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Chapter 18. Financing and Investing Through Securities Markets. Learning Goals. Define finance, and explain the role of financial managers. Describe the components of a financial plan and the financial planning process. Outline how organizations manage their assets.

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Learning Goals

Define finance, and explain the role of financial managers.

Describe the components of a financial plan and the financial planning process.

Outline how organizations manage their assets.

Compare the two major sources of funds for a business, and explain the concept of leverage.

Identify sources of short-term financing for business operations.

Discuss long-term financing options.

Describe mergers, acquisitions, buyouts, and divestitures.

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the business function of finance
The Business Function of Finance
  • 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 role of the finance manager
The Role of the Finance Manager
  • Implement the firm’s financial plan.
  • Determine the most appropriate source of funds.
  • Many CFOs are members of the board of directors.
risk return trade off
Risk-Return Trade-off

The process of maximizing the wealth of the firm’s shareholders by striking the optimal balance between risk and return.

financial planning
Financial Planning
  • 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.
managing assets
Managing Assets

Sound financial management requires assets to be managed and acquired

  • What a firm owns
  • Use of funds
short term assets
Short-term Assets
  • Cash
  • Marketable Securities
  • Accounts Receivable
  • Inventory
capital investment analysis
Capital Investment Analysis
  • Long-lived assets
  • Produce economic benefit for more than one year
  • Substantial investments
  • Capital Investment Analysis
    • Expansion: new assets
    • Replacement: upgrading assets
managing international assets
Managing International Assets
  • Today’s firms have facilities and assets worldwide.
  • Sales occur outside of the home country
  • International Assets require the management of activities to reduce the financial risk of exchange rates.
sources of funds and capital structure
Sources of Funds and Capital Structure

Debt Capital –funds obtained

through borrowing.

Equity Capital – investment in

the firm in exchange

for ownership.

leverage and capital structure decisions
Leverage and Capital Structure Decisions

Goal: increasing the rate of return on funds invested by borrowing funds.

mixing short term and long term funds
Mixing Short-Term and Long-Term Funds
  • Short-term funds
    • Current liabilities
    • Less expensive
    • Volatile interest rates
  • Long-term funds
    • Long-term debt and equity
    • Used for long-term assets
dividend policy
Dividend Policy
  • Dividends are cash payments to shareholders.
  • Financial Managers must make decisions regarding their dividend policy.
    • Should we pay a dividend?
    • When should it be paid?
short term funding options
Short-term Funding Options
  • Trade Credit
  • Short-term Loans
  • Commercial Paper
sources of long term financing
Sources of Long-Term Financing
  • Public Sale of Stocks and Bonds
  • Private Placements
  • Venture Capitalists
  • Private Equity Funds
  • Hedge Funds
mergers acquisitions buyouts and divestitures
Mergers, Acquisitions, Buyouts and Divestitures

Financial managers evaluate mergers, acquisitions, and other opportunities.

  • Leveraged buyouts
  • Divestiture
    • Sell-off/Spin-off