Financial Management Decisions n Investment: What assets to own? n Financing: How to pay for those assets? n Dividend: What to do with Net Income?

Investment Decision: Current Assets - Cash n How much cash is needed to meet monthly expenses? For emergencies? For unexpected opportunities? n How much cash to keep in checking account? n Where to invest temporarily excess cash?

Investment Decision: Current Assets - Accounts Receivable n Determine firm’s credit policy: n Who gets credit? n Terms of repayment? Discount for early payment? n Procedure for collecting from slow customers? When to write off account as bad debt (uncollectable)?

Investment Decision: Current Assets - Inventory n How much inventory to hold? n Holding costs (carrying costs) n Ordering costs n Want to minimize sum of costs

Trade-off in investing in current assets n Liquidity versus Profitability n Investing a lot of $$ in CA makes firm very liquid n Investing a lot of $$ in CA is not a very profitable investment of funds

Investment Decision: Fixed Assets n Capital Budgeting n Planning for acquisition of Property, Plant, and Equipment (PPE) n Estimate future cash flows investment will produce n Discount future cash flows and compare with current cost to determine whether to invest

Financing Decision n How should firm’s assets be financed? n Liabilities (Debt): Short-term and/or Long-term? n Equity: Sell new stock and/or reinvest profits? n What is best mix of debt and equity?

Sources of Short-Term Funds n Trade Credit n Family and Friends n Credit Cards n Bank Loans n Factoring n Purchase-Order Financing n Commercial Paper

Sources of Long-Term Funds n Debt: n Long-term loan n Issue Bonds n Equity: n Issue new shares Stock n Reinvest profits

Financial Markets: Where firms go to raise money n Debt vs. Equity n Primary vs. Secondary n Money vs. Capital

Dividend Decision n What to do with Net Income? n Pay Dividends. n Reinvest Profits. n Do some combination of both.

Goal of financial management? n Goal = Maximize profits? n Which measure, time period??? n Better goal = Maximize stock price n Easy to measure, all agree what it is

Disadvantage of Stock Price Maximization as a Goal n If managers focus solely on short-term stock price maximization, they may make decisions harmful to the corporation in the long-term. n May provide large returns to stockholders but firm may cease to exist n Need to take interests of all stakeholders into account

Stakeholders n Shareholders n Employees n Customers n Suppliers n Community n Creditors n Government

Long-term Decision Making n Stakeholders have interest in continued operation of corporation n Managers who make decisions that maximize stock price in the long-run will be acting in best interests of all stakeholders