2. Chapter 16
Financial Management and Securities Markets

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

5. 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

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

7. 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.

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

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

10. 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.

11. 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

12. 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

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

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

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

16. 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

17. 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

18. 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

19. 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

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

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

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

23. 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

24. 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

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

26. 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

27. A Basic Bond Quote

28. 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

29. 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

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

31. 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

32. 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

33. 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

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