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Chapter 16 THE FUTURE OF BUSINESS: The Essentials Gitman & McDaniel 2nd Edition THE FUTURE OF BUSINESS: The Essentials Gitman & McDaniel 2nd Edition Chapter.

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Presentation on theme: "Chapter 16 THE FUTURE OF BUSINESS: The Essentials Gitman & McDaniel 2nd Edition THE FUTURE OF BUSINESS: The Essentials Gitman & McDaniel 2nd Edition Chapter."— Presentation transcript:

1 Chapter 16 THE FUTURE OF BUSINESS: The Essentials Gitman & McDaniel 2nd Edition THE FUTURE OF BUSINESS: The Essentials Gitman & McDaniel 2nd Edition Chapter Understanding Financial Management and Securities Markets Prepared by Deborah Baker Texas Christian University Prepared by Deborah Baker Texas Christian University 16

2 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 2 1How do finance and the financial manager affect the firm’s overall strategy? 2What types of short-term and long-term expenditures does a firm make? 3What are the main sources and costs of unsecured and secured short-term financing? 4What are the key differences between debt and equity, and what are the major types and features of long-term debt? Learning Goals

3 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 3 5When and how do firms issue equity, and what are the costs? 6How do securities markets help firms raise funding, and what securities trade in the capital markets? 7What are the major U.S. securities exchanges and how are they regulated? 8What are the current trends in financial management and the securities markets? Learning Goals (continued)

4 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 4 1 Owners’ investment Borrowed Funds Cash Sales Purchase of Fixed Assets Payment of Dividends Purchase of Inventory Payment of Expenses Collection of Accounts Receivable Sale of Fixed Assets How Cash Flows Through a Business

5 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 5 1 KeyActivitiesKeyActivities Financial Planning Investment (spending money) Financing (raising money) The Financial Manager’s Responsibilities

6 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 6 1 Social Issues Market Conditions General Economic Conditions Interest Rates Changing Patterns of Market Demand Risk and Return Factors

7 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 7 How Organizations Use Funds 2 Short-Term Expenses Operating expenses Long-Term Expenditures Long-Term Expenditures Investment in long- lived assets Support current selling and production activities Expansion, asset replacement, new product development

8 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 8 Short-Term Expenses 2 Manage Current Assets Cash Management Accounts Receivable Inventory

9 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 9 Cash Management 2 Surplus Cash Marketable Securities Certificates of Deposit Treasury Bills Commercial Paper

10 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 10 Cash Management 2 Key Strategies Collect money owed to the firm Pay money owed to others Minimize funds tied up in inventory

11 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 11 Long-Term Expenditures 2 Capital Expenditures Machinery Buildings Land Equipment Information Systems

12 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 12 3 Raising Funds Borrow Money (Debt) Sell Ownership Shares (Equity) Retain Earnings (Profits) Obtaining Short-Term Financing

13 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 13 3 Bank Loans Lines of credit Revolving credit agreement Lines of credit Revolving credit agreement Trade Credit Seller extends credit to the buyer Commercial Paper Unsecured short-term debt issued by a financially strong corporation Unsecured Short-Term Loans

14 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 14 3 Secured Short-Term Loans Secured Loans Borrower pledges specific assets as collateral, such as accounts receivable or inventory. Factoring Firm sells its accounts receivable to a factor, such as a commercial bank or commercial finance company.

15 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 15 Debt versus Equity Financing 4

16 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 16 Debt Financing 4 Bonds Long-term debt obligations issued by corporations and governments. Term Loans A business loan with a maturity of more than one year. Mortgage Loans A long-term loan made against real estate as collateral.

17 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 17 Equity Financing 5 Venture Capital Preferred Stock Dividends & Retained Earnings Selling Common Stock

18 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 18 Securities Markets 6 Securities Debt (a loan to the issuer) Equity (ownership in issuing organization) Equity (ownership in issuing organization) Primary Market Secondary Market

19 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 19 Securities Markets 6 Help companies raise long-term financing, a process called underwriting Investment Bankers Investment Bankers A person (account executive) licensed to buy and sell securities on behalf of clients Stockbroker

20 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 20 6 Moody’s and Standard & Poor’s Bond Ratings

21 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 21 Securities Exchanges 7 Types of Securities Markets Over-the-Counter Market Organized Stock Exchanges

22 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 22 U.S. Stock Exchanges 7 American Stock Exchange (AMEX) New York Stock Exchanges (NYSE)

23 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 23 Global Trading and Foreign Exchanges 7 NYSE NASDAQ London Toronto Montreal Paris Sydney Zurich Buenos Aires Tokyo Frankfurt Hong Kong Taiwan

24 Chapter 16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved 24 Regulation of Securities Markets 7 Securities and Exchange Commission The main federal government agency responsible for regulating the U.S. securities industry. Insider Trading The use of information that is not available to the general public to make profits on securities transactions. Circuit Breakers Measures that, under certain conditions, stop trading in the securities markets to limit the amount the market can drop in one day.


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