Chapter 1 - Introduction to Corporate Finances - Chapter 1 Introduction to Corporate Finances Monday 9:59 PM Corporate finance broadly speaking is the

Chapter 1 - Introduction to Corporate Finances - Chapter 1...

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Chapter 1 - Introduction to Corporate Finances Monday, August 17, 2015 9:59 PM Corporate finance, broadly speaking, is the study of ways to answer the following three questions: 1. What long-term investments should you take on? That is, what lines of business will you be in and what sorts of buildings, machinery, and equipment will you need? 2. Where will you get the long-term financing to pay for your investment? Will you bring in other owners or will you borrow the money? 3. How will you manage your everyday financial activities such as collecting from customers and paying suppliers? In a large corporation, the financial manager would be in charge of answering the three questions listed above. The financial management function is usually associated with a top officer of the firm such as a vice president of finance or some other chief financial offer (CFO). Capital Budgeting The first questions concerns the firm's long-term investments. The process of planning and managing a firm's long-term investment is called capital budgeting. In capital budgeting, the financial manager tries to identify investment opportunities that are worth more to the firm than they cost to acquire. Financial managers must be concerned not only with how much money they are going to receive, but also with when they expect to receive it and how likely they are to receive it. Evaluating the size, timing, and risk of future cash flows is the essence of capital budgeting. Whenever evaluating a business decision, the size, timing and risk of cash flows will be the most important things to consider. Capital Structure The second question for the financial manager concerns ways in which the firm obtains and manages the long-term financing it needs to support its long-term investments. A firm's capital structure (or financial structure) is the specific mixture of long-term debt and equity the firm uses to finance its operations. The financial manager has two concerns in this area. First, how much should the firm borrow? (What mixture of debt and equity is best?) Second, what are the least expensive sources of funds for the firm? A firm's capital structure determines what percentage of the firm's cash flow goes to creditors and what percentage goes to shareholders. In addition to deciding on the financing mix, the financial manager has to decide exactly how and where to raise the money. Working Capital Management The third question concerns working capital management. Working capital management. The term working capital management refers to a firm's short-term assets, such as inventory, and its short-term liabilities, such as money owed to suppliers. Managing working capital is essential to ensuring the firm has sufficient resources to continue operations and avoid interruptions.
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