Financial Management and Securities Markets Chapter 16 *modified by other sources

Finance is the study of money within the firm.

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

A. Projecting outward flow of cash (month-by-month) Cost of daily operations cost of credit services cost of inventory purchase of major assets payment of debt payment of dividends

B. Projected flow of cash into the business (month-by-month) Daily cash sales accounts receivable being collected investment income interest income

C. Compare monthly inflows to outflows Perfect match: no financial action needed expenditures > cash inflow: additional funds are needed cash inflow > expenditures: cash surplus

II. Generating Revenue from excess funds A. Expansion - increase production capacity, adding sales outlets, acquire another firm B. High-liquidity investments (treasury bills, commercial paper, certificates of deposits)

III. Finding efficient sources of funds A. Short-term financing - financing used to obtain money to finance current operations, with repayment required within one year 1. Debt financing a. trade credit - accts payable b. commercial banks (loans, line of credit, factoring, floor planning) 2. Internal funds management

Finding sources (cont’d) B. Long-term financing - financing used to obtain money which will be repaid in more than a year’s time 1. debt financing a. loans - promissory note (payment schedule) b. bonds - IOU with an investor (periodic interest payments, principal at maturity) 2. equity financing a. retained earnings b. venture capital c. public sale of stock

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

IV. Managing the finances of the firm A. Managing working capital {current assets minus current liabilities} 1. cash 2. float 3. acct. receivable 4. inventory B. Developing capital budgets C. Developing financial controls

V. Securities - investment certificates issued by corporations or governments that represent either equity or debt A. Primary market 1. new securities sold to the public 2. issuer gets proceeds B. Secondary market 1. already issued securities are traded 2. stock exchanges, commodities exchanges, over-the-counter market

C. Role of Investment Bankers and Stockbrokers Corporations and government (buy securities at agreed upon price) Investment bankers/stockbrokers (resell securities at higher price) Public

VI. Securities Exchanges A. Organized stock exchanges 1. re-sell securities in an auction-type format 2. US stock exchanges New York Stock Exchange - began in 1792 American Stock Exchange 3. Global trading & foreign exchanges B. Over-the-Counter Market 1. electronic-based NASDAQ, first electronic-based stock market with up-to-date bid and ask prices C. Regulation of securities markets 1. Securities legislation - insider trading 2. Self-regulation