1. Financial Management and Securities Markets
Chapter 16 1 1

2. Chapter 16 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 the major types and features of long-term debt?
When and how do firms issue equity, and what are the costs?

3. Chapter 16 Learning Goals (cont’d.)
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 developments in financial management and the securities markets?

4. Learning Goal 1
How do finance and the financial manager affect the firm’s overall strategy?
Finance involves managing firm’s money
Financial manager decides
How much money is needed and when
How best to use the available funds
How to get the required financing
Financial manager’s responsibilities
Financial planning
Investing (spending money)
Financing (raising money)
Goal of the financial manager
Maximize the value of the firm

5. Financial management:
The art & science of managing a firm’s money so that it can meet its goals

6. Cash Flow Through a Business
Borrowed funds
Owners’ investment
Sale of fixed assets $
Cash sales
Collection of accounts receivable
Purchase of fixed assets
Payment of expenses
Payment of dividends
Purchase of inventory

7. Learning Goal 2
What types of short-term and long-term expenditures does a firm make?
Short-term expenditures
Supplies
Inventory
Wages
Long-term expenditures
Fixed assets
Land
Buildings
Equipment
Projects are carefully analyzed by financial managers to determine which offer best returns

8. How Organizations Use Funds
short-term expenses
cash management
accounts receivable
inventory
long-term expenditures
capital expenditures
capital budgeting

9. Learning Goal 3
What are the main sources and costs of unsecured and secured short-term financing?
Main sources of unsecured short-term financing
Trade credit
Bank loans
Commercial paper
Secured short-term financing
Require pledge of assets as security for loan
Selling accounts receivable outright at a discount

10. Obtaining Short-term Financing
unsecured short-term loans
trade credit, bank loans, commercial paper
secured short-term loans
collateral, factoring

11. Learning Goal 4
What are the key differences between debt and equity, and the major types and features of long-term debt?
Debt financing
Interest is tax-deductible
Requires payment of interest and principal on specified dates
Equity
Common and preferred stock
Permanent form of financing
Firm may or may not pay dividends
Dividends are not tax-deductible

12. Learning Goal 4 (cont’d.)
What are the key differences between debt and equity, and the major types and features of long-term debt?
Long-term debt
Types
Term loans
Secured or unsecured
5- to 12-year maturity
Bonds
10- to 30-year maturity
Mortgage loans
Secured by real estate

13. Learning Goal 5
When and how do firms issue equity, and what are the costs?
Chief sources of equity financing
Common stock
Cost includes issuing costs and potential dividend payments
Retained earnings
Profits reinvested in firm
Preferred stock
More expensive than debt
Dividends not tax-deductible
Claims are secondary to those of debtholders
Less expensive than common stock
Venture capital
Often a source of equity financing for young companies

14. Raising Long-term Financing
debt financing
financial risk
term loan, bonds, mortgage loan
equity financing
common stock, dividends, retained earnings, preferred stock, venture capital

15. Debt vs. Equity Financing
Management
Claim on income & assets
Maturity
Tax treatment
Debt
creditors have none
greater claim
stated maturity
interest is deductible
Equity
stockholders vote
residual claim
no maturity
dividends not deductible

16. Learning Goal 6
How do securities markets help firms raise funding, and what securities trade in the capital markets?
Securities markets
Allow stocks, bonds, and other securities to be bought and sold quickly and at a fair price
New issues are sold in primary market
Securities are traded in secondary market
Investment bankers
Specialize in issuing and selling new security issues
Stockbrokers
Licensed professionals who buy and sell securities on behalf of their clients

17. Securities:
Investment certificates issued by corporations or governments that represent either equity or debt

18. Types of Securities Markets
Primary
new securities sold to the public
issuer gets proceeds
Secondary
already issued securities are traded
stock exchanges, commodities exchanges, over-the-counter market

19. Other Popular Securities
U.S. Government securities and municipal bonds
Mutual funds
pools investors’ funds
Futures contracts
Options

20. Learning Goal 7
What are the major U.S. securities exchanges and how are they regulated?
Securities are resold on:
Organized stock exchanges, such as the New York Stock Exchange
Regional stock exchanges
Over-the-counter market
Securities markets are regulated by
Securities Act of 1933
Requires disclosure of important information on new securities issues
Securities Exchange Act of 1934 and 1964 amendment
Formally empowered the SEC to regulate organized securities exchanges and over-the-counter market
Investment Company Act of 1940
Places investment companies such as mutual funds under SEC control
Self-regulatory groups such as the NASD
“Circuit breakers” to halt trading if the Dow Jones Industrial Average drops rapidly

21. Securities Exchanges Organized stock exchanges Over-the-Counter Market
re-sell securities in an auction-type format
US stock exchanges
New York Stock Exchange
American Stock Exchange
Global trading & foreign exchanges
Over-the-Counter Market
electronic-based Nasdaq

22. Securities Exchanges: NYSE
To prevent a fast crash, the New York Stock Exchange has several “circuit breakers”
a 1,100-point drop stops trading for 1 hour if it occurs before 2:00 pm
a 2,250-point drop stops trading for 2 hours if it occurs before 1:00 pm
a 3,350-point drop stops trading for the rest of the day
Source: Associated Press in The Arizona Republic, Jan. 3, 2000, pg. D3.

23. Learning Goal 8
What are the current developments in financial management and the securities markets?
Financial managers are spending more time on risk management
Identifying and evaluating risks
Selecting techniques to control and reduce risk
Securities markets and the investment industry are changing considerably
New York Stock Exchange no longer dominates equity market activity
Nasdaq is challenging the Big Board
Emergence of electronic exchanges