Chapter 16 Financial Management and Securities Markets

Sears Holding Corporation – Using brand names to create bonds Sears Holding Corporation (SHC) parent of Kmart and Sears, Roebuck and Co.

Current Assets and Current 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

Current Assets Working capital management – managing of short-term assets and liabilities.

Managing Cash Transaction balances – cash kept on hand by a firm to pay normal daily expenses such as employee wages and bills for supplies utilities.

Managing Cash Lockbox – an address, usually a commercial bank, at which a company receives payments in order to speed collections from customers.

Going Green or Greenwashing? Eco Chic line – products made with organic materials. The Pottery Barn collection.

Managing Cash Marketable securities – temporary investment of extra cash by organizations up to one year in U.S. Treasury bills, certificates of deposit, commercial paper, or Eurodollar.

Managing Cash Treasury bills– short-term debt obligations the U.S. government sells to raise money. Commercial certificates of deposit (CD’s) – 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

Short-term Investment Possibilities for Idle Cash Managing Cash Type of Security Maturity Seller of Security Interest Rate 5/23/08 Safety Level Treasury bills 90 days U.S. Government 1.82% Excellent 180 days 1.87% Commercial Paper 30 days Major Corporations 2.19% Very Good CDs U.S. commercial banks 2.62% 2.80% Eurodollars European commercial banks 2.75% Short-term Investment Possibilities for Idle Cash

Managing Cash Eurodollar market – a market created in London for trading U.S. dollars in foreign countries.

Accounts Receivable – money owed to a business by credit customers.

Optimizing Inventory Optimizing inventory – minimize firm’s investment in inventory without experiencing production cutbacks.

Maximizing Current Liabilities Accounts payable – money an organization owes to suppliers for goods and services. Trade credit – credit extended by suppliers for the purchase of their goods and services 16-16

Bank Loans 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 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

Non-Bank Liabilities 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

Managing Fixed Assets Long-term (fixed) assets – production facilities (plants), offices, and equipment—all of which are expected to last for many years.

How Reliable is Budgeting and Planning? Budgeting & Planning Frequently Occasionally Rarely How Reliable is Budgeting and Planning?

Capital Budgeting Capital budgeting -- is the process of analyzing the needs of business and selecting the assets that will maximize its value

Qualitative Assessment of Capital Budgeting Risk Introduce a New Product in Foreign Markets (risk depends on stability of country) Expand into a New Market Introduce a New Product in a Familiar Area Add to a Product Line Buy New Equipment for an Established Market Repair Old Machinery Highest Risk Lowest Risk Qualitative Assessment of Capital Budgeting Risk

Long-term Money Profitability & Pricing Long Term Money -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

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

Bonds 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

A Basic Bond Quote

Types of Bonds 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 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

Financing With Owners’ Equity Owners’ equity -- the owners’ investment in an organization Common stock Preferred stock Retained earnings 16-30

Financing With Owners’ Equity 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 16-31

Investment Banking Primary market -- new issue or initial public offering (IPO) Secondary market -- Stock exchanges and OTC markets where investors trade securities with each other

Securities Markets Securities markets -- provide a mechanism for buying and selling securities Organized exchanges -- Central locations where investors buy and sell securities Over-the-counter market (OTC) -- A network of dealers all over the country, and world, linked by computers, telephones, and teletype machines

Measuring Market Performance Indexes Averages Bull market Bear market 16-34