* * Chapter Eighteen  Financial Management Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw...
WHAT’S FINANCE? * * <ul><li>Finance --  The function in a business that within the firm. </li></ul><ul><li>Finance activit...
FINANCIAL MANAGEMENT * * <ul><li>Financial Management --  The job of managing a firm’s resources to meet its goals and obj...
FINANCIAL MANAGERS * * <ul><li>Financial Managers --  Examine financial data and  recommend strategies for improving finan...
WHAT FINANCIAL  MANAGERS DO * * LG1 The Role of Finance and Financial Managers  18-
WHAT WORRIES FINANCIAL MANAGERS * * LG1 The Role of Finance and Financial Managers  <ul><li>Consumer demand for their firm...
WHY DO FIRMS  FAIL FINANCIALLY? * * <ul><li>Undercapitalization </li></ul><ul><li>Poor control over cash flow </li></ul><u...
TOP FINANCIAL CONCERNS of COMPANY CFOs * * LG1 <ul><li>Ability to accurately forecast financial results </li></ul><ul><li>...
FINANCIAL PLANNING * * <ul><li>Financial planning involves analyzing short-term and long-term money flows to and from the ...
WHO’S WHO in FINANCE * * <ul><li>CFO --  Chief Financial Officer </li></ul><ul><li>CFP --  Certified Financial Planner </l...
FINANCIAL FORECASTING * * <ul><li>Short-Term Forecast --  Predicts revenues, costs and expenses for a period of one year o...
BUDGETING in the FIRM * * <ul><li>Budget --  Sets forth  management’s expectations for revenues and allocates the use of s...
TYPES of BUDGETS * * <ul><li>Capital Budget --  Highlights a firm’s spending plans for  major asset purchases  that often ...
FINANICAL PLANNING * * Working with the Budget Process  LG2 18-
ESTABLISHING  FINANCIAL CONTROL * * <ul><li>Financial Control --  A process in which a firm periodically  compares its act...
FACTORS USED in ASSESSING FINANCIAL CONTROL * * Establishing Financial Control LG2 <ul><li>Is the firm meeting its short-t...
KEY NEEDS for OPERATIONAL  FUNDS in a FIRM * * <ul><li>Managing day-by-day needs of the business </li></ul><ul><li>Control...
WAYS to RAISE  START-UP CAPITAL * * The Need for Operating Funds LG3 <ul><li>Seek out a microloan from a microlender </li>...
HOW SMALL BUSINESSES  CAN IMPROVE CASH FLOW * * The Need for Operating Funds LG3 <ul><li>Be more aggressive in collecting ...
USING ALTERNATIVE  SOURCES of FUNDS * * <ul><li>Debt Financing --  The  funds raised through various forms of borrowing  t...
SHORT and LONG-TERM  FINANCING * * <ul><li>Short-Term Financing --  Funds needed for a year or less. </li></ul><ul><li>Lon...
WHY FIRMS NEED FINANCING * * Alternative Sources of Funds LG3 18- Short-Term Funds Long-Term Funds Monthly expenses New-pr...
TYPES of  SHORT-TERM FINANCING * * <ul><li>Trade Credit --  The practice of  buying goods or services now and paying for t...
DIFFERENT FORMS of  SHORT-TERM LOANS * * <ul><li>Commercial banks offer short-term loans like: </li></ul><ul><ul><li>Secur...
COMMERCIAL PAPER * * <ul><li>Commercial Paper --  Unsecured promissory notes in amounts of $100,000+ that come due in 270 ...
SETTING LONG-TERM  FINANCING OBJECTIVES * * <ul><li>Three questions of financial managers in setting long-term financing o...
The FIVE C’s of CREDIT * * <ul><li>The  character  of the borrower. </li></ul><ul><li>The borrower’s  capacity  to repay t...
USING LONG-TERM  DEBT FINANCING * * <ul><li>Long-term financing loans generally come due within 3 -7 years but may extend ...
USING DEBT FINANCING  by ISSUING BONDS * * <ul><li>Indenture Terms --  The terms of agreement in a bond issue. </li></ul><...
WHEN GOVERNMENT  BAILOUTS PAY OFF * * LG5 Debt Financing  18- Company Year Amount Lockheed 1971 $250 Million (Paid Back) C...
DIFFERENCES BETWEEN DEBT  and EQUITY FINANCING * * Comparing Debt and Equity Financing  LG5 18- Types of Financing Conditi...
Review Only
TONYA ANTONUCCI Women’s Professional Soccer League (WPS)  * * <ul><li>Antonucci was a former player who has held sports-re...
SAIL SMOOTHLY or  ROCK the BOAT? Making Ethical Decisions * * <ul><li>As a new financial manager, you notice employees’ ha...
KEEPING the CASH FLOWING  in HARD TIMES Spotlight on Small Business * * <ul><li>Small businesses are in a struggle to stay...
MAKING SURE IT’S a DONE DEAL Legal Briefcase * <ul><li>Financing constraints and challenges, political instability, and ot...
SECURING EQUITY FINANCING * * <ul><li>A company can secure equity financing by: </li></ul><ul><ul><li>Selling shares of st...
USING LEVERAGE for  FUNDING NEEDS * * <ul><li>Leverage --  Raising funds through borrowing to increase the firm’s rate of ...
SHARING the WEALTH? Reaching Beyond Our Borders * * <ul><li>Sovereign wealth funds (SWFs) were established to hold funds o...
PROGRESS ASSESSMENT * * <ul><li>What are the two major forms of debt financing available to a firm? </li></ul><ul><li>How ...
PROGRESS ASSESSMENT * * <ul><li>Name three finance functions important to the firm’s overall operations and performance. <...
PROGRESS ASSESSMENT * * <ul><li>Why are accounts receivable a financial concern of the firm? </li></ul><ul><li>What’s the ...
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BUS110 Chapter 18 - Financial Management

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  • See Learning Goal 1: Explain the responsibilities of financial managers. The finance function is responsible for managing a scarce resource - capital.
  • See Learning Goal 1: Explain the responsibilities of financial managers.
  • See Learning Goal 1: Explain the responsibilities of financial managers. This slide provides insight into the role of financial management. One point that is critical to communicate to students, is that financial managers must understand accounting (and in fact many of them have backgrounds in accounting), but they are not accountants within the company. They are decision-makers and managers in the truest sense of the word. You might want to work through each of the functions of the financial manager and make certain students see exactly what’s involved in such a job. Students often perked up when they hear that quite often next to the company CEO, the chief financial officer (CFO) is the highest paid person within an organization. It’s also a good time with this slide to reinforce exactly how the relationship between accounting and finance works. If students can catch on early, this chapter is easy for them to navigate.
  • See Learning Goal 1: Explain the responsibilities of financial managers. This slide gives the student a broad overview of what responsibilities financial managers have within a corporation. The CFOs responsibilities are rooted in the functions of “control” and “treasury.” The control function has its basis in the budgeting process: The budget represents the quantification of the goals and missions of the company as manifested by the resources required to attain those goals. The budget becomes the scorecard by which the company as a whole is measured. The other area of responsibility for CFOs is the treasury function. Procurement of financial resources available to the company. Ongoing communication with financial sources, investors, and debt holders who must be kept apprised of the firm’s financial performance. Allocation of resources within the context of the company budget.
  • See Learning Goal 1: Explain the responsibilities of financial managers. What Worries Financial Managers This slide highlights the things that worry financial managers. Financial managers are required to wear many hats in the organization. While specific responsibilities of a CFO will vary between large and small companies, and public and closely held companies, the principles of control and treasury responsibilities transgress all boundaries. The number of issues that financial managers face is one reason why they are so well compensated.
  • See Learning Goal 1: Explain the responsibilities of financial managers.
  • See Learning Goal 1: Explain the responsibilities of financial managers. Top Financial Concerns of Company CFOs This slide highlights the top concerns of company CFOs. The Chief Financial Officers of companies must concern themselves with a multitude of issues. To start a class discussion on the issues faced by company CFOs use this link from CFO magazine (http://www.cfo.com/article.cfm/10596933/c_10712531). One interesting point is the different issues facing American, Asian and European CFOs.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan. Who’s Who in Finance This slide presents the positions a person in finance might hold. Help students understand that there are a variety of positions a person in finance might strive to obtain. Ask students: What are some of the functions/responsibilities of each of these positions? How are these positions alike? How might they be different?
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan. Budgeting is critical for the organization to control expenses and to understand revenue expectations. Think of a budget as a guidepost or a reference point for the organization’s managers.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan. The capital and cash budget roll up into an operating or master budget.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan. Financial controls also help reveal which specific accounts, departments and people are varying from the financial plan.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan. Factors Used in Assessing Financial Control This slide highlights the factors used in assessing financial control. Financial control is used in conjunction with the firm’s budget to ensure the organization is meeting its commitments and goals. Ask students: Why is it important for the CFO to maintain financial control?
  • See Learning Goal 3: Explain why firms need operating funds.
  • See Learning Goal 3: Explain why firms need operating funds. Ways to Raise Start-Up Capital This slide profiles some of the unique methods businesses can use to raise capital. Trade credit and factoring are two of the oldest methods of raising capital. To start a discussion with students ask the advantages and disadvantages of using each of these methods. Peer-to-peer lending involves individuals loaning money to other individuals or businesses thus bypassing traditional lending outlets. For more information on this new method use loan statistics from www.lendingclub.com
  • See Learning Goal 3: Explain why firms need operating funds. How Small Businesses Can Improve Cash Flow The slide list methods small businesses use to improve cash flow. Lack of cash flow can impact a business of any size and may lead to the business shutting its doors. It is critical that students understand cash is king for a business of any size.
  • See Learning Goal 3: Explain why firms need operating funds.
  • See Learning Goal 3: Explain why firms need operating funds.
  • See Learning Goal 3: Explain why firms need operating funds. It is important for management to understand that they need capital for a variety of short-term and long-term situations.
  • See Learning Goal 4: Identify and describe different sources of short-term financing. Trade credit is the most common form of financing. 2/10 net 30 means a firm can receive a 2% discount if the bill is paid within 10 days; if they choose not to take the discount the net amount is due in 30 days.
  • See Learning Goal 4: Identify and describe different sources of short-term financing.
  • See Learning Goal 4: Identify and describe different sources of short-term financing. The commercial paper market is an important source of funding for financially stable companies. During the financial crisis which started in 2008, this important market completely shut down, forcing financially stable companies to seek alternative sources of funding.
  • See Learning Goal 5: Identify and describe different sources of long-term financing.
  • See Learning Goal 5: Identify and describe different sources of long-term financing. The Five C’s of Credit This slide highlights the 5 C’s of credit that underwriters use to make decisions. It is essential that underwriters make good decisions when deciding whether or not to loan capital to potential borrowers. Go through each of the C’s and have students evaluate how important each one is. Are they equally important for the underwriter to consider? Why or why not? Ask students: Can you think of any other things the underwriters should consider before loaning money? (Note: these do not have to be words that start with C.)
  • See Learning Goal 5: Identify and describe different sources of long-term financing.
  • See Learning Goal 5: Identify and describe different sources of long-term financing. It is critical that students understand bonds are a form of debt issued by companies. The terms debt, bond, and loan are all four letter words and basically mean the same thing. Students should walk away from this discussion knowing that the government and private industry compete insofar as the sale of bonds to the investing public. The issue of investor security can easily be addressed here as well as the differences in interest rates paid on specific bonds depending on the issuer. Students should understand that U.S. Government bonds are considered the safest investment in the bond market. There is a high probability that students will be familiar with U.S. Government Savings Bonds, and may in fact have received such a bond as a gift. They clearly need to understand the difference between such bonds and issues involving investments in corporate bonds.
  • See Learning Goal 5: Identify and describe different sources of long-term financing. When Government Bailouts Pay Off This slides gives an historical perspective to government support for various troubled companies dating back to 1971. The bailout of AIG and GM are were nothing new. Students will be surprised to find out how the federal government has come to the rescue numerous times over the past forty years. To start a discussion ask students the following: What are the advantages and disadvantages of government involvement in business? (Benefits of government involvement include the saving of jobs and the protection of an industry, but disadvantages include bailouts can be expensive and the may stifle creativity and competitive drive.)
  • See Learning Goal 5: Identify and describe different sources of long-term financing. Financial managers must evaluate the benefits of issuing debt or equity and then weigh those benefits with the drawbacks.
  • See Learning Goal 2: Outline the financial planning process and explain the three key budgets in the financial plan.
  • See Learning Goal 3: Explain why firms need operating funds. The Small Business and Entrepreneurship Council reports 60 to 80% of new jobs come from small business.
  • See Learning Goal 4: Identify and describe different sources of short-term financing. Today, international factoring accounts for $1 trillion in global trade.
  • See Learning Goal 5: Identify and describe different sources of long-term financing.
  • See Learning Goal 5: Identify and describe different sources of long-term financing.
  • See Learning Goal 5: Identify and describe different sources of long-term financing.
  • What are the two major forms of debt financing available to a firm? A company could issue and sell bonds or they could borrow from financial institutions and individuals. How does debt financing differ from equity financing? The primary difference is that debt must be repaid at maturity while there is no obligation to repay equity financing. Interest must be paid on debt while the company is under no obligation to issue dividends on equity financing. The interest paid is tax deductible while dividends are not. Finally, debt holders do not have the right to vote on company matters while equity holders do have voting rights. What are the major forms of equity financing available to a firm? A business can obtain equity financing from the sale of company stock, from retained earnings, or from venture capital firms. What is leverage, and why do firms choose to use it? Leverage is borrowing funds to invest in expansion, major asset purchases, or research and development. Firms use leverage in an effort to increase the firm’s profit.
  • Name three finance functions important to the firm’s overall operations and performance. Financial planning, budgeting, and the establishment of financial control. What three primary financial problems cause firms to fail? Undercapitalization, poor control of cash flow, and inadequate expense control. How do short-term and long-term financial forecasts differ? Short-term forecast attempts to project revenue, costs, and expenses for a period of one year or less, while the long-term forecast is for a period of greater than one year. What’s the purpose of preparing budgets? Identify the different types. A budget sets forth management’s expectations for revenues and becomes the organization’s primary guide for the financial operations as well as expected financial needs. The three types of budgets are: capital, cash, and operating.
  • Why are accounts receivable a financial concern of the firm? Providing credit to customers is often necessary to keep current customers happy and to attract new customers. The problem with selling on credit is that as much as 25 percent of the firm’s assets could be tied up in accounts receivable. This forces the business to use it own funds to pay for goods or services sold to customers who bought on credit. What’s the primary reason an organization spends a good deal of its available funds on inventory and capital expenditures? To attract customers a firm must purchase inventory as well as invest in tangible long-term assets such as land, buildings, and equipment, or intangible assets such as patents, trademarks, and copyrights. What’s the difference between debt and equity financing? The primary difference is that debt must be repaid at maturity while there is no obligation to repay equity financing. Interest must be paid on debt while the company is under no obligation to issue dividends on equity financing. The interest paid is tax deductible while dividends are not. Finally, debt holders do not have the right to vote on company matters as equity holders do.
  • BUS110 Chapter 18 - Financial Management

    1. 1. * * Chapter Eighteen Financial Management Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
    2. 2. WHAT’S FINANCE? * * <ul><li>Finance -- The function in a business that within the firm. </li></ul><ul><li>Finance activities include: </li></ul><ul><ul><li>Preparing budgets </li></ul></ul><ul><ul><li>Creating cash flow analyses </li></ul></ul><ul><ul><li>Planning for expenditures </li></ul></ul>The Role of Finance and Financial Managers LG1 18-
    3. 3. FINANCIAL MANAGEMENT * * <ul><li>Financial Management -- The job of managing a firm’s resources to meet its goals and objectives. </li></ul>The Role of Finance and Financial Managers LG1 18-
    4. 4. FINANCIAL MANAGERS * * <ul><li>Financial Managers -- Examine financial data and recommend strategies for improving financial performance . Financial managers are responsible for: </li></ul><ul><ul><li>Paying company bills </li></ul></ul><ul><ul><li>Collecting payments </li></ul></ul><ul><ul><li>Staying abreast of market changes </li></ul></ul><ul><ul><li>Assuring accounting accuracy </li></ul></ul>The Role of Finance and Financial Managers LG1 18-
    5. 5. WHAT FINANCIAL MANAGERS DO * * LG1 The Role of Finance and Financial Managers 18-
    6. 6. WHAT WORRIES FINANCIAL MANAGERS * * LG1 The Role of Finance and Financial Managers <ul><li>Consumer demand for their firm’s products </li></ul><ul><li>Credit markets and interest rates </li></ul><ul><li>Financial regulations from the government </li></ul><ul><li>Volatility of the dollar </li></ul><ul><li>Foreign competition </li></ul><ul><li>Environmental regulations </li></ul>Source: CFO Magazine, www.cfo.com . 18-
    7. 7. WHY DO FIRMS FAIL FINANCIALLY? * * <ul><li>Undercapitalization </li></ul><ul><li>Poor control over cash flow </li></ul><ul><li>Inadequate expense control </li></ul>The Value of Understanding Finance LG1 18-
    8. 8. TOP FINANCIAL CONCERNS of COMPANY CFOs * * LG1 <ul><li>Ability to accurately forecast financial results </li></ul><ul><li>Maintaining productivity during an economic downturn </li></ul><ul><li>Balance sheet weakness </li></ul><ul><li>Rising cost of healthcare </li></ul><ul><li>Attracting and retaining top quality employees </li></ul>Source: CFO Magazine, www.cfo.com . The Value of Understanding Finance 18-
    9. 9. FINANCIAL PLANNING * * <ul><li>Financial planning involves analyzing short-term and long-term money flows to and from the company. </li></ul><ul><li>Three key steps of financial planning: </li></ul><ul><ul><li>Forecasting the firm’s short-term and long-term financial needs. </li></ul></ul><ul><ul><li>Developing budgets to meet those needs. </li></ul></ul><ul><ul><li>Establishing financial controls to see if the company is achieving its goals. </li></ul></ul>Financial Planning LG2 18-
    10. 10. WHO’S WHO in FINANCE * * <ul><li>CFO -- Chief Financial Officer </li></ul><ul><li>CFP -- Certified Financial Planner </li></ul><ul><li>CFA -- Chartered Financial Analyst </li></ul><ul><li>Comptroller -- Chief Accounting Officer </li></ul>Financial Planning LG2 18-
    11. 11. FINANCIAL FORECASTING * * <ul><li>Short-Term Forecast -- Predicts revenues, costs and expenses for a period of one year or less. </li></ul><ul><li>Cash-Flow Forecast -- Predicts the cash inflows and outflows in future periods, usually months or quarters. </li></ul><ul><li>Long-Term Forecast -- Predicts revenues, costs, and expenses for a period longer than one year and sometimes as long as five or ten years. </li></ul>Forecasting Financial Needs LG2 18-
    12. 12. BUDGETING in the FIRM * * <ul><li>Budget -- Sets forth management’s expectations for revenues and allocates the use of specific resources throughout the firm. </li></ul><ul><li>Budgets depend heavily on the balance sheet, income statement, statement of cash flows and short-term and long-term financial forecasts. </li></ul><ul><li>The budget is the guide for financial operations and expected financial needs. </li></ul>Working with the Budget Process LG2 18-
    13. 13. TYPES of BUDGETS * * <ul><li>Capital Budget -- Highlights a firm’s spending plans for major asset purchases that often require large sums of money . </li></ul><ul><li>Cash Budget -- Estimates cash inflows and outflo ws during a particular period like a month or quarter. </li></ul><ul><li>Operating (Master) Budget -- Ties together all the firm’s other budgets and summarizes its proposed financial activities. </li></ul>Working with the Budget Process LG2 18-
    14. 14. FINANICAL PLANNING * * Working with the Budget Process LG2 18-
    15. 15. ESTABLISHING FINANCIAL CONTROL * * <ul><li>Financial Control -- A process in which a firm periodically compares its actual revenues, costs and expenses with its budget . </li></ul>Establishing Financial Control LG2 18-
    16. 16. FACTORS USED in ASSESSING FINANCIAL CONTROL * * Establishing Financial Control LG2 <ul><li>Is the firm meeting its short-term financial commitments? </li></ul><ul><li>Is the firm producing adequate operating profits on its assets? </li></ul><ul><li>How is the firm financing its assets? </li></ul><ul><li>Are the firms owners receiving an acceptable return on their investment? </li></ul>18-
    17. 17. KEY NEEDS for OPERATIONAL FUNDS in a FIRM * * <ul><li>Managing day-by-day needs of the business </li></ul><ul><li>Controlling credit operations </li></ul><ul><li>Acquiring needed inventory </li></ul><ul><li>Making capital expenditures </li></ul>The Need for Operating Funds LG3 18-
    18. 18. WAYS to RAISE START-UP CAPITAL * * The Need for Operating Funds LG3 <ul><li>Seek out a microloan from a microlender </li></ul><ul><li>Use asset-based lending or factoring </li></ul>Source: Entrepreneur Magazine, March 2009. <ul><li>Turn to the web and seek out peer-to-peer lending </li></ul><ul><li>Research local banks </li></ul><ul><li>Sweet-talk vendors you want to do business with </li></ul>18-
    19. 19. HOW SMALL BUSINESSES CAN IMPROVE CASH FLOW * * The Need for Operating Funds LG3 <ul><li>Be more aggressive in collecting accounts receivable. </li></ul><ul><li>Offer customers discounts by paying early. </li></ul><ul><li>Take advantage of special payment terms from vendors. </li></ul><ul><li>Raise prices. </li></ul><ul><li>Use credit cards discriminately. </li></ul>Source: American Express Small Business Monitor. 18-
    20. 20. USING ALTERNATIVE SOURCES of FUNDS * * <ul><li>Debt Financing -- The funds raised through various forms of borrowing that must be repaid. </li></ul><ul><li>Equity Financing -- The funds raised from within the firm from operations or through the sale of ownership in the firm (such as stock). </li></ul>Alternative Sources of Funds LG3 18-
    21. 21. SHORT and LONG-TERM FINANCING * * <ul><li>Short-Term Financing -- Funds needed for a year or less. </li></ul><ul><li>Long-Term Financing -- Funds needed for more than a year. </li></ul>Alternative Sources of Funds LG3 18-
    22. 22. WHY FIRMS NEED FINANCING * * Alternative Sources of Funds LG3 18- Short-Term Funds Long-Term Funds Monthly expenses New-product development Unanticipated emergencies Replacement of capital equipment Cash flow problems Mergers or acquisitions Expansion of current inventory Expansion into new markets Temporary promotional programs New facilities
    23. 23. TYPES of SHORT-TERM FINANCING * * <ul><li>Trade Credit -- The practice of buying goods or services now and paying for them later . </li></ul><ul><li>Businesses often get terms 2/10 net 30 when receiving trade credit. </li></ul><ul><li>Promissory Note -- A written contract agreeing to pay a supplier a specific sum of money at a definite time. </li></ul>Obtaining Short-Term Financing LG4 18-
    24. 24. DIFFERENT FORMS of SHORT-TERM LOANS * * <ul><li>Commercial banks offer short-term loans like: </li></ul><ul><ul><li>Secured Loans -- Backed by collateral. </li></ul></ul><ul><ul><li>Unsecured Loans -- Don’t require collateral from the borrower. </li></ul></ul><ul><ul><li>Line of Credit -- A given amount of money the bank will provide so long as the funds are available. </li></ul></ul><ul><ul><li>Revolving Credit Agreement -- A line of credit that’s guaranteed but comes with a fee. </li></ul></ul>Different Forms of Short-Term Loans LG4 18-
    25. 25. COMMERCIAL PAPER * * <ul><li>Commercial Paper -- Unsecured promissory notes in amounts of $100,000+ that come due in 270 days or less. </li></ul><ul><li>Since commercial paper is unsecured, only financially stable firms are able to sell it. </li></ul>Commercial Paper LG4 18-
    26. 26. SETTING LONG-TERM FINANCING OBJECTIVES * * <ul><li>Three questions of financial managers in setting long-term financing objectives: </li></ul><ul><ul><li>What are the organization’s long-term goals and objectives? </li></ul></ul><ul><ul><li>What funds do we need to achieve the firm’s long-term goals and objectives? </li></ul></ul><ul><ul><li>What sources of long-term funding (capital) are available, and which will best fit our needs? </li></ul></ul>Obtaining Long-Term Financing LG5 18-
    27. 27. The FIVE C’s of CREDIT * * <ul><li>The character of the borrower. </li></ul><ul><li>The borrower’s capacity to repay the loan. </li></ul><ul><li>The capital being invested in the business by the borrower. </li></ul><ul><li>The conditions of the economy and the firm’s industry. </li></ul><ul><li>The collateral the borrower has available to secure the loan. </li></ul>LG5 Obtaining Long-Term Financing 18-
    28. 28. USING LONG-TERM DEBT FINANCING * * <ul><li>Long-term financing loans generally come due within 3 -7 years but may extend to 15 or 20 years. </li></ul><ul><li>Term-Loan Agreement -- A promissory note that requires the borrower to repay the loan with interest in specified monthly or annual installments. </li></ul><ul><li>A major advantage of debt financing is the interest the firm pays is tax deductible. </li></ul>Debt Financing LG5 18-
    29. 29. USING DEBT FINANCING by ISSUING BONDS * * <ul><li>Indenture Terms -- The terms of agreement in a bond issue. </li></ul><ul><li>Secured Bond -- A bond issued with some form of collateral (i.e. real estate). </li></ul><ul><li>Unsecured (Debenture) Bond -- A bond backed only by the reputation of the issuing company. </li></ul>Debt Financing by Issuing Bonds LG5 18-
    30. 30. WHEN GOVERNMENT BAILOUTS PAY OFF * * LG5 Debt Financing 18- Company Year Amount Lockheed 1971 $250 Million (Paid Back) City of New York 1973 $6.9 Billion (Paid Back) Chrysler 1980 $1.5 Billion (Paid Back) Saving & Loan Industry 1984 $160 Billion ( Not Paid Back) Airline Industry 2001 $15 Billion ( Not Paid Back)
    31. 31. DIFFERENCES BETWEEN DEBT and EQUITY FINANCING * * Comparing Debt and Equity Financing LG5 18- Types of Financing Conditions Debt Equity Management influence None. Unless special conditions have been agreed on. Common stock holders have voting rights. Repayment Debt has a maturity date. Stock has no maturity date. Yearly obligations Payment of interest. The firm isn’t legally liable to pay dividends. Tax benefits Interest is tax deductible. Dividends are not tax deductible.
    32. 32. Review Only
    33. 33. TONYA ANTONUCCI Women’s Professional Soccer League (WPS) * * <ul><li>Antonucci was a former player who has held sports-related jobs since earning her MBA. </li></ul>Profile <ul><li>She needed to see that WPS didn’t make the same financial mistakes the previous league did. </li></ul><ul><li>WPS plays in smaller stadiums, has partnerships with the men’s league and has a salary cap. </li></ul>18-
    34. 34. SAIL SMOOTHLY or ROCK the BOAT? Making Ethical Decisions * * <ul><li>As a new financial manager, you notice employees’ have “who cares” attitudes about financial controls. </li></ul><ul><li>You suggest the company do something about it. </li></ul><ul><li>The CEO says things have always been that way and it’s best not to rock the boat. What do you do? What could be the result of your decision? </li></ul>18-
    35. 35. KEEPING the CASH FLOWING in HARD TIMES Spotlight on Small Business * * <ul><li>Small businesses are in a struggle to stay afloat as financial institutions hold onto money and consumers are slow to buy. </li></ul><ul><li>James “Hoss” Boyd’s electrical business is doing well, but he’s having a cash flow problem. </li></ul><ul><li>Boyd and others are calling for help and the Small Business and Entrepreneurship Council are trying to find a solution. </li></ul>18-
    36. 36. MAKING SURE IT’S a DONE DEAL Legal Briefcase * <ul><li>Financing constraints and challenges, political instability, and other factors make global trade difficult. </li></ul><ul><li>Efforts such as international factoring make it a bit easier. </li></ul><ul><li>International factoring involves an exporter, the U.S. factor, a foreign factor and an importer. </li></ul><ul><li>Each fills its role to make the transaction safe. </li></ul>* 18-
    37. 37. SECURING EQUITY FINANCING * * <ul><li>A company can secure equity financing by: </li></ul><ul><ul><li>Selling shares of stock in the company. </li></ul></ul><ul><ul><li>Earning profits and using the retained earnings as reinvestments in the firm. </li></ul></ul><ul><ul><li>Attracting Venture Capital -- Money that is invested in new or emerging companies that some investors believe have great profit potential . </li></ul></ul>Equity Financing LG5 18-
    38. 38. USING LEVERAGE for FUNDING NEEDS * * <ul><li>Leverage -- Raising funds through borrowing to increase the firm’s rate of return. </li></ul><ul><li>Cost of Capital -- The rate of return a company must earn in order to meet the demands of its lenders and expectations of equity holders. </li></ul>LG5 Comparing Debt and Equity Financing 18-
    39. 39. SHARING the WEALTH? Reaching Beyond Our Borders * * <ul><li>Sovereign wealth funds (SWFs) were established to hold funds of a nation if its surplus is too large to reinvest. </li></ul><ul><li>Countries like the U.A.E. and Kuwait had large surpluses the led them to U.S. investments. </li></ul><ul><li>People question if the presence of foreign governments in U.S. business will impact U.S. policy. </li></ul>18-
    40. 40. PROGRESS ASSESSMENT * * <ul><li>What are the two major forms of debt financing available to a firm? </li></ul><ul><li>How does debt financing differ from equity financing? </li></ul><ul><li>What are the major forms of equity financing available to a firm? </li></ul><ul><li>What is leverage, and why do firms choose to use it? </li></ul>Progress Assessment 18-
    41. 41. PROGRESS ASSESSMENT * * <ul><li>Name three finance functions important to the firm’s overall operations and performance. </li></ul><ul><li>What three primary financial problems cause firms to fail? </li></ul><ul><li>How do short-term and long-term financial forecasts differ? </li></ul><ul><li>What’s the purpose of preparing budgets? Identify the different types. </li></ul>Progress Assessment 18-
    42. 42. PROGRESS ASSESSMENT * * <ul><li>Why are accounts receivable a financial concern of the firm? </li></ul><ul><li>What’s the primary reason an organization spends a good deal of its available funds on inventory and capital expenditures? </li></ul><ul><li>What’s the difference between debt and equity financing? </li></ul>Progress Assessment 18-

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