1. Understanding Financial Management and Securities Markets
Chapter 16
THE FUTURE OF BUSINESS: The Essentials
Gitman & McDaniel
2nd Edition
Prepared by
Deborah Baker
Texas Christian University

2. Learning Goals
How do finance and the financial manager affect the firm’s overall strategy?
What types of short-term and long-term expenditures does a firm make?
What are the main sources and costs of unsecured and secured short-term financing?
What are the key differences between debt and equity, and what are the major types and features of long-term debt?
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

3. Learning Goals (continued)
When and how do firms issue equity, and what are the costs?
How do securities markets help firms raise funding, and what securities trade in the capital markets?
What are the major U.S. securities exchanges and how are they regulated?
What are the current trends in financial management and the securities markets?
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

4. How Cash Flows Through a Business
Chapter 16
How Cash Flows Through a Business 1
Owners’ investment
Borrowed Funds
Cash Sales
Purchase of Fixed Assets
Payment of Dividends
Purchase of Inventory
Payment of Expenses
Collection of Accounts Receivable
Sale of Fixed Assets
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

5. The Financial Manager’s Responsibilities
Chapter 16
The Financial Manager’s Responsibilities 1
Key
Activities
Financial Planning
Investment (spending money)
Financing (raising money)
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

6. Risk and Return Factors
Chapter 16
Risk and Return Factors 1
Social Issues
Market Conditions
General Economic Conditions
Interest Rates
Changing Patterns of Market Demand
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

7. How Organizations Use Funds
Chapter 16
How Organizations Use Funds 2
Short-Term Expenses
Operating expenses
Long-Term
Expenditures
Investment in long-lived assets
Support current selling and production activities
Expansion, asset replacement, new product development
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

8. Short-Term Expenses 2 Cash Management Manage Current Assets
Chapter 16
Short-Term Expenses 2
Manage Current Assets
Cash Management
Accounts Receivable
Inventory
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

9. Marketable Securities Certificates of Deposit
Chapter 16
Cash Management 2
Surplus Cash
Marketable Securities
Certificates of Deposit
Treasury Bills
Commercial Paper
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

10. Cash Management 2 Collect money owed to the firm Key Strategies
Chapter 16
Cash Management 2
Key Strategies
Collect money owed to the firm
Pay money owed to others
Minimize funds tied up in inventory
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

11. Long-Term Expenditures
Chapter 16
Long-Term Expenditures 2
Capital Expenditures
Machinery
Buildings
Land
Equipment
Information Systems
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

12. Obtaining Short-Term Financing
Chapter 16
Obtaining Short-Term Financing 3
Raising Funds
Borrow Money (Debt)
Sell Ownership Shares (Equity)
Retain Earnings (Profits)
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

13. Unsecured Short-Term Loans
Chapter 16
Unsecured Short-Term Loans 3
Trade Credit
Seller extends credit to the buyer
Bank Loans
Lines of credit
Revolving credit agreement
Commercial Paper
Unsecured short-term debt issued by a financially strong corporation
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

14. Secured Short-Term Loans
Chapter 16
Secured Short-Term Loans 3
Secured Loans
Borrower pledges specific assets as collateral, such as accounts receivable or inventory.
Factoring
Firm sells its accounts receivable to a factor, such as a commercial bank or commercial finance company.
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

15. Debt versus Equity Financing
Chapter 16
Debt versus Equity Financing 4
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

16. Chapter 16
Debt Financing 4
Term Loans
A business loan with a maturity of more than one year.
Bonds
Long-term debt obligations issued by corporations and governments.
Mortgage Loans
A long-term loan made against real estate as collateral.
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

17. Dividends & Retained Earnings
Chapter 16
Equity Financing 5
Venture Capital
Preferred Stock
Dividends & Retained Earnings
Selling Common Stock
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

18. Debt (a loan to the issuer) (ownership in issuing organization)
Chapter 16
Securities Markets 6
Securities
Debt (a loan to the issuer)
Equity
(ownership in issuing organization)
Primary Market
Secondary Market
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

19. Securities Markets 6 Investment Bankers Stockbroker
Chapter 16
Securities Markets 6
Investment
Bankers
Help companies raise long-term financing, a process called underwriting
Stockbroker
A person (account executive) licensed to buy and sell securities on behalf of clients
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

20. Moody’s and Standard & Poor’s Bond Ratings
Chapter 16
Moody’s and Standard & Poor’s Bond Ratings 6
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

21. Securities Exchanges 7 Organized Stock Exchanges
Chapter 16
Securities Exchanges 7
Types of Securities Markets
Over-the-Counter Market
Organized Stock Exchanges
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

22. American Stock Exchange (AMEX) New York Stock Exchanges (NYSE)
Chapter 16
U.S. Stock Exchanges 7
American Stock Exchange (AMEX)
New York Stock Exchanges (NYSE)
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

23. Global Trading and Foreign Exchanges
Chapter 16
Global Trading and Foreign Exchanges 7
NYSE NASDAQ
London
Toronto
Montreal
Paris
Sydney
Zurich
Buenos Aires
Tokyo
Frankfurt
Hong Kong
Taiwan
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved

24. Regulation of Securities Markets
Chapter 16
Regulation of Securities Markets 7
Securities and Exchange Commission
The main federal government agency responsible for regulating the U.S. securities industry.
Insider Trading
The use of information that is not available to the general public to make profits on securities transactions.
The losses resulting from the bankruptcy of Enron were more than $60 billion. And Enron was just the first in a series of companies whose stories hit the front pages as news of their disregard for accepted accounting procedures became public. Companies such as Adelphia, Qwest, Tyco, WorldCom, and Xerox join Enron in a rogue’s gallery for their financial abuses.
Circuit Breakers
Measures that, under certain conditions, stop trading in the securities markets to limit the amount the market can drop in one day.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved