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Chptr 18.pdf
1.
Emblem of Socio-Economic
Empowerment of Women Chapter 18 Financial Management Business in Action 8e Bovée/Thill
2.
Emblem of Socio-Economic
Empowerment of Women Learning Objectives 1. Identify three fundamental concepts that affect financial decisions, and identify the primary responsibilities of a financial manager. Describe the budgeting process, three major budgeting challenges, and the four major types of budgets. Compare the advantages and disadvantages of 2. 3. debt and equity financing, and explain major considerations in choosing from alternatives. Copyright © 2017 Pearson Education, Inc. the two financing 18-2
3.
Emblem of Socio-Economic
Empowerment of Women Learning Objectives (cont.) 4. Identify the major financing. Identify the major financing. categories of short-term debt 5. categories of long-term debt 6. Describe the two options for equity financing, and explain how public offering. companies prepare an initial Copyright © 2017 Pearson Education, Inc. 18-3
4.
Emblem of Socio-Economic
Empowerment of Women The Role of Financial Management • Financial management Planning for a firm’s money needs and managing the allocation and spending funds of • Risk/return trade-off The balance of potential potential rewards risks against Copyright © 2017 Pearson Education, Inc. 18-4
5.
Emblem of Socio-Economic
Empowerment of Women Financial Management: Exhibit 18.1 Three Fundamental Concepts Copyright © 2017 Pearson Education, Inc. 18-5
6.
Emblem of Socio-Economic
Empowerment of Women Developing a Financial Plan • Financial plan A document that outlines the funds needed for a certain period of time, along with the sources and intended uses of those funds Strategic plan, company’s financial statements, external financial environment Copyright © 2017 Pearson Education, Inc. 18-6
7.
Emblem of Socio-Economic
Empowerment of Women Exhibit 18.2 Finding and Allocating Funds Copyright © 2017 Pearson Education, Inc. 18-7
8.
Emblem of Socio-Economic
Empowerment of Women Managing Accounts Receivable and Accounts Payable • • Accounts receivable Accounts payable Amounts that are Amounts that firm currently a owes currently firm owed to a to other parties Copyright © 2017 Pearson Education, Inc. 18-8
9.
Emblem of Socio-Economic
Empowerment of Women Monitoring the Exhibit 18.3 Working Capital Accounts Copyright © 2017 Pearson Education, Inc. 18-9
10.
Emblem of Socio-Economic
Empowerment of Women The Budgeting Process • Budget A planning and control tool that reflects expected revenues, operating expenses, cash receipts and outlays and • Financial control The process of analyzing and adjusting the basic financial plan to correct for deviations from forecasted events Copyright © 2017 Pearson Education, Inc. 18-10
11.
Emblem of Socio-Economic
Empowerment of Women Budgeting Challenges Exhibit 18.4 Copyright © 2017 Pearson Education, Inc. 18-11
12.
Emblem of Socio-Economic
Empowerment of Women The Budgeting Process (cont.) • Hedging Protecting against cost increases with contracts that allow a company to buy supplies in the future at designated prices 18-12 Copyright © 2017 Pearson Education, Inc.
13.
Emblem of Socio-Economic
Empowerment of Women The Budgeting Process (cont.) • Zero-based budgeting A budgeting approach in which each year starts from zero and must justify every item in the budget, rather than simply adjusting amounts the previous year’s budget 18-13 Copyright © 2017 Pearson Education, Inc.
14.
Emblem of Socio-Economic
Empowerment of Women Types of Budgets • Start-up budget A budget that identifies the money that a new company will need to spend to launch operations • Operating budget A budget that identifies all sources of revenue and coordinates the spending of those funds throughout the coming year Also known as the master budget 18-14 Copyright © 2017 Pearson Education, Inc.
15.
Emblem of Socio-Economic
Empowerment of Women Types of Budgets (cont.) • Capital budget A budget that outlines expenditures for estate, new facilities, major equipment, other capital investments real and • Capital investments Money paid to acquire something permanent value in a business of 18-15 Copyright © 2017 Pearson Education, Inc.
16.
Emblem of Socio-Economic
Empowerment of Women Types of Budgets (cont.) • Project budget A budget that identifies the costs needed to accomplish a particular project 18-16 Copyright © 2017 Pearson Education, Inc.
17.
Emblem of Socio-Economic
Empowerment of Women Financing Alternatives: Factors to Consider • Debt financing Arranging funding by borrowing money • Equity financing Arranging funding by selling ownership shares in the company, publicly or privately 18-17 Copyright © 2017 Pearson Education, Inc.
18.
Emblem of Socio-Economic
Empowerment of Women Debt Versus Equity Financing Exhibit 18.5 Characteristic Debt Financing Equity Financing Maturit y Specific: In most cases, specifiesa dateby which debt must be repaid. NIA: Equity funding does not need to be repaid. Claim on income Nondiscretionary, usually a recurring cost and usually fixed: Debt obligations must be repaid, regard• less ofwhetherthe companyis profitable; payments can be regilar (e.g., monthly), balloon (repaid all at once), or a combination. Discretionary cost: At management'sdiscretion and if company is profrtable, shareholdersmay receive dividends aftercreditorshave been paid; howeter, company is not required to pay dividends. Residual: Shareholdershave claims only after the nm satisfiesclaims ofleriders. Claim on assets Priority:lenders have priorclaims on assets. Influence over management Usually little: lenders usually have no influence <:Nel management unless debitvehicles come with concitions or management fails to makepayments on time. Varies:As owners of the company, shareholders can vote on some aspects of corporate operations, althougl in practiceonly large shareholdershave much infu!nce. Privateequity holders (such as venture capitalists)can have considerable Influence. Tax consequences Deductible: Debt payments reduce taxable income, lowering tax obligations. NIA: Does not createany opportunttiesfor compensation alternativessuch as stockoptions. Not deductible: Oividerid payments arenot tax deducbble. Employeebenefit potential Stock options: Issuing company shares creates the opportunityto use stockoptionsas a motivation or retention tool. 18-18 Copyright © 2017 Pearson Education, Inc.
19.
Emblem of Socio-Economic
Empowerment of Women Length of T erm • • Short-term financing Long-term financing Financing used to Financing used to cover long-term expenses such as assets (generally repaid over a period of more than one year) cover current expenses (generally repaid within a year) 18-19 Copyright © 2017 Pearson Education, Inc.
20.
Emblem of Socio-Economic
Empowerment of Women Interest Rates • Prime interest rate The lowest rate of interest that banks charge for short-term customers loans to their most creditworthy 18-20 Copyright © 2017 Pearson Education, Inc.
21.
Emblem of Socio-Economic
Empowerment of Women Opportunity Cost • Leverage The technique of increasing the rate of return on an investment by financing borrowed funds Capital structure it with • A firm’s mix of debt and equity financing 18-21 Copyright © 2017 Pearson Education, Inc.
22.
Emblem of Socio-Economic
Empowerment of Women Financial Leverage Exhibit 18.6 Copyright © 2017 Pearson Education, Inc. 18-22
23.
Emblem of Socio-Economic
Empowerment of Women Financing Alternatives: Short-T erm Debt • Trade credit Credit obtained by a purchaser directly supplier from a • Secured loans Loans backed up can claim in case of property with assets that of default, such the lender as a piece 18-23 Copyright © 2017 Pearson Education, Inc.
24.
Emblem of Socio-Economic
Empowerment of Women Financing Alternatives: Short-T erm Debt (cont.) • Unsecured loans Loans that require a good credit rating collateral but no • Compensating balance The portion of an unsecured loan that is kept on deposit at a lending institution to protect the lender and increase the lender’s return 18-24 Copyright © 2017 Pearson Education, Inc.
25.
Emblem of Socio-Economic
Empowerment of Women Financing Alternatives: Short-T erm Debt (cont.) • Line of credit An arrangement in which a financial institution makes money available for use at any time after the loan has been approved • Commercial paper Short-term promissory notes, or contractual agreements, to repay a borrowed amount by a specified time with a specified interest rate 18-25 Copyright © 2017 Pearson Education, Inc.
26.
Emblem of Socio-Economic
Empowerment of Women Sources of Long-Term Exhibit 18.7 Debt Financing 18-26 Copyright © 2017 Pearson Education, Inc.
27.
Emblem of Socio-Economic
Empowerment of Women Long-T erm Loans 18-27 Copyright © 2017 Pearson Education, Inc.
28.
Emblem of Socio-Economic
Empowerment of Women Leases • Lease An agreement to use for regular payment an asset in exchange Similar to renting 18-28 Copyright © 2017 Pearson Education, Inc.
29.
Emblem of Socio-Economic
Empowerment of Women Corporate Bonds • Bonds A method of funding in which the issuer borrows from an investor and provides a written promise to make regular interest payments and repay the borrowed amount in the future 18-29 Copyright © 2017 Pearson Education, Inc.
30.
Emblem of Socio-Economic
Empowerment of Women Corporate Bonds (cont.) • • Secured bonds Debentures Bonds backed by specific assets that will be given to bondholders if the Corporate bonds backed only by the reputation issuer of the borrowed amount is not repaid 18-30 Copyright © 2017 Pearson Education, Inc.
31.
Emblem of Socio-Economic
Empowerment of Women Corporate Bonds (cont.) • Convertible bonds Corporate bonds that can be exchanged at the the owner’s discretion into common stock of issuing company 18-31 Copyright © 2017 Pearson Education, Inc.
32.
Emblem of Socio-Economic
Empowerment of Women Private Equity • Private equity Ownership assets that aren’t publicly traded Includes venture capital 18-32 Copyright © 2017 Pearson Education, Inc.
33.
Emblem of Socio-Economic
Empowerment of Women Public Stock Offerings 18-33 Copyright © 2017 Pearson Education, Inc.
34.
Emblem of Socio-Economic
Empowerment of Women Public Stock Offerings (cont.) • Underwriter A specialized type of bank that buys the shares from the company preparing an IPO and sells them to investors • Prospectus An SEC-required document that discloses required information about the company, its finances, and its plans for using the money it hopes to raise 18-34 Copyright © 2017 Pearson Education, Inc.
35.
Emblem of Socio-Economic
Empowerment of Women Applying What You’ve Learned 1. Identify three fundamental concepts that affect financial decisions, and identify the primary responsibilities of a financial manager. Describe the budgeting process, three major budgeting challenges, and the four major types of budgets. Compare the advantages and disadvantages of debt and equity financing, and explain the two major considerations in choosing from financing alternatives. 18-35 2. 3. Copyright © 2017 Pearson Education, Inc.
36.
Emblem of Socio-Economic
Empowerment of Women Applying What You’ve Learned (cont.) 4. Identify the major categories of short-term debt financing. Identify the major categories of long-term debt financing. 5. 6. Describe the two options for equity financing, and explain how public offering. companies prepare an initial 18-36 Copyright © 2017 Pearson Education, Inc.
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