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AEM1200-0929ToPost - AEM1200 Introduction to Business...

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Unformatted text preview: AEM1200, Introduction to Business Management. AEM1200, Wednesday 9/29 Corporate Finance Financial management Sources and uses of funds Sources of long term finance Join Charles H. Dyson School alumni in a discussion of critical global challenges Friday, October 1, 3:30-5:30 p.m., Call Auditorium, Kennedy Hall. Open to the Cornell Community Energy Security and a Cornell and the Developing World: Commercial, Financial Management The job of managing a firm’s resources so it can meet its goals and objectives. What Financial Managers Do What Objectives of Financial Statement Analysis Objectives Find out how liquid is an enterprise Find liquid Find out how profitable is an enterprise Find profitable Find out how efficient is an enterprise Find efficient Ratio Analysis Ratio Solvency ratios Current ratio: Current assets / Current liabilities Current Current Acid ratio: (Current assets – inventory) / Current liabilities (Current Acid Debt to equity (also leverage): Long term debt / equity Long Debt Return to equity Return to sales Earnings per share Inventory turnover : CGS / Inventory CGS Inventory Accounts receivable turnover : Accounts Accounts receivable / Daily sales Accounts Profitability ratios Efficiency ratios Accounts payable turnover: Accounts payable / Daily CGS Financial Planning Process Financial Forecast cash flow Short-term uses – one year or less Long-term uses – from one to ten or more years in the future Cash budget Estimate of a firm’s projected cash inflows and outflows that the firm Estimate can use to plan for any cash shortages or surpluses during a given period; period; Budget cash needs Capital budget Firms’ spending plans for major asset purchases that often require Firms’ large amounts of money; large Operating (master) budget Summary of a business’s proposed financial activities Control differences Actual vs. projected flows Modify forecasts and budgets Compare results The Three Financial Sins The Undercapitalization Poor control over cash flow Inadequate expense control Financial Management: Responsibilities Financial Short term finance Working capital and liquidity Long term finance Retained earnings Long term debt, including bonds Equity (stock) Corporate investment decision making Financing Daily Operations – Cash Flow Financing Money received Money from (cash in) from Credit Sales Cash Sales Investment Income Business expenses Business (cash out) (cash Inventory Purchases Payment on Loans Payment on Assets Salaries Payable Supplies Taxes Sources of Funds Sources Short Term Long Term Trade Credit Promissory Notes Family/Friends Banks, etc. Secured Loan Unsecured Loan Debt Term-Loan Bonds Secured Unsecured Equity Stock Factoring Commercial Paper Venture Capital and Venture Private Equity Private Retained Earnings Use of Excess Funds Use Marketable securities Treasury bills Commercial paper Commercial deposits Expansion Increase working capital Asset purchases Working Capital Working Current assets minus current liabilities Current assets are cash, accounts receivable, and Current inventories; inventories; Current liabilities include accounts payable and Current accrued liabilities; accrued Market and pricing power: Wal-Mart, Dell (till 2005!) Just-in-time Just-in-time Liquidity Principles of working capital management Retained Earnings Retained The portion of after-tax net income of a corporation not The paid out to shareholders in the form of dividends, but which instead is retained for use in the business. which Advantages Cheap Full control Avoids the double tax penalty Hard and slow to accumulate How do shareholders relate to it? Crises are characterized by absence of earnings. Disadvantages Long term debt Long Debt obligations issued by private or public companies Debt to raise funds for a variety of corporate purposes such as building a new facility, purchasing equipment, or expanding the business. expanding Corporate bonds Securitized, syndicated bank loans Cheaper than equity, because they are not taxed (and Cheaper interest is tax deductible) interest Relatively easy to raise, multiple sources Leverage Interest payments, to be made no matter what; Credit worthiness an issue Lenders frown on volatility. Advantages Disadvantages Equity Capital Equity Money raised from within the firm or through the Money sale of ownership in the firm sale Retained earnings New equity Powerful motivational device (as options); Offers strong upsides to buyers; Easy to obtain in bull markets. Expensive (taxation and need to post dividends) Weakening of retained earnings Loss of control Advantages of new equity Disadvantages of new equity Take-Aways Take-Aways Financial management: Matches sources and uses of funds in the business; Helps the CEO decide what is the best use of Helps investment funds; investment Designs funding structures to minimize cost of Designs capital. capital. Stock Long term debt Retained earnings Sources of funds ...
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