transactions.
Circuit BreakersCircuit Breakers
Measures that, under certain conditions, stop trading in thesecurities markets to limit theamount the market can drop in
one day.
Measures that, under certain conditions, stop trading in thesecurities markets to limit theamount the market can drop in
one day.