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

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

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

How Cash Flows Through a Business Chapter 16 How Cash Flows Through a Business 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 The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

The Financial Manager’s Responsibilities Chapter 16 The Financial Manager’s Responsibilities 1 Key Activities Financial Planning Investment (spending money) Financing (raising money) The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Risk and Return Factors Chapter 16 Risk and Return Factors 1 Social Issues Market Conditions General Economic Conditions Interest Rates Changing Patterns of Market Demand The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

How Organizations Use Funds Chapter 16 How Organizations Use Funds 2 Short-Term Expenses Operating expenses Long-Term Expenditures Investment in long-lived assets Support current selling and production activities Expansion, asset replacement, new product development The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Short-Term Expenses 2 Cash Management Manage Current Assets Chapter 16 Short-Term Expenses 2 Manage Current Assets Cash Management Accounts Receivable Inventory The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Marketable Securities Certificates of Deposit Chapter 16 Cash Management 2 Surplus Cash Marketable Securities Certificates of Deposit Treasury Bills Commercial Paper The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Cash Management 2 Collect money owed to the firm Key Strategies Chapter 16 Cash Management 2 Key Strategies Collect money owed to the firm Pay money owed to others Minimize funds tied up in inventory The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Long-Term Expenditures Chapter 16 Long-Term Expenditures 2 Capital Expenditures Machinery Buildings Land Equipment Information Systems The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Obtaining Short-Term Financing Chapter 16 Obtaining Short-Term Financing 3 Raising Funds Borrow Money (Debt) Sell Ownership Shares (Equity) Retain Earnings (Profits) The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Unsecured Short-Term Loans Chapter 16 Unsecured Short-Term Loans 3 Trade Credit Seller extends credit to the buyer Bank Loans Lines of credit Revolving credit agreement Commercial Paper Unsecured short-term debt issued by a financially strong corporation The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Secured Short-Term Loans Chapter 16 Secured Short-Term Loans 3 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. The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Debt versus Equity Financing Chapter 16 Debt versus Equity Financing 4 The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Chapter 16 Debt Financing 4 Term Loans A business loan with a maturity of more than one year. Bonds Long-term debt obligations issued by corporations and governments. Mortgage Loans A long-term loan made against real estate as collateral. The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Dividends & Retained Earnings Chapter 16 Equity Financing 5 Venture Capital Preferred Stock Dividends & Retained Earnings Selling Common Stock The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Debt (a loan to the issuer) (ownership in issuing organization) Chapter 16 Securities Markets 6 Securities Debt (a loan to the issuer) Equity (ownership in issuing organization) Primary Market Secondary Market The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Securities Markets 6 Investment Bankers Stockbroker Chapter 16 Securities Markets 6 Investment Bankers Help companies raise long-term financing, a process called underwriting Stockbroker A person (account executive) licensed to buy and sell securities on behalf of clients The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Moody’s and Standard & Poor’s Bond Ratings Chapter 16 Moody’s and Standard & Poor’s Bond Ratings 6 The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Securities Exchanges 7 Organized Stock Exchanges Chapter 16 Securities Exchanges 7 Types of Securities Markets Over-the-Counter Market Organized Stock Exchanges The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

American Stock Exchange (AMEX) New York Stock Exchanges (NYSE) Chapter 16 U.S. Stock Exchanges 7 American Stock Exchange (AMEX) New York Stock Exchanges (NYSE) The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Global Trading and Foreign Exchanges Chapter 16 Global Trading and Foreign Exchanges 7 NYSE NASDAQ London Toronto Montreal Paris Sydney Zurich Buenos Aires Tokyo Frankfurt Hong Kong Taiwan The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

Regulation of Securities Markets Chapter 16 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. The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses. Circuit Breakers Measures that, under certain conditions, stop trading in the securities markets to limit the amount the market can drop in one day. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved