Learning Objectives1 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.
The Business Function of Finances 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
The Role of the Finance Managers Implement the firm’s financial plans Determine the most appropriate source of fundss Many CFOs are members of the board of directors
Risk-Return Tradeoffs The process of maximizing the wealth of the firm’s shareholders by striking the optimal balance between risk and return.
Financial Plannings 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.
Managing Assetsound financial management requires assetsto be managed and acquired. s What a firm owns s Use of funds
Capital Investment Analysiss Long-lived assetss Produce economic benefit for more than one years Substantial investmentss Capital Investment Analysis s Expansion: new assets s Replacement: upgrading assets
Managing International Assetss 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
Sources of Funds and Capital Structures Debt Capital– funds obtained through borrowing.s Equity Capital– investment in the firm in exchange for ownership.
Leverage and Capital Structures Goal: increasing the rate of return on funds invested by borrowing funds
Mixing Short and Long-Term Fundss Short-term funds s Current liabilities s Less expensive s Volatile interest ratess Long-term funds s Long-term debt and equity s Used for long-term assets
Dividend Policys Dividends are cash payments to shareholders. s Highest dividend yielding stockss Financial managers must make decisions regarding their dividend policy. s Should we pay a dividend? s When should it be paid?
Short-Term Funding Optionss Trade Credits Short-term Loanss Commercial Paper
Sources of Long-Term Financings Public Sale of Stocks and Bondss Private Placementss Venture Capitalistss Private Equity Fundss Hedge Funds
Mergers, Acquisitions, Buyouts, and Divestituress Financial managers evaluate mergers, acquisitions, and other opportunities. s Leveraged buyouts s Divestiture s Sell-off/Spin-off