Lecture-1-Understanding+Public+Financial+Management

A hurdle rate is the minimum acceptable rate of

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Unformatted text preview: resources in a project. The financial manager should set the hurdle rate to reflect the riskiness of the project with higher hurdle rates for riskier 25 25 25 projects. projects. Long-term financing decisions involve the acquisition of Long-term funds needed to support long-term investments. Such decisions concern the firm’s capital structure, which is the mix of long-term debt and equity (value of assets after all liabilities or debts have been paid) the firm uses to finance its operations. These sources of financing are shown on the rightoperations. hand side of the balance sheet. Firms have much flexibility in hand choosing a capital structure. Typical financing questions facing the financial manager include: the • Does the type of financing used make a difference? Does • Is the existing capital structure the right one? Is • How and where should the firm raise money? How • Should the firm use funds raised through its revenues? Should • Should the firm raise money from outside the business? Should • If the firm seeks external financing, should it bring in other 26 26 26 owners or borrow the money? owners The financial manager can obtain the needed funds for its The investments and operations either internally or externally. Internally generated funds represent the amount of earnings Internally that the firm decides to retain after paying a cash dividend, if any, to its stockholders. According to the dividend principle, a firm should return cash According to the owners if there are not enough investments that earn the hurdle rate. For publicly traded firms, a firm has the option of returning cash to owners either through dividends or stock repurchases. The form of return depends largely on the characteristics of the The firm’s stockholders. firm’s 27 27 27 If the firm decides to raise funds externally, the financial If manager can do so by incurring debts, such as through bank loans or the sale of bonds, or by selling ownership interests through a stock offering. The choice of financing method involves various tradeoffs. method When making financing decisions, managers should keep When the financing principle in mind. the The financing principle states that the financial The manager should choose a financing mix that maximizes the value of the investments made and matches the financing to the assets being financed. Matching the cash inflows from the assets being financed with the cash outflows used to finance these assets reduces the potential risk. reduces 28 28 28 Decisions involving a firm’s short-term assets and liabilities Decisions refer to working capital management. Net working capital is defined as current assets minus Net current liabilities. The financial manager has varying degrees of operating responsibility over current assets and liabilities. Some key questions that the financial manager faces Some involving working capital management include: involving • How much of a firm’s total assets should the firm hold in each type of current asset such as cash, marketable securities (highly liquid-treasury bills, banker’s acceptance) and inventory? acceptance) • How much credit should the firm grant to custome...
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This note was uploaded on 02/11/2014 for the course FIN 9891 taught by Professor Wu during the Fall '11 term at Kazakhstan Institute of Management, Economics and Strategic Research.

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