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Financial Management
Chapter
17
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.
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Learning Objectives
Identify sources of short-term financing for business operations.
Discuss long-term financing options.
Describe mergers, acquisitions, buyouts, and divestitures.
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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 Business Function of Finance
Implement the firm’s financial plan Determine the most appropriate source of funds Many CFOs are members of the board of directors
The Role of the Finance Manager
The process of maximizing the wealth of the firm’s shareholders by striking the optimal balance between risk and return.
Risk-Return Tradeoff
Financial Plan– the inflows and outflows and sources of funds.
Financial plans are built by answering the following questions:
What funds will the firm require during the planning period?
When will it need additional funds? Where will it obtain the necessary funds?
Financial plans are based on the forecasts of costs and expected sales activities for a given period.
Financial Planning
Sound financial management requires assets to be managed and acquired.
What a firm owns Use of funds
Managing Assets
Cash
Marketable Securities
Accounts Receivable
Inventory
Short-Term Assets
Long-lived assets Produce economic benefit for more than one year
Substantial investments
Capital Investment Analysis Expansion: new assets Replacement: upgrading assets
Capital Investment Analysis
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. Balance
Managing International Assets
Debt Capital– funds obtained through borrowing.
Equity Capital– investment in the firm in exchange for ownership.
Sources of Funds and Capital Structure
Goal: increasing the rate of return on funds invested by borrowing funds
Leverage and Capital Structure
Short-term funds Current liabilities
Less expensive Volatile interest rates
Long-term funds Long-term debt and equity
Used for long-term assets
Mixing Short and Long-Term Funds
Dividends are cash payments to shareholders. Highest dividend yielding stocks
Financial managers must make decisions regarding their dividend policy. Should we pay a dividend? When should it be paid?
Dividend Policy
Trade Credit
Short-term Loans
Commercial Paper
Short-Term Funding Options
Public Sale of Stocks and Bonds
Private Placements
Venture Capitalists
Private Equity Funds
Hedge Funds
Sources of Long-Term Financing
Financial managers evaluate mergers, acquisitions, and other opportunities. Leveraged buyouts Divestiture
Sell-off/Spin-off
Mergers, Acquisitions, Buyouts, and Divestitures