AEM2200-1012ToPost-1 - AEM2200, Introduction to Business...

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Unformatted text preview: AEM2200, Introduction to Business Management. AEM2200, Wednesday 10/12 Corporate Finance Financial management Sources and uses of funds Sources of long term finance Financial Management The job of managing a firm’s resources so it can meet its goals and objectives. What Financial Managers Do What 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 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 Budget cash needs 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; 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 Compare results Modify forecasts and budgets Financing Daily Operations – Cash Flow Financing Money received Money from (cash in) from Business expenses Business (cash out) (cash Credit Sales Inventory Purchases Payment on Loans Payment on Assets Salaries Payable Supplies Taxes Cash Sales Investment Income Sources of Funds Sources Short Term Trade Credit Promissory Notes Family/Friends Banks, etc. Secured Loan Unsecured Loan Factoring Commercial Paper Long Term Debt Term-Loan Bonds Secured Unsecured Equity Stock Venture Capital and Venture Private Equity Private Retained Earnings Dealing with a “Cash Crunch” Dealing Current Assets Factor accounts receivable; Factor accounts Sell inventory at a price well Sell inventory below market. below Long-term liabilities Secured Unsecured Current Liabilities Increase your accounts Increase payable through the use of payable trade credit; trade Take short term debt Promissory Notes Family/Friends Banks, etc. Secured Loan Unsecured Loan Commercial Paper Term-Loan Bonds Equity Stock Venture Capital and Venture Private Equity Private Retained Earnings Improve the Flow Minimize accounts receivable Reduce the raw material and finished products inventory Control your spending Delay your accounts payable 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 Principles of working capital management Market and pricing power: Wal-Mart, Dell (till 2005!) Just-in-time Just-in-time Liquidity 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 SETTING LONG-TERM FINANCING OBJECTIVES FINANCING • Three questions of financial managers in setting longterm financing objectives: 1. 2. 3. What are the organization’s long-term goals and What objectives? objectives? What funds do we need to achieve the firm’s long-term What goals and objectives? goals What sources of long-term funding (capital) are What available, and which will best fit our needs? available, 18-14 Long Term Goals and Objectives Long Maximize investment Maximize returns returns Time value of money Compete successfully Grow Sales Customers Profits Higher market share Higher on existing products and / or markets and New markets New products 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 Disadvantages Hard and slow to accumulate How do shareholders relate to it? Crises are characterized by absence of earnings. 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 Advantages Cheaper than equity, because they are not taxed (and Cheaper interest is tax deductible) interest Relatively easy to raise, multiple sources Leverage Disadvantages Interest payments, to be made no matter what; Credit worthiness an issue Lenders frown on volatility. Equity Capital Equity Money raised from within the firm or through the Money sale of ownership in the firm sale Retained earnings New equity Advantages of new equity Powerful motivational device (as options); Offers strong upsides to buyers; Easy to obtain in bull markets. Disadvantages of new equity Expensive (taxation and need to post dividends) Weakening of retained earnings Loss of control 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. Sources of funds Stock Long term debt Retained earnings ...
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This note was uploaded on 10/21/2011 for the course AEM 2200 taught by Professor Perez,p.d. during the Spring '07 term at Cornell University (Engineering School).

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