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Financial Management Chapter 17. Define finance and explain the role of financial managers. Describe the components of a financial plan and the financial.

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Presentation on theme: "Financial Management Chapter 17. Define finance and explain the role of financial managers. Describe the components of a financial plan and the financial."— Presentation transcript:

1 Financial Management Chapter 17

2 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. 1 Learning Objectives Identify sources of short-term financing for business operations. Discuss long-term financing options. Describe mergers, acquisitions, buyouts, and divestitures. 234567

3 Finance– planning, obtaining, and managing the company’s funds in order to accomplish its objectives Maximizing overall worth Meeting expenses Investing in assets Increasing profits to shareholders The Business Function of Finance

4 Implement the firm’s financial plan Determine the most appropriate source of funds Many CFOs are members of the board of directors The Role of the Finance Manager

5 The process of maximizing the wealth of the firm’s shareholders by striking the optimal balance between risk and return. Risk-Return Tradeoff

6 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. Financial Planning

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

8 Cash Marketable Securities Accounts Receivable Inventory Short-Term Assets

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

10 Today’s 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 Managing International Assets

11 Debt Capital– funds obtained through borrowing. Equity Capital– investment in the firm in exchange for ownership. Sources of Funds and Capital Structure

12 Goal: increasing the rate of return on funds invested by borrowing funds Leverage and Capital Structure

13 Short-term funds Current liabilities Less expensive Volatile interest rates Long-term funds Long-term debt and equity Used for long-term assets Mixing Short and Long-Term Funds

14 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? Dividend Policy

15 Trade Credit Short-term Loans Commercial Paper Short-Term Funding Options

16 Public Sale of Stocks and Bonds Private Placements Venture Capitalists Private Equity Funds Hedge Funds Sources of Long-Term Financing

17 Financial managers evaluate mergers, acquisitions, and other opportunities. Leveraged buyouts Divestiture Sell-off/Spin-off Mergers, Acquisitions, Buyouts, and Divestitures

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