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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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BUSN
9
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Finance:Acquiring and Using Funds toMaximize Value
• How does maximizing financial value relate to social responsibility?
• How do financial managers use key ratios?
• How do financial managers use budgeted financial statements and cash budgets?
• Why is working capital management important?
• How do financial managers evaluate capital budgeting proposals?
• How do financial managers determine the firm’s capital structure?
2
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
What Motivates Financial Decisions?
3
What types of assets do we need to achieve goals?How do we get the funds we need?
• Evaluate financial performance
• Plan financial resources
• Manage working capital
• Evaluate investment opportunities
• Determine appropriate strategy
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Shareholder Value and Social Responsibility: Does Good Behavior Pay Off?
• Historically, the goal of the firm has been to:
Maximize the value of the firm to its owners
• Publicly traded firms aim to maximize their stock price
• The emphasis on shareholder value may seem to conflict with social responsibility
• But, a long-term perspective can balance value with responsibility
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Evaluating Current Conditions: Where Do We Stand?
5
• Financial ratios provide insight into financial strengths and weaknesses
• Use financial data from balance sheet and income statement
• Companies can compare their ratios with other businesses
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Key Financial Ratios
6
RATIO TYPE HOW IT IS COMPUTED
Current Liquidity: ability to pay short-term liabilities.
Current AssetsCurrent Liabilities
InventoryTurnover
Asset Management: how firm is using assets to generate revenue.
Cost of Good SoldAverage Inventory
Debt-to-equity Leverage: extent to which a firm relies on debt.
Total DebtTotal Owner’s Equity
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Key Financial Ratios
7
RATIO TYPE HOW IT IS COMPUTED
Debt-to-assets
Leverage: measures the extent to which a firm relies on debt
Total DebtTotal Assets
Return on equity
Profitability: compares the amount of profit compared to resources invested
Net Income – Preferred DivAvg Common Stock Equity
Return on assets
Profitability: compares the amount of profit compared to resources invested
Net IncomeAverage Total Assets
Earnings per share
Profitability: compares the amount of profit compared to resources invested
Net Income – Preferred DivAvg # of Shares Out
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Financial Planning: Providing a Road Map for the Future
8
• What assets must be obtained?
• How much additional financing is needed?
• How much can the firm generate Internally? Externally?
• When will external financing be required?
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Basic Planning Tools: Budgeted Financial Statements and Cash Budget
9
Budgeted Income Statement –forecasts the sales,
expenses and net income
Budgeted Balance Sheet –forecasts the types and amounts
of assets a firm will need to carry out plans.
Cash Budget – detailed projection of cash flows to
determine when cash shortages and surpluses will occur.
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cash Budget for Oze-Moore
10
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Managing Working Capital: Current Events
11
Net Working Capital:Difference between current assets and liabilities
Working capital must be managedAppropriate level of current assetsCurrent liabilities needed to finance activities
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Managing Current Assets: Cash
12
• Need cash to pay bills• Cash does not earn returns• Report cash equivalents as cash
Commercial PaperT-BillsMoney Market Mutual Funds
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Managing Current Assets: Cash
13
Commercial Paper
• Short-term unsecured promissory note (IOUs).
T-bills
• Short-term IOUs issued by the U.S. government.
Money Market Mutual Funds
• Pooled funds to purchase a portfolio of short-term, liquid securities
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Managing Current Assets: Accounts Receivable
14
Set Credit Terms
Establish Credit Standards
Design Appropriate Collection Policy
Accounts Receivable - Money which is owed to a company by a customer for products and services provided on credit.
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Managing Current Assets: Inventory
• Inventory: finished goods, work-in-process, parts and materials
• Customers are disappointed when they cannot find desired products on the shelves
• But, inventory ties up cash and it is a major investment
• Inventory management is a part of overall working capital management
• Inventory policies are included in operations strategy
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Short-term Financing: Arranging for Quick Cash
16
• Spontaneous FinancingTrade Credit
• Short-Term Bank LoansLine of CreditRevolving Credit
• Factoring• Commercial Paper
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Capital Budgeting: In It for the Long Haul
17
• Replace machines and equipment
• New machines and equipment
• A new factory, warehouse or office
• Introduce a new product line
Capital Budgeting
a systematic evaluation of a
firm’s major long-run capital
investment opportunities.
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Evaluating Capital Budgeting Proposals: Time Value of Money
18
Managers must evaluate costs and benefits of investment that occur over a period of many years.
Time Value of Money – a dollar received today is worth more than a dollar received in the future
Compounding – earning interest in the current period on interest from previous periods
Present Value – How much a given amount of cash received in a future period is worth today, given the time value of money
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using Net Present Value to Evaluate Capital Budgeting Proposals
19
Net present value is the present value of all cash flows associated with an investment, including the
initial (negative) cash flow of the investment.
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
How a Present Value of $1,000 Grows to a Future Value in 4 years
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Choosing the Sources of Long-term Capital: Loaners vs. Owners
• Capital Structure – the mix of equity and debt financing a firm uses for financing needs
Debt Financing – creditorsEquity Financing - owners
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pros and Cons of Debt Financing
Debt is a legally binding agreement to repay the money plus interest
Debt requires fixed payments
Many lenders require collateral which lenders can use to recover balance
Interest payments are tax-deductible
Avoids additional investment of stockholders
Some lenders impose covenants on the borrower
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pros and Cons of Equity Financing
• Equity financing:
Money invested from newly issued stock
Earning the company reinvested
• No required payments—dividend payments can be skipped
• Does not yield tax benefits
• Dilutes ownership
• Does not provide leverage
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Financing Leverage: Using Debt to Magnify Gains (And Losses)
24
Financial Leverage:• Heavy debt in capital structure• Potential high returns to owners• Increased risk
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BUSN
9 Finance: Acquiring and Using Funds to Maximize Value
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
How Financial Leverage Affects the Return of Equity
25
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BUSN
9
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Looking Back
• How does maximizing financial value relate to social responsibility?
• How do financial managers use key ratios?
• How do financial managers use budgeted financial statements and cash budgets?
• Why is working capital management important?
• How do financial managers evaluate capital budgeting proposals?
• How do financial managers determine the firm’s capital structure?
26