© 2009 South-Western, a division of Cengage Learning 1 Chapter 9: FINANCE Using Funds To Maximize...
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Transcript of © 2009 South-Western, a division of Cengage Learning 1 Chapter 9: FINANCE Using Funds To Maximize...
© 2009 South-Western, a division of Cengage Learning1
Chapter 9: FINANCE
Using Funds To Maximize Value
© 2009 South-Western, a division of Cengage Learning
2
LOOKING AHEAD
• How does maximizing financial value relate to social responsibility?
• How do financial managers use key ratios?
• How do financial managers use cash budgets?
• Why is working capital management important?
• How do financial managers evaluate capital budgeting proposals?
• How do financial managers determine the firm’s capital structure?
© 2009 South-Western, a division of Cengage Learning
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WHAT MOTIVATES FINANCIAL DECISIONS
• What types of assets do we need to achieve goals?• How do we get the funds we need?
• Evaluate financial performance• Plan financial resources• Manage working capital• Evaluate investment
opportunities• Determine appropriate strategy
© 2009 South-Western, a division of Cengage Learning
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EVALUATING PERFORMANCE: WHERE DO WE STAND?
• Financial ratios provide insight into financial strengths and weaknesses
• Use financial data from balance sheet and income statement
• Companies can compare their ratios with other businesses
© 2009 South-Western, a division of Cengage Learning
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KEY FINANCIAL RATIOS
RATIORATIO TYPETYPE HOW IT IS HOW IT IS COMPUTEDCOMPUTED
Current Liquidity: ability to pay short-term liabilities.
Current Assets
Current Liabilities
Inventory
Turnover
Asset Management: how firm is using assets to generate revenue.
Cost of Good Sold
Average Inventory
Debt-to-equity Leverage: extent to which a firm relies on debt.
Total Debt
Total Owner’s Equity
© 2009 South-Western, a division of Cengage Learning
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KEY FINANCIAL RATIOS
RATIORATIO TYPETYPE HOW IT IS HOW IT IS COMPUTEDCOMPUTED
Debt-to-assets
Leverage: measures the extent to which a relies on debt
Total Debt
Total Assets
Return on equity
Profitability: compares the amount of profit compared to resources invested
Net Income – Preferred Div
Avg Common Stock Equity
Return on assets
Profitability: compares the amount of profit compared to resources invested
Net Income
Average Total Assets
Earnings per share
Profitability: compares the amount of profit compared to resources invested
Net Income – Pref Dividends
Avg # of Shares Out
© 2009 South-Western, a division of Cengage Learning
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BASIC PLANNING TOOLS
Pro Forma Income Statement – forecasts the sales,
expenses and net income
Pro Forma Balance Sheet – forecasts the types and amounts
of assets a firm will need to carry out plans.
Cash Budget – detailed projection of
cash flows to determine when cash shortages
and surpluses will occur.
© 2009 South-Western, a division of Cengage Learning
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CASH BUDGET
© 2009 South-Western, a division of Cengage Learning
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FINANCIAL PLANNING: PROVIDING A ROAD MAP FOR THE FUTURE
• What assets must be obtained?• How much additional financing
is needed?• How much can the firm
generate Internally? Externally?
• When will external financing be required?
© 2009 South-Western, a division of Cengage Learning
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MANAGING WORKING CAPITAL: CURRENT EVENTS
• Net Working Capital:– Difference between current assets and
liabilities
• Working capital must be managed– Appropriate level of current assets– Current liabilities needed to finance
activities
© 2009 South-Western, a division of Cengage Learning
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SAMPLE BALANCE SHEET
© 2009 South-Western, a division of Cengage Learning
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MANAGING CASH
• Need cash to pay bills• Cash does not earn returns
© 2009 South-Western, a division of Cengage Learning
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CASH EQUIVALENTS
• Commercial Paper– Short-term unsecured promissory note (IOUs).– Issued by major corporations with excellent credit rating– Sold at a discount; price plus interest is paid when the paper comes due
• T-bills– Short-term IOUs issued by the U.S. government.– T-Bills normal mature in 4, 13, or 26 weeks– Sold at a discount; face value is paid at maturity– Good market for T-Bills since they are backed by the government
• Money Market Mutual Funds– Pooled funds to purchase a portfolio of short-term, liquid securities– Affordable way for small investors to get into the market
© 2009 South-Western, a division of Cengage Learning
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MANAGING ACCOUNTS RECEIVABLE
• Set Credit Terms
• Establish Credit Standards
• Design Appropriate Collection Policy
Accounts Receivable - Money which is owed to a company by a customer for products and services provided on credit.
© 2009 South-Western, a division of Cengage Learning
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SHORT-TERM FINANCING
• Spontaneous Financing– Trade Credit
• Short-Term Bank Loans– Line of Credit– Revolving Credit
• Factoring• Commercial Paper
© 2009 South-Western, a division of Cengage Learning
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BORROWING MONEY
““
“If you want to know the value of money, go and try to borrow
some.”- Benjamin Franklin
© 2009 South-Western, a division of Cengage Learning
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CAPITAL BUDGETING: IN IT FOR THE LONG HAUL
• Replace machines and equipment
• New machines and equipment
• Build a new factory, warehouse or office
• Introduce a new product line
Capital Budgeting – a systematic evaluation of a firm’s major long-run
capital investment opportunities.
© 2009 South-Western, a division of Cengage Learning
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COMPARING CASH FLOWS THAT OCCUR AT DIFFERENT TIMES
Managers must evaluate costs and benefits of investment that occur over a period of many years.
Time Value of Money – a dollar received today is worth more than a dollar received in the future.
Compounding – earning interest in the current period on interest from previous periods.
© 2009 South-Western, a division of Cengage Learning
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SOURCES OF LONG-TERM CAPITAL: LOANERS VS. OWNERS
Capital Structure – the mix of equity and debt financing a firm uses for financing needs.
Debt Financing – creditors.
Equity Financing – owners.
© 2009 South-Western, a division of Cengage Learning
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SAMPLE BALANCE SHEET
© 2009 South-Western, a division of Cengage Learning
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SOURCES OF DEBT FINANCING
• Long-term loans
• Issuing notes or bonds
© 2009 South-Western, a division of Cengage Learning
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SOURCES OF EQUITY FINANCING
• Direct contributions by owners– Owners directly contribute resources to
unincorporated businesses– Corporations raise equity capital by issuing
stock
• Retained earnings
Equity vs. Debt
• Equity doesn’t require payments
• Debt has tax advantages
• Equity gives up ownership control
• Debt had interest
© 2009 South-Western, a division of Cengage Learning
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