1. Part 6 Financing the Enterprise © 2015 McGraw-Hill Education.

2. CHAPTER 14 Accounting and Financial Statements CHAPTER 15 Money and the Financial System CHAPTER 16 Financial Management and Securities Markets 16-2

3. Learning Objectives LO 16-1Describe some common methods of managing current assets. LO 16-2Identify some sources of short-term financing (current liabilities). LO 16-3Summarize the importance of long-term assets and capital budgeting. LO 16-4Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds. LO 16-5Discuss how corporations can use equity financing by issuing stock through an investment banker. LO 16-6Describe the various securities markets in the United States. 16-3

4. Managing Current Assets 16-4 Transaction Balances Cash kept on hand by a firm to pay normal daily expenses, such as employee wages and bills for supplies and utilities Lockbox An address, usually a commercial bank, at which a company receives payments in order to speed collections from customers Working Capital Management The managing of short-term assets and liabilities

5. Managing Current Assets 16-5 Sometimes cash comes in faster than needed to pay bills Marketable Securities Temporary investment of “extra” cash by organizations for up to one year in U.S. Treasury bills, certificates of deposit, commercial paper, or Eurodollar loans Treasury Bills (T-Bills) Short-term debt obligations the U.S. government sells to raise money T-bills are considered risk free

6. 16-6 Managing Current Assets Certificates of deposit issued by commercial banks and brokerage companies, available in minimum amounts of $100,000 which may be traded prior to maturity Commercial Certificates of Deposit (CDs) A written promise from one company to another to pay a specific amount of money Commercial Paper A market centered in London for trading U.S. dollars in foreign countries Eurodollar Market

7. Managing Current Liabilities 16-7 Averting a cash shortfall with short-term funds Trade Credit is extended by suppliers for the purchase of their goods and services Accounts Payable Most suppliers offer discounts for early payment, offered as “1/10 net 30,” meaning a 1% discount if given is paid in 10 days and the full amount is due in 30 days

8. Managing Current Liabilities 16-8 An arrangement by which a bank agrees to lend a specified amount of money to an organization upon request Line of Credit Loans backed by collateral the bank can claim if the borrowers do not repay them Secured Loans Loans backed only by the borrowers’ good reputation and previous credit rating Unsecured Loans The interest rate commercial banks charge their best customers (usually large corporations) for short-term loans Prime Rate Factor A finance company to which businesses sell their accounts receivable – usually for a percentage of the total face value

9. Managing Fixed Assets 16-9 Long-Term (Fixed) Assets Production facilities (plants), offices, and equipment – all of which are expected to last for many years Capital Budgeting The process of analyzing the needs of the business and selecting the assets that will maximize its value

10. Assessing Risk 16-10 Introduce a New Product in Foreign Markets Expand into a New Market Introduce a New Product in a Familiar Market Add to a Product Line Buy New Equipment for Established Market Repair Old Machinery Highest Risk Lowest Risk

11. Financing with Long-Term Liabilities 16-11 Two common sources for long-term funds: Attracting new owners (equity financing) Long-term liabilities (debt financing) Long-Term Liabilities Debts that will be repaid over a number of years, such as long-term loans and bond issues Bonds Debt instruments that larger companies sell to raise long-term funds

12. Types of Bonds 16-12 Debentures, or bonds that are not backed by specific collateral Unsecured Bonds Bonds backed by specific collateral that must be forfeited in the event the issuing firm defaults Secured Bonds A sequence of small bond issues of progressively longer maturity Serial Bonds Bonds with interest rates that change with current interest rates otherwise available in the economy Floating-Rate Bonds A special type of high interest-rate bond that carries higher inherent risks Junk Bonds

13. Financing with Owners’ Equity 16-13 Corporate owners own shares of the company and stockholders’ equity includes common stock, preferred stock and retained earnings Retained Earnings Earning after expenses and taxes that are reinvested in the assets of the firm and belong to the owners in the form of equity Retained earnings are the only long-term funds the company can generate internally Dividend Yield The dividend per share divided by the stock price

14. Investment Banking 16-14 Primary Market The market where firms raise financial capital Secondary Markets Stock exchanges and over-the-counter markets where investors can trade their securities with others Investment Banking The sale of stocks and bonds for corporations

15. Securities Markets 16-15 Securities Markets The mechanism for buying and selling securities Over-The-Counter (OTC) Market A network of dealers all over the country linked by computers, telephones and Teletype machines