9 Finance - · PDF file©2015 Cengage Learning. All Rights Reserved. ... Dividend/Average Common Stockholders Equity ... Appropriate collection policy

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

9 Finance: Acquiring and Using Funds to

Maximize Value

Identify the goal of financial management

and explain the issues financial managers

confront as they seek to achieve this goal

Describe the tools financial managers use to

evaluate their company’s current financial

condition and develop financial plans

Evaluate the major sources of funds

available to meet a firm’s short-term and

long-term financial needs

2

9-1

9-2

9-3


9Identify the key issues involved in

determining a firm’s capital structure

Describe how financial managers acquire

and manage current assets

Explain how financial managers evaluate

capital budgeting proposals to identify the

best long-term investment options for their

company

3

Finance: Acquiring and Using Funds to

Maximize Value

9-4

9-5

9-6


Financial Management: An Overview

4

•Funds a firm uses to acquire its assets and finance its operations

Financial capital

•Functional area of business responsible for finding the best sources of funds and the best ways to use them

Finance


Financial Needs: Evaluation and Planning

5

•Comparing values of key accounts listed on a firm’s financial statements

Financial ratio analysis

•Use of debt in a firm’s capital structure

Financial leverage


Key Financial Ratios

6

Ratio name Type How it is computed

Current Liquidity

• Measures ability to pay short-

term liabilities as they come due

Current Assets/Current

Liabilities

Inventory

turnover

Asset management

• Measures how effectively a firm

is using its assets to generate

revenue

Cost of Goods Sold/Average

Inventory

Average

collection

period

Asset management

• Measures how effectively a firm

is using its assets to generate

revenue

Accounts

Receivable/(Annual Credit

Sales/365)


Key Financial Ratios

7

Ratio name Type How it is computed

Debt-to-

assets

Leverage

• Measures the extent to which

a firm relies on debt to meet

its financing needs

Total Debts/Total Assets

Return on

equity

Profitability

• Compares the amount of

profit to some measure of

resources invested

Net Income – Preferred

Dividend/Average Common

Stockholders Equity

Earnings

per share

Profitability

• Compares the amount of

profit to some measure of

resources invested

Net Income – Preferred

Dividend/Average Number of

Common Shares Outstanding


Planning Tools

• Projection showing how a firm’s budgeted sales and costs will affect expected net income

Budgeted income statement

• Projected statement forecasting:•Types and amounts of assets a firm will need to implement future

plans

•Amount of additional financing required to acquire these assets

Budgeted balance sheet

• Detailed forecast of future cash flows

• Helps identify periods of temporary shortages or surpluses of cash

Cash budget

8


Funds and Finance: An Overview

•Granted by sellers when they deliver goods and services to customers without requiring immediate payment

•Spontaneous financing: Granted when the company places its orders without requiring any special arrangements

Trade credit

•Cash owed to a firm during credit sales, shown in accounts receivable on the company’s balance sheet

•Factor: Purchases the accounts receivables of other firms at a discount

Factoring

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•Line of credit: Pre-approved credit up to a specified limit if the firm maintains an acceptable credit rating

•Revolving credit agreement: Bank makes a formal, legally binding commitment to provide the agreed-upon funds

Short-term bank loans

•Promissory notes issued by large corporations

Commercial paper

10



￭ Direct investments from owners

￭ Retained earnings: Profits that a firm

reinvests

￭ Long-term debt

Term loans

• Covenant: Restriction lenders impose on

borrowers as a condition of the loan

￭ Corporate bond

11

Reality TV Video Slide

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￭ In your opinion, why did Earth Class Mail seek venture capital funding before seeking venture debt financing from a bank?

￭ Describe the major advantage and the major disadvantage for Earth Class Mail in seeking additional financing through venture debt funding rather than additional venture capital investment.

13


Capital Structure

￭ Mix of equity and debt financing a firm

uses to meet its permanent financing

needs

Equity financing: Funds provided by the

owners of a company

Debt financing: Funds provided by lenders

14


Debt Financing

Advantages

• Interest payments a firm makes on debts are a tax-deductible expense

• Firm acquires additional funds without:

• Making stockholders invest more

• Sale of stock to new investors

Disadvantages

• Required interest payments:

• Take up most of a firm’s earnings in a bad financial situation leading to bankruptcy

• Covenants hamper a firm’s flexibility

• Restrictions on dividends make it difficult for the firm to raise money

15


Equity Financing

Advantages

•More flexible and less risky than debt financing

•Does not impose:

•Required payments

•Covenants

Disadvantages

•Does not yield tax benefits

•Existing owners might not want a firm to issue more stock

•Firm forgoes the opportunity to use financial leverage

16


Exhibit 9.3 - How Financial Leverage Affects the Return

on Equity

17


Dodd-Frank Act

￭ Monitors financial markets to identify

and respond to emerging risks

Places limitations on risky financial

strategies such as heavy reliance on

leverage

18


Web-link: Implementing the Dodd-Frank Wall Street

Reform and Consumer Protection Act

￭ The web-link provides references to all

the rules that have been proposed or

adopted in connection with the Dodd-

Frank Act

http://www.sec.gov/spotlight/dodd-

frank.shtml

19

http://www.sec.gov/spotlight/dodd-frank.shtml


Current Assets Handling

•Safe and highly liquid assets that are listed with cash holdings on a balance sheet

Cash equivalents

•Short-term marketable IOUs issued by the U.S. federal government

U.S. Treasury bills (T-bills)

•Pools funds from many investors to purchase safe and highly liquid securities

Money market mutual funds

20


Current Assets Handling

￭ Key elements of managing credit sales

Set credit terms

Establish credit standards

Appropriate collection policy

￭ Firms keep inventories low to reduce

costs and improve efficiency

21


How to Evaluate Budget Proposals

22

• Used to evaluate long-term investment proposals

Capital budgeting

• Principle that a dollar received today is worth more than a dollar received in the future

Time value of money

• Interest-earning deposit requiring funds to remain deposited for a fixed term

Certificate of deposit (CD)


How to Evaluate Budget Proposals

23

• Amount of money invested today at a given rate of interest would grow to become some future amount in a specified time

Present value

• Higher discount rate computed for present values of cash flows of risky projects

Risk-return tradeoff

• Sum of the present values of expected future cash flows from an investment, minus the cost of that investment

Net present value (NPV)


Exhibit 9.5 - Decision Rule for Capital Budgeting

24


Identify the goal of financial management

and explain the issues financial managers

confront as they seek to achieve this goal

Describe the tools financial managers use to

evaluate their company’s current financial

condition and develop financial plans

Evaluate the major sources of funds

available to meet a firm’s short-term and

long-term financial needs

25

9-1

9-2

9-3


Identify the key issues involved in

determining a firm’s capital structure

Describe how financial managers acquire

and manage current assets

Explain how financial managers evaluate

capital budgeting proposals to identify the

best long-term investment options for their

company

26

9-4

9-5

9-6

Documents

9 Finance - · PDF file©2015 Cengage Learning. All Rights Reserved. ... Dividend/Average Common Stockholders Equity ... Appropriate collection policy