Chapters 1 & 2 - Capital budgeting Financial Management...

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Unformatted text preview: Capital budgeting Financial Management Decisions Decisions What long-term investments or projects What should the business take on? should How should we pay for our assets? Should we use debt or equity? How do we manage the day-to-day finances How of the firm? of Capital structure Working capital management Goal Of Financial Management Goal What should be the goal of a corporation? Maximize profit? Minimize costs? Maximize market share? Maximize the current value of the company’s stock? Does this mean we should do anything and Does everything to maximize owner wealth? everything The Balance Sheet - Figure 2.1 The Net Working Capital and Liquidity Liquidity Net Working Capital Current Assets – Current Liabilities Positive when the cash that will be received over the next 12 months Positive exceeds the cash that will be paid out exceeds Usually positive in a healthy firm Ability to convert to cash quickly without a significant loss in value Liquid firms are less likely to experience financial distress But liquid assets earn a lower return Trade-off to find balance between liquid and illiquid assets Liquidity Market Vs. Book Value Market The balance sheet provides the book value of The the assets, liabilities, and equity. the Market value is the price at which the assets, Market liabilities ,or equity can actually be bought or sold. sold. Market value and book value are often very Market different. Why? different. Which is more important to the decision-making Which process? process? The Concept of Cash Flow The Cash flow is one of the most important pieces of Cash information that a financial manager can derive from financial statements from The statement of cash flows does not provide us The with the same information that we are looking at here here We will look at how cash is generated from We utilizing assets and how it is paid to those that finance the purchase of the assets finance Cash Flow From Assets Cash Cash Flow From Assets (CFFA) = Cash Cash Flow to Creditors + Cash Flow to Stockholders Stockholders Cash Flow From Assets = Operating Cash Cash Flow – Net Capital Spending – Changes in NWC NWC Cash Flow Summary Table 2.5 Cash ...
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