Chapter 16 Financial Management and Securities Markets

1. Chapter 16 � Financial Management and Securities Markets

2. Chapter 16 Learning Goals How do finance and the financial manager affect the firm�s overall strategy? What types of short-term and long-term expenditures does a firm make? What are the main sources and costs of unsecured and secured short-term financing? What are the key differences between debt and equity, and the major types and features of long-term debt?

3. Chapter 16 Learning Goals (cont�d.) When and how do firms issue equity, and what are the costs? How do securities markets help firms raise funding, and what securities trade in the capital markets? What are the major U.S. securities exchanges and how are they regulated? What are the current developments in financial management and the securities markets?

4. Finance Traditional Finance Activities Financial planning Investing money Raising funds Goal: to maximize the value of the firm to its owners

5. The Role of Finance Financial Management Managing a firm�s money to meet its goals Track cash flows Choose the best source of funding Analyze and use financial statements and data to make financial decisions

6. Cash Flow Through a Business

7. How do organizations use funds? Companies use funds for Short term expenses or Operating expenses Benefits produced in less than 1 year Long term expenditures or Capital expenditures Benefits produced in over a year

8. Funds for Operating Expenses In order to have money for operating expenses, companies have to manage their current assets Cash Management Managing Account Receivable Managing Inventory

9. Capital Expenditures Capital Budgeting Select the long term project that offers the greatest return Challenges Accessing the value of information technology Decisions involving new products or acquisitions

10. Raising Funds How do companies raise the funds they need? Borrow (debt) Sell Ownership Shares (equity) Retain Earnings (profit)

11. Short term Financing Unsecured loans Trade Credit/Accounts Payable Line of Credit Revolving Credit Agreement Commercial Paper Secured loans Require collateral Factoring

12. Long term Financing Debt �vs- Equity Want a mix to balance cost & risk Debt Advantages: no loss of ownership, interest can be deducted on taxes Disadvantages: financial risk Equity Advantages: places few restrictions on the firm Disadvantages: more costly than debt, gives common shareholders voice in management

13. Debt vs. Equity Financing Management Claim on income & assets Maturity Tax treatment  Debt creditors have none greater claim stated maturity interest is deductible

14. Debt Financing Types of long term debt financing Term loan Maturity greater than 1 year Secured or unsecured Bonds Issued by corporations and governments Interest (coupon rate) paid regularly, principal (par value) paid at maturity Higher bond rating, lower risk of default Mortgage Secured by real estate

15. Equity Financing Ways to obtain equity financing � owner�s investment Selling new issues of common stock Retained Earnings Determine the right amount of profit to go to retained earnings and to dividends Selling preferred stock Venture Capital

16. Securities Markets Securities � investment certificates Equity or debt Securities Markets � facilitate the transfer of funds Primary Market Secondary Market Key players in securities markets Investment bankers Stockbrokers

17. Securities Types of Securities Company Stock Corporate Bonds U.S. Government Securities Treasury bills Treasury notes Treasury bonds

18. Types of Securities, cont. Municipal Bonds General obligation bonds Revenue bonds Mutual Funds Futures Contracts Options

19. Securities Exchanges Organized Stock Exchanges U.S. Stock Exchanges New York Stock Exchange (NYSE) American Stock Exchange (AMEX) Regional Stock Exchanges (Boston, Cincinnati, Chicago, Pacific) Foreign Exchanges London Stock Exchange Tokyo Stock Exchange

20. Securities Exchanges, cont. Over the Counter Market National Association of Securities Dealers Automated Quotation (NASDAQ) system A number of dealers handle a security Several well known companies, commercial banks, insurance companies, government & corporate bonds trade on the NASDAQ

21. Regulation of Securities Markets Securities legislation Requires full disclosure Bans insider trading Regulates investment company practices Self Regulation Ethical standards �Circuit Breakers� to limit the amount the market can fall in one day

22. Securities Exchanges: NYSE To prevent a fast crash, the New York Stock Exchange has several �circuit breakers� a 1,100-point drop stops trading for1 hour if it occurs before 2:00 pm a 2,250-point drop stops trading for2 hours if it occurs before 1:00 pm a 3,350-point drop stops trading for the rest of the day

23. Trends in Finance Expanding role into risk management Credit risk Market risk Operational risk Increased competition among securities markets NASDAQ is challenging the NYSE The Fourth Market � electronic communications networks

24. Review Finance Traditional Activities Goal Role Using Funds Types of Financing Securities Security Markets Types of Securities Security Exchanges Regulations Trends