Chapter Sixteen Financial Management and Securities Markets

Chapter SixteenFinancial Managementand Securities MarketsCurrent Assetsand Current LiabilitiesCurrent assets: Financial resources that can be converted to cash within a year.CashMarketable securitiesAccounts receivableInventoryCurrent Liabilities:Short-term debt obligations that must be paid within a year.Accounts payableWages payableTaxes payableNotes (loans) payableManaging Current Assets and LiabilitiesWorking Capital ManagementManaging Current Assets:Short-term resources: cash, investments, accounts receivable, inventoryManaging Current Liabilities:Short-term debts: accounts payable, accrued salaries, accrued taxes, short-term bank loansManaging Current AssetsManaging Cash:Cash flowTransaction balancesLockbox Managing Current AssetsInvesting Idle Cash:Marketable securitiesUS Treasury bills (T-bills)Commercial certificates of deposit (CDs)Commercial paperInternational investments – the EurodollarShort-term InvestmentPossibilities for Idle CashMaximizing Accounts ReceivableAccounts Receivable:Money owed to a business by credit customers.Typically due within 30, 60, or 90 days.1-2% discount if paid between 10 and 30 days1-1.5% penalty charged if paid lateMaximizing Accounts ReceivableOptimizing InventoryThe objective is to maximize inventory investment without production cutbacks because of materials shortfalls or lost sales due to insufficient finished goods inventories.Maximizing Current LiabilitiesAccounts Payable:Managing cash collectionsManaging trade creditTaking advantage of discounts – “1/10 net 30”Bank LoansLine of Credit An arrangement by which a bank agrees to lend a specified amount of money to an organization upon request.Secured Loans Loans backed by collateral that the bank can claim if the borrowers do not repay the debt.Bank LoansUnsecured Loans Loans backed only by the borrowers’ good reputation and previous credit ratingPrime Rate Interest rates commercial banks charge their best customers (usually large corporations) for short- term loansNon-Bank LiabilitiesShort-term loans from insurance companies, pension funds, money market funds, or finance companiesThe Eurodollar and commercial paper marketsFactoring – selling accounts receivable at a discountManaging Fixed AssetsLong-term (fixed) assets:PlantsOfficesEquipmentHeavy machineryAutomobilesManaging Fixed AssetsCapital Budgeting:Analyzing business’ needs and selecting the assets that will maximize its value.Assessing RiskQualitative Assessment of Capital Budgeting RiskIntroduce a New Product ina Familiar AreaIntroduce a New Product inForeign Markets (risk dependson stability of country)Expand into a New MarketAdd to a Product LineBuy New Equipment foran Established MarketRepair Old MachineryHighest RiskLowest RiskThe Impact of Organizational Performance on Investment Decisions15%14%12%14%Pricing Long-term MoneyFactors to Consider:How much cash will be generatedCost of financingSupply of funds available for investmentAccurately identifying opportunities with the greatest potential for ROI Financing with Long-Term LiabilitiesDebts that will be repaid over a number of years, such as long-term loans and bond issues.Equity FinancingDebt financingBonds: Corporate IOUsBonds:Debt instruments that larger companies sell to raise long-term funds.Indenture:The bond contract specifying all terms of agreement between bondholder and the issuing organizationA Basic Bond QuoteTypes of BondsUnsecured Debentures, or bonds, that are not backed by specific collateralSecured Bonds that are backed by specific collateral that must be forfeited in the event the issuing firm defaultsSerial A sequence of small bond issues of progressively longer maturityTypes of BondsFloating-rate Bonds with interest rates that change with current interest rates otherwise available in the economyJunk Special type of high interest rate bond that carries higher inherent risksFinancing With Owners’ EquityOwners’ Equity:The owners’ investment in an organization.CashCommon StockRetained EarningsA Basic Stock QuoteInvestment BankingInvestment Banking:The sale of stocks and bonds for corporations.New IssueInitial Public Offering (IPO)Primary Market – used to raise capitalSecondary Market – stock exchanges and OTC markets where investors trade securities with each otherThe Securities MarketsSecurities Markets:The mechanism for buying and selling securities.Organized ExchangesCentral locations where investors buy and sell securities.Over-the-counter Market (OTC)A network of dealers all over the country, and world, linked by computers, telephones, and Teletype machinesMeasuring Market PerformanceThe Investor’s Key Question:“How well are my investments performing relative to the market as a whole?”Measuring Market PerformanceIndexesAveragesA Bull MarketA Bear MarketFAST FACT:Online investing is the fastest growing area in personal finance management. The number of online investment accounts grew to 20.5 billion in 2001.Source: Dave Pettit, “Still Clicking,” Wall Street Journal, June 11, 2001, p. R4.The 30 Stocks in the Dow Jones Industrial AverageDow’s MilestonesThe Dow climbed from 860 in August 1982 to a high of 11,497 at the beginning of 2000.The worst drop in history (684.81 points) was on September 17, 2001 after the markets were closed for 4 days following terrorist attacks on September 11 that destroyed the World Trade Center and parts of the Pentagon.Solve the Dilemma1. Normally, rapidly increasing sales is a good thing. What seems to be the problem here?2. List the important components of a firm’s working capital. Include both current assets and current liabilities.3. What are some management techniques applied to current liabilities that Glasspray might use to improve its working capital position?Explore Your Career OptionsWhat types of skills would be most useful to a financial manager? What are some of the most stressful aspects of the job?Additional Discussion Questions and Exercises1. 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?Chapter 16 Quiz1. Which one of the following is an example of a current liability? a. accounts receivable b. marketable securities c. wages payable d. inventory2. Which of the following is an example of a current asset? a. cash b. accounts payable c. accrued salaries d. short-term bank loansChapter 16 Quiz3. 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 banks4. Dividend yield refers to a. the dividend rate divided by the stock market average. b. dividends per share divided by stock price. 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.Multiple Choice Questions about the Video1. If a company wanted to raise external sources of equity financing it would a. retain earnings rather than pay dividends. b. sell bonds. c. sell common stock. d. sell debentures.2. Small business would most likely be able to raise external funds by a. selling common stock in the capital market. b. selling bonds. c. borrowing money form friends and relatives. d. retaining earnings.