16 Chapter Financial Management and Securities Markets Objectives Describe some common methods of managing current assets. Identify some sources of short-term financing (current liabilities). Summarize the importance of long-term assets and capital budgeting. Specify how companies finance their operations and manage fixed assets with longterm liabilities, particularly bonds. 5. Discuss how corporations can use equity financing by issuing stock through an investment banker. 6. Describe the various securities markets in the United States. 7. Critique the short-term asset and liabilities position of a small manufacturer and recommend corrective action. 1. 2. 3. 4. Current Assets and Current Liabilities Current assets are short-term resources Cash Investments Accounts receivable Inventory Current liabilities are short-term debts Accounts payable Accrued salaries Accrued taxes Short-term bank loans Managing Current Assets Managing cash Investing idle cash Maximizing accounts receivable Optimizing inventory
Managing Cash Effectively managing the firm's cash flow is crucial Transaction balances Lockbox systems Electronic funds transfer
Marketable securities US Treasury bills (T-bills) Commercial certificates of deposit (CDs) Commercial paper International investments the Eurodollar
Investing Idle Cash
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Short-term Investment Possibilities for Idle Cash Maximizing Accounts Receivable Each credit sale represents an account 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 days 1-1.5% penalty charged if paid late Optimizing Inventory The objective is to maximize inventory investment without production cutbacks because of materials shortfalls or lost sales due to insufficient finished goods inventories
Accounts payable Bank loans Nonbank liabilities
Maximizing Current Liabilities
Accounts Payable Money an organization owes to suppliers for goods and services Trade credits Most suppliers offer trade discounts
Line 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 Loans
Bank Loans
Unsecured Loans Loans backed only by the borrowers' good reputation and previous credit rating Prime Rate Interest rates commercial banks charge their best customers (usually large corporations)
for short-term loans Non-Bank Liabilities Short-term loans from insurance companies, pension funds, money market funds, or finance companies Factoring organization Purchases accounts receivable at a discount Taxes and employees' wages 2
Long-term (fixed) assets: Plants Offices Equipment Heavy machinery Automobiles
Managing Fixed Assets
Capital Budgeting and Project Selection Capital is budgeting the process of analyzing the needs of business and selecting the assets that will maximize its value Assessing risk Every investment in capital assets has its own risk Qualitative Assessment of Capital Budgeting Risk Pricing Long-term Money
Factors to Consider: How much cash will be generated Cost of financing Supply of funds available for investment Accurately identifying opportunities with the greatest potential for ROI
Financing with Long-Term Liabilities Debts that will be repaid over a number of years Long-term loans Bond issues
Debt instruments that larger companies sell to raise long-term funds. Indenture:
The bond contract specifying all terms of agreement between bondholder and the
Bonds: Corporate IOUs
issuing organization
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
Types of Bonds
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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 A Basic Bond Quote A Basic Stock Quote Financing With Owners' Equity Owners' equity is the owners' investment in an organization Common stock Preferred stock Retained earnings Estimated Common Stock Price-Earnings Ratio and Dividends for Selected Companies Investment Banking The sale of stocks and bonds for corporations Primary market New issue or initial public offering (IPO) Secondary market Stock exchanges and OTC markets where investors trade securities with each other The Securities Markets Securities markets provide a mechanism for buying and selling securities Organized exchanges Central 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 machines
Types of Bonds
Indexes Averages Bull market Bear market
Measuring Market Performance
The 30 Stocks in the Dow Jones Industrial Average
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Dow's Milestones The 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 Dilemma 1. 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?
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