Financial Management and the Securities Market 12 Chapter © 2004 by Nelson, a division of Thomson Canada Limited.

2 Learning Goals 1.What roles do finance and the financial manager play in the firm’s overall strategy? 2.How does a firm develop its financial plans, including forecasts and budgets? 3.What types of short-term and long- term expenditures does a firm make?

3© 2004 by Nelson, a division of Thomson Canada Limited. Learning Goals (cont’d) 4.What are the main sources and costs of unsecured and secured short-term financing? 5.How do the two primary sources of long-term financing compare? 6.What are the major types, features, and costs of long-term debt? 7.When and how do firms issue equity, and what are the costs?

4© 2004 by Nelson, a division of Thomson Canada Limited. Learning Goals (cont’d) 8.Where can investors buy and sell securities? 9.What trends are affecting the field of financial management?

5© 2004 by Nelson, a division of Thomson Canada Limited. Learning Goal 1 What roles do finance and the financial manager play in the firm’s overall strategy?

6© 2004 by Nelson, a division of Thomson Canada Limited. Financial Management: the art and science of managing the firm’s money so that it can meet its goals

7© 2004 by Nelson, a division of Thomson Canada Limited. The Role of the Financial Manager To maximize the value of the firm to its owners by: financial planning investment (spending money) financing (raising money)

8© 2004 by Nelson, a division of Thomson Canada Limited. Learning Goal 2 How does a firm develop its financial plans, including forecasts and budgets?

9© 2004 by Nelson, a division of Thomson Canada Limited. Financial Planning Requirements Forecasts –short-term (operating plans) –long-term (strategic plans) Budgets –cash budget –capital budget –operating budget

10© 2004 by Nelson, a division of Thomson Canada Limited. Learning Goal 3 What types of short-term and long-term expenditures does a firm make?

11© 2004 by Nelson, a division of Thomson Canada Limited. How Organizations Use Funds Short-term expenses –cash management –accounts receivable –inventory Long-term expenditures –capital expenditures –capital budgeting

12© 2004 by Nelson, a division of Thomson Canada Limited. Learning Goal 4 What are the main sources and costs of unsecured and secured short-term financing?

13© 2004 by Nelson, a division of Thomson Canada Limited. Unsecured Short-Term Financing Trade credits (accounts payable) Bank loans –line of credit –revolving credit agreement Commercial paper

14© 2004 by Nelson, a division of Thomson Canada Limited. Secured Short-Term Financing Secured loans –pledging specific assets as collateral Factoring –selling accounts receivable outright at a discount

15© 2004 by Nelson, a division of Thomson Canada Limited. Learning Goal 5 How do the two primary sources of long- term financing compare?

16© 2004 by Nelson, a division of Thomson Canada Limited. Comparing Long-Term Financing Debt financing (borrowing) –interest expense is tax deductible –no loss of ownership –requires payment of interest and principal on specified dates Equity financing (ownership) –not required to pay dividends (not tax deductible) or repay investment –common shareholders have voting rights

17© 2004 by Nelson, a division of Thomson Canada Limited. Learning Goal 6 What are the major types, features, and costs of long-term debt?

18© 2004 by Nelson, a division of Thomson Canada Limited. Long-Term Debt Term loans –secured or unsecured –5- to 12-year maturity Corporate bonds –10- to 30-year maturity Mortgage loans –secured by real estate

19© 2004 by Nelson, a division of Thomson Canada Limited. Learning Goal 7 When and how do firms issue equity, and what are the costs?

20© 2004 by Nelson, a division of Thomson Canada Limited. 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 stockholders –less expensive than common stock

21© 2004 by Nelson, a division of Thomson Canada Limited. Debt vs. Equity Financing DebtEquity Voice in Management Creditors have none Stockholders vote Claim on income & assets Greater claim Residual claim MaturityStated maturity No maturity Tax treatmentInterest is deductible Dividends not deductible

22© 2004 by Nelson, a division of Thomson Canada Limited. Learning Goal 8 Where can investors buy and sell securities?

23© 2004 by Nelson, a division of Thomson Canada Limited. Securities: investment certificates issued by corporations or governments that represent either equity or debt

24© 2004 by Nelson, a division of Thomson Canada Limited. Types of Markets Primary market –new securities are sold (IPO) Secondary market –organized stock exchanges Toronto Stock Exchange (TSX) TSX Venture Exchange –foreign exchanges New York Stock Exchange (NYSE) –over-the-counter market

25© 2004 by Nelson, a division of Thomson Canada Limited. Trends in Finance Finance goes global Risk management –credit risk –market risk –operational risk