Financial Management http://www.wileybusinessupdates.com Chapter 17 1 Define the role of the financial manager. Describe financial planning. Outline how organizations manage their assets. Discuss the sources of funds and capital structure. 1 Learning Objectives Identify short-term funding options. Discuss sources of long-term financing. Describe mergers, acquisitions, buyouts, and divestitures. 2 3 4 5 6 7 2 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 Business Function of Finance 3 Implement the firm’s financial plan Determine the most appropriate source of funds Many CFOs are members of the board of directors The Role of the Finance Manager 4 The process of maximizing the wealth of the firm’s shareholders by striking the optimal balance between risk and return. Risk-Return Tradeoff 5 Financial Plan– the inflows and outflows and sources of funds. Financial plans are built by answering the following questions: What funds will the firm require during the planning period? When will it need additional funds? Where will it obtain the necessary funds? Financial plans are based on the forecasts of costs and expected sales activities for a given period. Financial Planning 6 Sound financial management requires assets to be managed and acquired. What a firm owns Use of funds Managing Assets 7 Cash Marketable Securities Accounts Receivable Inventory Short-Term Assets 8 Long-lived assets Produce economic benefit for more than one year Substantial investments Capital Investment Analysis Expansion: new assets Replacement: upgrading assets Capital Investment Analysis 9 Debt Capital– funds obtained through borrowing. Equity Capital– investment in the firm in exchange for ownership. Sources of Funds and Capital Structure 10 Goal: increasing the rate of return on funds invested by borrowing funds Leverage and Capital Structure 11 Short-term funds Current liabilities Less expensive Volatile interest rates Long-term funds Long-term debt and equity Used for long-term assets Mixing Short and Long-Term Funds 12 Dividends are cash payments to shareholders. Highest dividend yielding stocks Financial managers must make decisions regarding their dividend policy. Should we pay a dividend? When should it be paid? Dividend Policy 13 Trade Credit Short-term Loans Commercial Paper Short-Term Funding Options 14 Public Sale of Stocks and Bonds Private Placements Private Equity Funds Hedge Funds Sources of Long-Term Financing 15 Financial managers evaluate mergers, acquisitions, and other opportunities. Leveraged buyouts Divestiture Sell-off/Spin-off Mergers, Acquisitions, Buyouts, and Divestitures ...

1. Financial Management
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Chapter
17
1
Define the role of the financial manager.
Describe financial planning.
Outline how organizations manage their assets.
Discuss the sources of funds and capital structure.
1
Learning Objectives
Identify short-term funding options.
Discuss sources of long-term financing.
Describe mergers, acquisitions, buyouts, and divestitures.
2

2. 3
4
5
6
7
2
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 Business Function of Finance

3. 3
Implement the firm’s financial plan
Determine the most appropriate source of funds
Many CFOs are members of the board of directors
The Role of the Finance Manager
4
The process of maximizing the wealth of the firm’s shareholders
by striking the optimal balance between risk and return.
Risk-Return Tradeoff

4. 5
Financial Plan– the inflows and outflows and sources of funds.
Financial plans are built by answering the following questions:
What funds will the firm require during the planning period?
When will it need additional funds?
Where will it obtain the necessary funds?
Financial plans are based on the forecasts of costs and expected
sales activities for a given period.
Financial Planning
6
Sound financial management requires assets to be managed and
acquired.
What a firm owns
Use of funds

5. Managing Assets
7
Cash
Marketable Securities
Accounts Receivable
Inventory
Short-Term Assets
8
Long-lived assets

6. Produce economic benefit for more than one year
Substantial investments
Capital Investment Analysis
Expansion: new assets
Replacement: upgrading assets
Capital Investment Analysis
9
Debt Capital– funds obtained through borrowing.
Equity Capital– investment in the firm in exchange for
ownership.
Sources of Funds and Capital Structure
10

7. Goal: increasing the rate of return on funds invested by
borrowing funds
Leverage and Capital Structure
11
Short-term funds
Current liabilities
Less expensive
Volatile interest rates
Long-term funds
Long-term debt and equity
Used for long-term assets
Mixing Short and Long-Term Funds

8. 12
Dividends are cash payments to shareholders.
Highest dividend yielding stocks
Financial managers must make decisions regarding their
dividend policy.
Should we pay a dividend?
When should it be paid?
Dividend Policy
13
Trade Credit
Short-term Loans
Commercial Paper

9. Short-Term Funding Options
14
Public Sale of Stocks and Bonds
Private Placements
Private Equity Funds
Hedge Funds
Sources of Long-Term Financing
15
Financial managers evaluate mergers, acquisitions, and other
opportunities.
Leveraged buyouts
Divestiture

10. Sell-off/Spin-off
Mergers, Acquisitions, Buyouts, and Divestitures
16
The Financial System
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Chapter
16
1

11. Understand the financial system.
List the various types of securities.
Discuss financial markets.
Understand the stock markets.
1
Learning Objectives
Evaluate financial institutions.
Explain the role of the Federal Reserve System.
Describe the regulation of the financial system.
Describe the global perspective of the financial system.
2
3
4
5
6
7
8
2

12. The financial system is the process by which money flows from
savers to users.
The Financial System
3
Financial System
Savers
Users
Financial Institutions
Financial Markets
Savings is a function of many variables.
Funds can be transferred between users and savers directly or
indirectly.
Understanding the Financial System

13. 4
Securities
Financial instruments
Bonds, Stocks, Money Market Instruments
Obligations on the part of the issuer
Businesses and governments
Provide rate of return to purchasers
Types of Securities
5
Short-term debt securities
Issued by governments, financial institutions, and corporations
Investors are paid interest for the use of their funds
Generally low-risk
U.S. Treasury bills, commercial paper, and bank certificates of
deposit

14. Money Market Instruments
6
Government Bonds
Bonds sold by the U.S. Department of the Treasury
Municipal Bonds
Bonds issued by state or local governments
Revenue bonds are used toward a project that will produce
revenue, general obligation bonds are not
Corporate Bonds
A diverse group and often vary based on the collateral
Bonds
7

15. Types of Bonds
8
Price is determined by risk and interest rate.
Several firms rate bonds
Standard & Poor’s (S&P)
Moody’s
Fitch
Investment-grade
Speculative/Junk
Bond Ratings
9

16. Standard and Poor’s Bond Ratings
Common stock– basic form of corporate ownership
Vote on major company decisions
Cash dividends
Price appreciation
Preferred stock– stockholders who receive preference in the
payment of dividends
Stocks
11
Primary market– firms and governments issue securities and sell
them initially to the public
When a firm offers a stock for sale to the general public for the
first time

17. Secondary market– collection of financial markets in which
previously issued securities are traded among investors
Financial Markets
12
Stock market (exchange)– market in which shares are bought
and sold by investors, such as the New York Stock Exchange.
Understanding Stock Markets
13
The New York Stock Exchange– the Big Board is the most
famous and one of the oldest stock markets in the world. More
than 2,300 companies’ stocks are listed on the NYSE.
The NASDAQ Stock Market– the second largest stock market.
Over 3,6000 companies have their stocks listed on Nasdaq, but

18. many are smaller firms.
Foreign markets
Stock Exchanges
14
Investors use brokerage firms to trade and sell stock.
The brokerage firm executes the trade on behalf of the investor,
charging a fee for the order.
Market order
Limit order
Investor Participation in the Stock Market
15

19. Commercial Banks
Savings Banks and Credit Unions
Non-depository Institutions
Financial Institutions
16
Financial Institutions
17
An increasing amount of funds move through electronic funds

20. transfers (EFTs).
Millions of businesses and consumers now pay bills and receive
payments electronically.
Most employers directly deposit employee paychecks.
Social Security and other federal payments are made each year
electronically.
Many consumers do some or all of their banking online
Electronic Banking
18
Enacted by the Banking Act of 1933
Restored public confidence in the banking system
Before deposit insurance, runs were common as people rushed
to withdraw their money from the bank
Deposit insurance shifts the risk of bank failures from
individuals to the FDIC
Federal Deposit Insurance Corporation

21. 19
Offer a variety of consumer services
Not a major lender to small businesses
Credit unions are cooperative financial institutions owned by
depositors/members
By law, credit union members must share similar occupations,
employers, or memberships in certain organization, effectively
capping the size.
Savings Banks and Credit Unions
20
Insurance Companies
Pension Funds
Finance Companies
Mutual Funds

22. Nondepository Financial Institutions
21
The Federal Reserve
Created In 1913
Central bank of the United States
Regulates commercial banks
Performs banking-related activities for the U.S. Department of
Treasury
Provides services for banks
Sets monetary policy
The Role of the Federal Reserve
22
Controlling supply of money and credit
Measures of the money supply: M1 & M2
The Fed requires banks to maintain reserves

23. Set the discount rate
Open market operations
Monetary Policy
23
Commercial Bank Loans
24

24. Tools Used by the Federal Reserve to Regulate the Growth in
the Money Supply
25
Bank regulation
Government regulation of the financial markets (SEC)
Regulation of the Financial System
26
The financial system is more connected.
Financial institutions are more global.
Only 3 of the 20 largest banks in the world are U.S. institutions.
Most nations have a central bank.

25. The Financial System: A Global Perspective
27
Understanding Accounting and Financial Statements
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Chapter
15
1
Discuss the users of accounting information.
Describe accounting professionals.
Identify the foundation of the accounting system.
Outline the steps in the accounting cycle.

26. 1
Learning Objectives
Explain financial statements.
Discuss financial ratio analysis.
Describe the role of budgeting.
Outline international accounting practices.
2
3
4
5
6
7
8
2
Accounting is the process of measuring, interpreting, and
communicating financial information to enable people inside
and outside the firm to make informed decisions.

27. Accounting
3
Open book management- sharing sensitive financial information
with employees and teaching them how to understand and use
financial statements.
Viewing financial information may help them better understand
how their work contributes to the company’s success.
Outsiders use financial data to evaluate investment
opportunities.
Open Book Management
4
Financing activities provide necessary funds to start a business

28. and expand it after it begins operating.
Investing activities provide valuable assets required to run a
business.
Operating activities focus on selling goods and services, but
they also consider expenses as important elements of sound
financial management.
Business Activities Involving Accounting
5
Public Accountants
Provide accounting services (auditing, tax preparation,
consulting) to individuals or business firms for a fee
CPA
Management Accountants
Provide timely, relevant, accurate, and concise information that
executives can use to operate their firms
CMA
Government and Not-for-Profit Accountants

29. Accounting Professionals
6
Generally accepted accounting principles (GAAP) encompass
the conventions, rules, and procedures for determining
acceptable accounting practices at a particular time.
Financial Accounting Standards Board (FASB) is primarily
responsible for evaluating, setting, or modifying GAAP in the
U.S.
Sarbanes-Oxley Act (SOX) responded to cases of accounting
fraud.
Created the Public Accounting Oversight Board, which sets
audit standards and investigates and sanctions accounting firms
that certify the books of publicly traded firms.
Senior executives must personally certify that the financial
information reported by the company is correct.
Resulted in increase in demand for accountants.
The Foundation of The Accounting System

30. 7
Accounting cycle- set of activities involved in converting
information about transactions into financial statements.
The Accounting Cycle
8
Assets- anything of value owned or leased by a business.
Liability- claim against a firm’s assets by a creditor.
Owner’s equity- all claims of the proprietor, partners, or
stockholders against the assets of a firm, equal to the excess of
assets over liabilities.
Basic accounting equation- relationship that states assets equal
liabilities plus owners’ equity.
Double-entry bookkeeping- process by which accounting
transactions are entered; each individual transaction always has
an offsetting transaction.

31. The Accounting Equation
9
Simplifies the accounting process by automating data entry and
calculations.
Available products are customized for businesses of different
sizes.
Entrepreneurs and small businesses use: QuickBooks, Peachtree,
and BusinessWorks.
Larger firms use larger scale software packages like: Computer
Associates, Oracle, and SAP.
Software that handles accounting information for international
businesses is another option. Offers different country
information/language.
Some systems offer web-based packages for small and medium
businesses.
Impact of Technology on Accounting

32. 10
Balance sheet— statement of a firm’s financial on a particular
date.
Photograph of firm’s assets together with its liabilities and
owner’s equity
Follows the accounting equation
Balance Sheet
11
Sample Balance Sheet
12

33. Income Statement— financial record of a company’s revenues
and expenses and profits over a period of time
Firm’s financial performance in terms of revenues, expenses,
and profits over a given time period
Reports profit or loss
Focus on revenues and costs associated with revenues
The Income Statement
13
Sample Income Statement
14
Statement of Owners’ Equity— is designed to show the
components of the change in equity from the end of one fiscal

34. year to the end of the next
Begins with the amount of equity shown on the balance sheet
Net income is added, and cash dividends paid to owners are
subtracted
Statement of Owners’ Equity
15
Sample Statement of Owners’ Equity
16
Statement of cash flows— a firm’s cash receipts and cash
payments that presents information on its sources and uses of
cash

35. Accrual accounting— method that records revenue and expenses
when they occur, not necessarily when cash actually changes
hands
Statement of Cash Flows
17
Sample Statement of Cash Flows
18
Ratio analysis— tool for measuring a firm’s liquidity,
profitability, and reliance on debt financing as well as the
effectiveness of management’s resource utilization

36. Financial Ratio Analysis
19
Liquidity Ratios
Cash and equivalents
+ short-term investments
+ accounts receivable
Total current liabilities
Total current assets
Total current liabilities
Current ratio compares current assets to current liabilities.
Acid-test (or quick) ratio measures the ability of a firm to meet
its debt payments on short notice.

37. 20
Activity Ratios
Inventory turnover ratio indicates the number of times
merchandise moves through a business.
Total asset turnover ratio indicates how much in sales each
dollar invested in assets generates.
Net sales
Average of inventory
Net sales
Average of total assets
21

38. Profitability Ratios
Profitability ratios measure the organization’s overall financial
performance by evaluating its ability to generate revenues in
excess of operating costs and other expenses.
22
Leverage Ratios
Leverage ratios measure the extent to which a firm relies on
debt financing.

39. Total liabilities to total assets ratio > 50 percent indicates that a
firm is relying more on borrowed money than owners’ equity.
23
Budgeting
Budget- planning and control tool that reflects a firm’s expected
sales revenues, operating expenses, and cash receipts and
outlays
Management estimates of expected sales, cash inflows and
outflows, and costs
Budgets are a financial blueprint that serves as a financial plan
Cash budget- tracks the firm’s cash inflows and outflows.
24

40. Sample Budget
25
International Accounting
Accounting procedures and practices must be adapted to
accommodate an international business environment.
The International Accounting Standards Committee (IASC) was
established in 1973 to promote worldwide consistency in
financial reporting practices. The IASC soon developed its first
set of accounting standards and interpretations and, in 2001,
became the International Accounting Standards Board (IASB).
International Financial Reporting Standards (IFRS) are the
standards and interpretations adopted by the IASB.
Exchange rates- ratio at which a country’s currency can be
exchanged for other currencies
Consolidated financial statements must reflect gains and losses
due to changes in exchange rates
Can have significant impact on financial statement

41. 26