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Chapter Fifteen

Chapter Fifteen. Financial Management and Securities Markets. Current assets (Financial resources that can be converted to cash within a year) Current Liabilities (Short-term debt obligations that must be paid within a year). Cash Marketable securities Accounts receivable Inventory

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Chapter Fifteen

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  1. Chapter Fifteen Financial Management and Securities Markets

  2. Current assets(Financial resources that can be converted to cash within a year) Current Liabilities(Short-term debt obligations that must be paid within a year) Cash Marketable securities Accounts receivable Inventory Accounts payable Wages payable Taxes payable Notes (loans) payable Types of Current Assetsand Current Liabilities 15-1

  3. Short-term InvestmentPossibilities for Idle Cash Type of Security Maturity Issuer of Security Interest Rate (March/02) Treasury Bill 1 month Bank of Canada 1.99% Treasury Bill 3 months Bank of Canada 2.01% Treasury Bill 6 months Bank of Canada 2.27% Treasury Bill 1 year Bank of Canada 2.88% Govt. of Canada Bonds 2 years Govt. of Canada 3.70% Short Term Deposits 30-59 days Banks, Trust and Loan cos. 0.90 – 1.90 % Short Term Deposits 60-99 days Banks, Trust and Loan cos. 0.90 – 1.90 % Short Term Deposits 90-119 days Banks, Trust and Loan cos. 0.90 – 1.90 % Fixed Term Deposits 1 year Banks, Trust and Loan cos. 1.30 – 2.50 % Fixed Term Deposits 2 years Banks, Trust and Loan cos. 2.25 – 3.37 % 15-2

  4. Bank Loans Line of Credit An arrangement by which a bank agrees to lend a specified amount of money to an organization upon request Securedloans Loans backed by collateral that the bank can claim if the borrowers do not repay the debt Unsecuredloans Loans backed only by the borrowers’ good reputation and previous credit rating 15-3

  5. American Express extends lines of credit to its Small Business Services customers. 15-4

  6. Qualitative Assessment of Capital Budgeting Risk Highest Risk Add to a Product Line 15-5 Introduce a New Product inForeign Markets (risk dependson stability of country) Buy New Equipment foran Established Market Expand into a New Market Repair Old Machinery Introduce a New Product ina Familiar Area Lowest Risk

  7. The Impact of Organizational Performance on Investment Decisions 15-6 15% 14% 12% 14%

  8. Types of Bonds Unsecured Debentures, or bonds, that are not backed by specific collateral Secured Bonds that are backed by specific collateral that must be forfeited in the event the issuing firm defaults Serial A sequence of small bond issues of progressively longer maturity 15-7a

  9. Types of Bonds Floating-rate Bonds with interest rates that change with current interest rates otherwise available in the economy Junk Special type of high interest rate bond that carries higher inherent risks 15-7b

  10. A Basic Bond Quote Issuer (1) Coupon (2) Maturity (3) Price (4) Yield - % (5) Price Change - $ (6) Canada 11.750 Feb 01/03 109.37 2.41 -0.04 Royal Bank 5.400 April 07/03 102.99 2.84 -0.034 Suncor 6.700 Aug. 22/11 100.88 6.57 -0.05 Domtar 10.000 April 15/22 108.53 8.63 -0.05 • Issuer – the name or abbreviation of the name of the government or corporation issuing the bond • Coupon – the annual percentage rate specified on the bond certificate. Domtar’s rate is 10%, so a $1,000 bond will receive $100 per year. • Maturity – the bond’s maturity date; the date on which the issuer will repay the bondholders the face value of each bond; April 15, 2011 for Domtar. • Price – the closing price. For Domtar, 108.58 = percent of the face value or $1,085.58 per bond. • Yield – percentage return from interest, based on the closing price (column 4). If you buy a Domtar bond at today’s closing price of 108.85 ($1,085.58) and receive $100 per year, your rate of return to maturity will be 8.63%. • Price Change - $ - the change in price from the close of the precious trading day. Domtar’s bond price decreased by $0.05. 15-8

  11. A Basic Stock Quote 15-9

  12. The 30 Stocks in the Dow Jones Industrial Average 15-10a

  13. The Stocks in the TSE Index Abitibi-Consolidated Canadian Pacific Placer Dome Barrick Gold Canadian Tire Corp. Research in Motion Alcan Dofasco Inc. Royal Bank of Canada Bombardier Inc. Husky Energy Shaw Communications BCE Inc. Magna International Suncor Energy Bank of Montreal Inco Ltd. TELUS Bank of Nova Scotia National Bank of Canada TransAlta Corp. Biovail Nova Chemicals Corp. Teck Corp. Celestica Noranda Inc. TD Bank CIBC Nortel Networks Corp. Talisman Energy Canadian National Railway Nexen Thomson Corporation Petro Canada TransCanada Pipelines 15-10b*

  14. The Major Indices Created for the TSE • TSE 300 Composite Index • TSE 300 Capped Composite Index • TSE 200 Index • TSE 100 Index • S&P/TSE 60 Index • S&P/TSE 60 Capped Index • S&P/TSE Canadian SmallCap Index • S&P/TSE Canadian MidCap Index • Toronto 35 Index 15-10c*

  15. 5,168days 1,000 to 2,000 357days 9,000 to 10,000 Dow’s Milestones Time it took for the industrial average to go from: 15-11

  16. Solve the Dilemma a. Normally, rapidly increasing sales is a good thing. What seems to be the problem here? b. List the important components of a firm’s working capital. Include both current assets and current liabilities. c. What are some management techniques applied to current liabilities that Glasspray might use to improve its working capital position? 15-12

  17. Explore Your Career Options What types of skills would be most useful to a financial manager? What are some of the most stressful aspects of the job? 15-13

  18. Additional Discussion Questions and Exercises 1. Why would a business use a lockbox to receive payments? 2. What are the advantages of a firm using electronic funds transfer rather than traditional check-clearing procedures? 3. What is a junk bond? Why do investors buy junk bonds? 4. What do companies do with retained earnings? 5. Why is the prime rate of interest important for business firms? 15-14

  19. Chapter 15 Quiz 1. Which one of the following is an example of a current liability? a. accounts receivable b. marketable securities c. wages payable d. inventory 2. Which of the following is an example of a current asset? a. cash b. accounts payable c. accrued salaries d. short-term bank loans 15-15a

  20. Chapter 15 Quiz 3. Which of the following is where new issues of stocks and bonds are sold directly to the public? a. primary market b. secondary market c. over-the-counter market d. investment banks 4. The payout ratio refers to a. the dividend rate divided by the stock market average. b. dividends per share divided by earnings per share. c. the percentage of return an investor has earned on the original investment. d. the coupon rate on bonds that change with current interest rates. 15-15b

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