Financial Management

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Financial Management
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Chapter
2
Learning Objectives
Define finance and explain the role of financial
managers. Describe the components of a financial
plan and the financial planning process. Outline
how organizations manage their assets. Compare
the two major sources of funds for a business,
and explain the concept of leverage.
Identify sources of short-term financing for
business operations. Discuss long-term financing
options. Describe mergers, acquisitions, buyouts,
and divestitures.
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The Business Function of Finance

• Finance planning, obtaining, and managing the
  companys funds in order to accomplish its
  objectives
• Maximizing overall worth
• Meeting expenses
• Investing in assets
• Increasing profits to shareholders

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The Role of the Finance Manager

• Implement the firms financial plan
• Determine the most appropriate source of funds
• Many CFOs are members of the board of directors

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Risk-Return Tradeoff

• The process of maximizing the wealth of the
  firms shareholders by striking the optimal
  balance between risk and return.

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Financial Planning

• Financial Plan the inflows and outflows and
  sources of funds.
• Financial plans are built by answering the
  following questions
• What funds will the firm require during the
  planning period?
• When will it need additional funds?
• Where will it obtain the necessary funds?
• Financial plans are based on the forecasts of
  costs and expected sales activities for a given
  period.

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Managing Assets

• Sound financial management requires assets to be
  managed and acquired.
• What a firm owns
• Use of funds

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Short-Term Assets

• Cash
• Marketable Securities
• Accounts Receivable
• Inventory

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Capital Investment Analysis

• Long-lived assets
• Produce economic benefit for more than one year
• Substantial investments
• Capital Investment Analysis
• Expansion new assets
• Replacement upgrading assets

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Managing International Assets

• Todays firms have facilities and assets
  worldwide.
• Sales occur outside of the home country.
• International assets require the management of
  activities to reduce the financial risk of
  exchange rates.
• Balance

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Sources of Funds and Capital Structure

• Debt Capital funds obtained through borrowing.
• Equity Capital investment in the firm in
  exchange for ownership.

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Leverage and Capital Structure

• Goal increasing the rate of return on funds
  invested by borrowing funds

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Mixing Short and Long-Term Funds

• Short-term funds
• Current liabilities
• Less expensive
• Volatile interest rates
• Long-term funds
• Long-term debt and equity
• Used for long-term assets

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Dividend Policy

• Dividends are cash payments to shareholders.
• Highest dividend yielding stocks
• Financial managers must make decisions regarding
  their dividend policy.
• Should we pay a dividend?
• When should it be paid?

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Short-Term Funding Options

• Trade Credit
• Short-term Loans
• Commercial Paper

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Sources of Long-Term Financing

• Public Sale of Stocks and Bonds
• Private Placements
• Venture Capitalists
• Private Equity Funds
• Hedge Funds

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Mergers, Acquisitions, Buyouts, and Divestitures

• Financial managers evaluate mergers,
  acquisitions, and other opportunities.
• Leveraged buyouts
• Divestiture
• Sell-off/Spin-off

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