Chapter 16

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Chapter 16 Financial Management and Securities
Markets
2
Chapter 16 Learning Goals

• How do finance and the financial manager affect
  the firms 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?

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Chapter 16 Learning Goals (contd.)

• When and how do firms issue equity, and what are
  the costs?
• 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?

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Finance

• Traditional Finance Activities
• Financial planning
• Investing money
• Raising funds
• Goal to maximize the value of the firm to its
  owners

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The Role of Finance

• Financial Management
• Managing a firms money to meet its goals
• Track cash flows
• Choose the best source of funding
• Analyze and use financial statements and data to
  make financial decisions

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Cash Flow Through a Business
Borrowedfunds
Sale offixed assets
Ownersinvestment

Collection ofaccounts receivable
Cash sales
Payment ofexpenses
Purchase offixed assets
Purchase ofinventory
Payment ofdividends
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How do organizations use funds?

• Companies use funds for
• Short term expenses or Operating expenses
• Benefits produced in less than 1 year
• Long term expenditures or Capital expenditures
• Benefits produced in over a year

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Funds for Operating Expenses

• In order to have money for operating expenses,
  companies have to manage their current assets
• Cash Management
• Managing Account Receivable
• Managing Inventory

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Capital Expenditures

• Capital Budgeting
• Select the long term project that offers the
  greatest return
• Challenges
• Accessing the value of information technology
• Decisions involving new products or acquisitions

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Raising Funds

• How do companies raise the funds they need?
• Borrow (debt)
• Sell Ownership Shares (equity)
• Retain Earnings (profit)

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Short term Financing

• Unsecured loans
• Trade Credit/Accounts Payable
• Line of Credit
• Revolving Credit Agreement
• Commercial Paper
• Secured loans
• Require collateral
• Factoring

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Long term Financing

• Debt vs- Equity
• Want a mix to balance cost risk
• Debt
• Advantages no loss of ownership, interest can
  be deducted on taxes
• Disadvantages financial risk
• Equity
• Advantages places few restrictions on the firm
• Disadvantages more costly than debt, gives
  common shareholders voice in management

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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
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Debt Financing

• Types of long term debt financing
• Term loan
• Maturity greater than 1 year
• Secured or unsecured
• Bonds
• Issued by corporations and governments
• Interest (coupon rate) paid regularly, principal
  (par value) paid at maturity
• Higher bond rating, lower risk of default
• Mortgage
• Secured by real estate

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Equity Financing

• Ways to obtain equity financing owners
  investment
• Selling new issues of common stock
• Retained Earnings
• Determine the right amount of profit to go to
  retained earnings and to dividends
• Selling preferred stock
• Venture Capital

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Securities Markets

• Securities investment certificates
• Equity or debt
• Securities Markets facilitate the transfer of
  funds
• Primary Market
• Secondary Market
• Key players in securities markets
• Investment bankers
• Stockbrokers

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Securities

• Types of Securities
• Company Stock
• Corporate Bonds
• U.S. Government Securities
• Treasury bills
• Treasury notes
• Treasury bonds

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Types of Securities, cont.

• Municipal Bonds
• General obligation bonds
• Revenue bonds
• Mutual Funds
• Futures Contracts
• Options

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Securities Exchanges

• Organized Stock Exchanges
• U.S. Stock Exchanges
• New York Stock Exchange (NYSE)
• American Stock Exchange (AMEX)
• Regional Stock Exchanges (Boston, Cincinnati,
  Chicago, Pacific)
• Foreign Exchanges
• London Stock Exchange
• Tokyo Stock Exchange

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Securities Exchanges, cont.

• Over the Counter Market
• National Association of Securities Dealers
  Automated Quotation (NASDAQ) system
• A number of dealers handle a security
• Several well known companies, commercial banks,
  insurance companies, government corporate bonds
  trade on the NASDAQ

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Regulation of Securities Markets

• Securities legislation
• Requires full disclosure
• Bans insider trading
• Regulates investment company practices
• Self Regulation
• Ethical standards
• Circuit Breakers to limit the amount the market
  can fall in one day

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Securities Exchanges NYSE

• To prevent a fast crash, the New York Stock
  Exchange has several circuit breakers
• a 1,100-point drop stops trading for1 hour if it
  occurs before 200 pm
• a 2,250-point drop stops trading for2 hours if
  it occurs before 100 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.
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Trends in Finance

• Expanding role into risk management
• Credit risk
• Market risk
• Operational risk
• Increased competition among securities markets
• NASDAQ is challenging the NYSE
• The Fourth Market electronic communications
  networks

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• Review
• Finance
• Traditional Activities
• Goal
• Role
• Using Funds
• Types of Financing
• Securities
• Security Markets
• Types of Securities
• Security Exchanges
• Regulations
• Trends