Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-1 Financial Management and Institutions
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-2 The Role of the Financial Manager ●Chief financial officer—top finance executive of a corporation; usually reports directly to the firm’s CEO. –VP for Financial Management –Treasurer –Controller ●All address the risk-return trade-off
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-3 ●Organizational Structure of the Finance Function
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-4 The Role of the Financial Manager ●The Financial Plan –Document specifying the funds a firm will need for a period of time, the timing of inflows and outflows, and the most appropriate sources and uses of funds. What funds will the firm require during the appropriate period of operations? How will it obtain necessary funds? When will it need more funds?
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-5 Financial Management ●Short-term Uses for Excess Cash –Will need back within a year –Investments: U.S. Treasury bills Commercial paper Repurchase agreements Certificates of deposit
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-6 Sources of Funds ●Short-Term Sources of Funds –Repaid within one year –Includes: Trade credit Short-term loans Commercial paper Repurchase agreements
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Uses for Long-Term Excess Cash ●What does a business do with it’s excess cash? –Cash not needed for investing in the business 1-7
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-8 Sources of Long-term Cash ●Long-term –Repaid over many years ●Include: –Long - term loans –Bonds - similar to loans –Equity financing – sell ownership in the business IPO – initial public offering Primary market Secondary market
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-9 Comparison of Debt and Equity Capital
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Exercise ●Need to raise $100M ●Do you sell stocks or bonds? 1-10
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved Leverage ●The greater the percent you borrow, the greater your returns on equity –Also the greater your loss ●Example –Flip a house Firm AFirm B Stock $10,000$100,000 Bonds (10%) 90,0000 Total $100,000 Earnings $30,000 Bond Int. (9,000)0 Net Inc. $21,000$30,000 Ret. To shareholders 210%30%
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved The Federal Reserve System ●Central bank of the United States. Has four basic responsibilities: –Regulating commercial banks –Performing banking-related activities for the U.S. Treasury –Servicing member banks –Monetary policy