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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

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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