2. 17
Chapter
Financial Management

3. Learning Objectives LO 17.1 Define the role of financial managers.
LO 17.2 Describe the parts of a financial plan and the financial planning process.
LO 17.3 Outline how organizations manage their assets.
LO 17.4 Discuss the two major sources of funds for a business and capital structure.
LO 17.5 Identify sources of short-term financing for businesses.
LO 17.6 Discuss long-term financing options.
LO 17.7 Describe mergers, acquisitions, buyouts, and divestitures.

4. Financial Management
Finance: The business function of planning, obtaining, and managing the company’s funds to accomplish its objectives as effectively and efficiently as possible
Maximizing overall worth
Meeting expenses
Investing in assets
Increasing profits to shareholders

5. FIGURE 17.1 The Finance Organization at a Typical Firm
The Role of the Financial Manager
Financial managers: The executives who develop and carry out their firm’s financial plan and decide on the most appropriate sources and uses of funds
FIGURE 17.1 The Finance Organization at a Typical Firm

6. The Role of the Financial Manager (cont’d)
Risk-return trade-off: the process of maximizing the wealth of the firm’s shareholders by striking the right balance between risk and return

7. Financial Planning
Financial plan: a document that specifies the funds needed by a firm for a period of time, the timing of cash inflows and outflows, and the most appropriate sources and uses of funds
Financial plans are built by answering the following questions:
What funds will the firm require during the planning period?
When will the firm need additional funds?
Where will the firm obtain the necessary funds?
Based on the forecasts of production costs, purchasing needs, plant/equipment expenses, and sales activities for a given period

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

9. Short-Term Assets Also known as current assets Cash
Marketable securities
Accounts receivable
Inventory

10. Test Your Knowledge All of the following are short-term assets except
a) inventory.
b) accounts receivable.
c) equipment.
d) cash.
Answer: c

11. 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

12. Managing International Assets
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

13. Sources of Funds and Capital Structure
Debt capital consists of funds obtained through borrowing
Equity capital consists of funds provided by the firm’s owners when they reinvest their earnings, make additional contributions, liquidate assets, issue shares to the general public, or raise capital from outside investors

14. FIGURE 17.2 How Leverage Works
Leverage and Capital Structure Decisions
Goal: increasing the rate of return on funds invested by borrowing funds
Note: The example assumes that both companies have $100 million in capital. Leverage Company consists of $50 million in equity and $50 million in bonds (with an interest rate of 10 percent). Equity Company consists of $100 million in equity and no bonds. This example also assumes no corporate taxes.
FIGURE 17.2 How Leverage Works

15. 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

16. Dividend Policy Dividends are periodic 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?

17. Short-Term Funding Options
Trade credit
Short-term loans
Commercial paper

18. Test Your Knowledge Trade credit is a source of long-term financing.
a) True
b) False
Answer: b

19. Sources of Long-Term Financing
Public sale of shares and bonds
Private placements
Venture capitalists
Private equity funds
Hedge funds

20. Test Your Knowledge
Why would a firm prefer to sell its bonds through private placement rather than an initial public offering?
a) Firms typically receive more favourable repayment terms from private holders.
b) There are more buyers for private placements than publicly traded bonds.
c) It is often cheaper for the firm to sell securities privately.
d) Private placements reduce the risk of default.
Answer: c

21. Buyouts, and Divestitures
Mergers, Acquisitions,
Buyouts, and Divestitures
Financial managers evaluate mergers, acquisitions, and other opportunities by comparing costs and benefits
Tender offer
Leveraged buyouts (LBOs)
Divestiture
Selloff
Spinoff

22. Copyright
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