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Financing and Investing Through Securities Markets

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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Financing and Investing Through Securities Markets

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  1. Chapter 18 Financing and Investing Through Securities Markets

  2. 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. 5 1 6 2 7 3 4

  3. 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

  4. 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.

  5. Risk-Return Trade-off The process of maximizing the wealth of the firm’s shareholders by striking the optimal balance between risk and return.

  6. 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.

  7. Managing Assets Sound financial management requires assets to be managed and acquired • What a firm owns • Use of funds

  8. Short-term Assets • Cash • Marketable Securities • Accounts Receivable • Inventory

  9. 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

  10. 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.

  11. Sources of Funds and Capital Structure Debt Capital –funds obtained through borrowing. Equity Capital – investment in the firm in exchange for ownership.

  12. Leverage and Capital Structure Decisions Goal: increasing the rate of return on funds invested by borrowing funds.

  13. 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

  14. 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?

  15. Short-term Funding Options • Trade Credit • Short-term Loans • Commercial Paper

  16. Sources of Long-Term Financing • Public Sale of Stocks and Bonds • Private Placements • Venture Capitalists • Private Equity Funds • Hedge Funds

  17. Mergers, Acquisitions, Buyouts and Divestitures Financial managers evaluate mergers, acquisitions, and other opportunities. • Leveraged buyouts • Divestiture • Sell-off/Spin-off

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