1. FHF Ferrell Hirt Ferrell M: Business 2 nd Edition

2. FHF 16 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Financial Management and Securities Markets

3. FHF The management of short-term assets and liabilities Current assets : short-term resources ✴ Cash ✴ Investments ✴ Accounts receivable ✴ Inventory Current liabilities : short-term debts Accounts payable Accrued salaries Accrued taxes Short-term bank loans Working Capital Market 16-3

4. [ ] FHF Transaction Balance Cash kept on hand by a firm to pay normal daily expenses such as employee wages and bills for supplies utilities 16-4

5. ] [ An address, usually a commercial bank, at which a company receives payments in order to speed collections from customers Lockbox FHF 16-5

6. FHF Marketable Securities Temporary investment of extra cash by organizations up to one year in U.S. Treasury bills, certificates of deposit, commercial paper, or Eurodollars Treasury B`ills Short-term debt obligations the U.S. government sells to raise money. Investing Idle Cash 16-6

7. FHF Commercial Certificates of Deposit (CDs) Issued by commercial banks and brokerages available in minimum amounts of $100,000 and can be traded prior to maturity Commercial Paper A written promise from one company to another to pay a specific amount of money Eurodollar Market A market for trading U.S. dollars in foreign countries Investing Idle Cash (continued) 16-7

8. FHF Short-Term Investment for Idle Cash 16-8

9. FHF Occurs on the balance sheet after cash and marketable securities Accounts Receivable Money owed to a business by credit customers Optimizing Inventory Minimize firm’s investment in inventory without experiencing production cutbacks Accounts Receivable and Inventory 16-9

10. FHF Accounts Payable Money an organization owes to suppliers for goods and services Trade Credit The most important account payable Credit extended by suppliers for the purchase of their goods and services Managing Current Liabilities 16-10

11. FHF Line of Credit An arrangement by which a bank agrees to lend a specified amount of money to an organization upon request Secured Loans Loans backed by collateral that the bank can claim if the borrowers do not repay the debt Bank Loans 16-11

12. FHF Unsecured Loan Loans backed only by the borrower’s good reputation and previous credit rating Prime Rate The interest rate that commercial banks charge their best customers for short-term loans Bank Loans (continued) 16-12

13. Non-Bank Liabilities FHF Short-term loans from insurance companies, pension funds, money market funds, or finance companies Factoring organization Purchases accounts receivable at a discount Taxes and employees’ wages 16-13

14. FHF Expected to last for many years Production facilities (plants), offices, and equipment Tend to be high-cost, making financing critical Long-Term (Fixed) Assets 16-14

15. FHF The process of analyzing the needs of business and selecting the assets that will maximize its value Not an exact process Managers must be flexible as new information becomes available Capital Budgeting 16-15

16. FHF Assessing Budgeting Risk 16-16

17. FHF Factors to Consider: How much cash will be generated Cost of financing Supply of funds available for investment Accurately identifying opportunities with the greatest potential for ROI Long-Term Money 16-17

18. FHF Debts that will be repaid over a number of years Long-term loans Bond issues Financing with Long-Term Liabilities 16-18

19. FHF Are Corporate IOU’s Debt instruments that larger companies sell to raise long-term funds Indenture: ✴ The bond contract specifying all terms of agreement between bondholder and the issuing organization Bonds 16-19

20. FHF Unsecured Bonds Debentures, or bonds, that are not backed by specific collateral Secured Bonds Bonds that are backed by specific collateral that must be forfeited in the event the issuing firm defaults Serial Bonds A sequence of small bond issues of progressively longer maturity Types of Bonds 16-20

21. FHF Floating-Rate Bonds with interest rates that change with current interest rates otherwise available in the economy Junk Bonds Special type of high interest rate bond that carries higher inherent risks Types of Bonds (continued) 16-21

22. FHF A 30-Year Treasury Bond 16-22

23. FHF The owners’ investment in an organization Common Stock The most important source of capital for most new companies Gives stockholders voting and control rights Financing with Owner’s Equity 16-23

24. Financing with Owner’s Equity FHF Preferred Stock Gives the stockholder preference in distribution of profits, but not voting and control rights Retained Earnings Earnings after expenses and taxes that are reinvested in the assets of the firm and belong to the owners in the form of equity 16-24

25. FHF Retained Earnings Reinvested in the assets of the firms Dividend Yield The dividend per share divided by the stock price ✴ Not all companies pay dividends When a Company has Profits Left Over After Paying Expenses and Taxes 16-25

26. FHF Is the sale of stocks and bonds for corporations Primary Market New issue or initial public offering (IPO) Secondary Market Stock exchanges and OTC markets where investors trade securities with each other Investment Banking 16-26

27. FHF The mechanism for buying and selling securities The Stock Market NY Stock Exchange and NASDAQ now are for-profit businesses Most exchanges are or are becoming electronic– making organized exchanges less centralized Over-the-Counter Market (OTC) A network of dealers all over the country, and world, linked by computers, telephones, and teletype machines Securities Market 16-27

28. FHF American International Group was bailed out by the government American International Group ✴ Other banks like Lehman Brothers were allowed to fail An insurance company run like a (risky) hedge fund Danger of high-tech trading is that most people do not know the risks 16-28

29. FHF Indexes Averages Bull market Bear market Measuring Market Performance 16-29

30. FHF The Dow Jones Industrial Average Note: Data was taken from the mid-point of each month. Source: "Market Overview," Yahoo Finance 16-30

31. FHF 16-31