Financing and Investing Through Securities Markets

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