1. Using Funds To Maximize Value
Chapter 9: FINANCE
Chapter 10: SECURITIES MARKETS
Using Funds To Maximize Value
Trading Financial Resources

2. Finance Worksheet

3. WHAT MOTIVATES FINANCIAL DECISIONS
What types of assets do we need to achieve goals?
How do we get the funds we need?
Evaluate financial performance
Plan financial resources
Manage working capital
Evaluate investment opportunities
Determine appropriate strategy

4. EVALUATING PERFORMANCE: WHERE DO WE STAND?
Financial ratios provide insight into financial strengths and weaknesses
Use financial data from balance sheet and income statement
Companies can compare their ratios with other businesses %

5. KEY FINANCIAL RATIOS RATIO TYPE HOW IT IS COMPUTED Current
Liquidity: ability to pay short-term liabilities.
Current Assets / Current Liabilities
Inventory
Turnover
Asset Management: how firm is using assets to generate revenue.
Cost of Good Sold / Average Inventory
Debt-to-equity
Leverage: extent to which a firm relies on debt.
Total Debt / Total Owner’s Equity
Debt-to-assets
Leverage: measures the extent to which a relies on debt
Total Debt / Total Assets
Return on equity
Profitability: compares the amount of profit compared to resources invested
(Net Income – Preferred Div) / Avg Common Stock Equity
Return on assets
Net Income / Average Total Assets
Earnings per share
(Net Income – Pref Dividends) / Avg # of Shares Out

6. KEY FINANCIAL RATIOS Burn Rate:
Decline in Cash Position / time period over which cash decline occurs
Higher the Burn Rate, the more quickly a firm is using up its cash
Options to conserve cash include:
Conserve existing cash
Seek new funds

7. FINANCIAL PLANNING: PROVIDING A ROAD MAP FOR THE FUTURE
What assets must be obtained?
How much additional financing is needed?
How much can the firm generate Internally? Externally?
When will external financing be required?

8. BASIC PLANNING TOOLS Pro Forma Income Statement – forecasts the sales,
expenses and net income
Pro Forma Balance Sheet –
forecasts the types and amounts
of assets a firm will need to
carry out plans.
Cash Budget –
detailed projection of
cash flows to determine
when cash shortages
and surpluses will occur.

9. CASH BUDGET

10. MANAGING WORKING CAPITAL: CURRENT EVENTS
Net Working Capital:
Difference between current assets and liabilities
Working capital must be managed
Appropriate level of current assets
Current liabilities needed to finance activities

11. MANAGING CASH Need cash to pay bills Cash does not earn returns
Report cash equivalents as cash
Commercial Paper
T-Bills
Money Market Mutual Funds

12. MANAGING ACCOUNTS RECEIVABLE
Accounts Receivable - Money which is owed to a company by a customer for products and services provided on credit.
Set Credit Terms
Establish Credit Standards
Design Appropriate Collection Policy

13. SHORT-TERM FINANCING Spontaneous Financing Short-Term Bank Loans
Trade Credit
Short-Term Bank Loans
Line of Credit
Revolving Credit
Factoring
Commercial Paper

14. “If you want to know the value of money, go and try to borrow some.”
BORROWING MONEY “
“If you want to know the value of money, go and try to borrow some.”
- Benjamin Franklin “

15. CAPITAL BUDGETING: IN IT FOR THE LONG HAUL
Replace machines and equipment
New machines and equipment
Build a new factory, warehouse or office
Introduce a new product line
Capital Budgeting – a systematic evaluation of a firm’s major long-run capital investment opportunities.

16. COMPARING CASH FLOWS THAT OCCUR AT DIFFERENT TIMES
Managers must evaluate costs and benefits of investment that occur over a period of many years.
Time Value of Money – a dollar received today is worth more than a dollar received in the future.
Compounding – earning interest in the current period on interest from previous periods.

17. USING NET PRESENT VALUE TO EVALUATE CAPITAL BUDGETING PROPOSALS
Present Value – How much a given amount of cash received in a future period is worth today, given the time value of money.
Managers must compare the amount of cash an investment generates and when it generates the cash
Time value of money – a dollar received today is worth more than a dollar received in the future

18. NPV CALCULATION Net present value is the present value of all cash
flows associated with an investment, including the
initial (negative) cash flow of the investment.

19. SOURCES OF LONG-TERM CAPITAL: LOANERS VS. OWNERS
Equity Financing – owners.
Debt Financing – creditors.
Capital Structure – the mix of equity and debt financing a firm uses for financing needs.

20. SOURCES OF DEBT FINANCING
Long-term loans
Private placements
Issuing notes or bonds
Pros
Debt is a legally binding agreement to repay the money plus interest
Debt requires fixed payments
Many lenders require collateral which lenders can use to recover balance
Interest payments are tax-deductible
Avoids additional investment of stockholders
Some lenders impose covenants on the borrower
Cons

21. SOURCES OF EQUITY FINANCING
Direct contributions by owners
Owners directly contribute resources to unincorporated businesses
Corporations raise equity capital by issuing stock
Retained earnings
Equity financing provides more flexibility than debt financing

22. FINANCIAL LEVERAGE: USING DEBT TO MAGNIFY GAINS
Heavy debt in capital structure
Potential high returns to owners
Increased risk

23. Chapter 10: SECURITIES MARKETS
Trading Financial Resources
Trading Financial Resources

24. BASIC TYPES OF FINANCIAL SECURITIES
Three major types of securities that are traded in markets:
Common Stock
Preferred Stock
Bonds

25. Primary Securities Market
SECURITIES MARKETS
Primary Market - where corporations raise additional capital by
issuing and selling newly issued securities
Funds
Primary Securities Market
Debt & Equity
Corporations
Investors
Stocks & Bonds
Securities
Additional Funds Support:
Expansion of facilities
Research and Product Development
Adoption of New Technologies
Other strategic initiatives
Returns to Investors:
Dividends, Interest,
Capital Gains
Long term financing
Secondary Market – involves trades of previously issued securities

26. COMMON STOCK: A SHARE OF CORPORATE OWNERSHIP
The basic form of ownership in a corporation
Voting Rights
Right to Dividends
Capital Gains
Preemptive Rights
Right to Residual Claim on Assets

27. PREFERRED STOCK
Stock that gives its holder preference over common stockholders.
No Voting Rights
Claim on Assets
Payment of Dividends
Cumulative Feature

28. Foundations Stock Market Summary
Company
Close
Change
Shares
MarketCap ($M)
Book Value
EPS
Dividend
Yield
P/E
Andrews
$8.89
$4.20
2,879,847
$26
$7.72
$0.59
$0.00
0.0%
15.1
Baldwin
$2.54
($0.94)
2,624,052 $7
$5.09
($0.15)
-17.2
Chester
$3.47
($6.24)
2,814,010
$10
$6.93
($0.97)
-3.6
Digby
$0.61
($2.00) $2
$1.22
($3.56)
-0.2
Erie
$9.10
$0.44
2,399,873
$22
$8.20
$1.19
$0.25
2.7%
7.7
Ferris
$9.09
($2.71)
2,760,252
$25
$8.83
$0.34
27.0
Close value of a share at the end of a trading day
Change how much higher /lower price today than yesterday (in Foundation- last year)
Shares outstanding
Dividend cash payment to owners
Yield dividend/ stock price
EPS earnings per share= net income / shares

29. BONDS: A FORMAL IOU
Long-term debt issued by a corporation or government
Maturity Date
Par Value
Coupon Rate

30. How Bonds Work
Suppose ABC offers bonds with a Par Value of $1000 at a Coupon (interest) rate of 10% with a Maturity of 5 years.
You give ABC $1000 which they promise to pay back over the next 5 years
Year 1, ABC gives you $100 (10% of $1000) in interest.
Year 2, ABC gives you $100 in interest.
Years 3 and 4, same as Year 2.
Year 5, ABC gives you $100 in interest and also pays back the entire face value of the bond, $1000.

31. CHARACTERISTICS OF BONDS
Most bonds are secured with a pledge of specific assets
Methods of retiring bonds:
Serial bonds have unique maturity dates and help spread out repayments
Companies may establish sinking fund to assist in repayment
Callable bonds have provisions for early redemption
Convertible bonds allow bonds to be transferred into shares of common stock

32. Bond Credit Quality Ratings -Rating Agencies
Credit Risk Moody’s Standard Fitch
& Poor’s Ratings
Investment grade
Highest quality Aaa AAA AAA
High quality (very strong) Aa AA AA
Upper medium grade (strong) A A A
Medium grade Baa BBB BBB
Not investment grade
Lower medium grade (speculative) Ba BB BB
Low grade (speculative) B B B
Poor quality (may default) Caa CCC CCC
Most speculative Ca CC CC
No interest paid or bankruptcy petition C D C
In default C D D

33. JUNK BONDS
Junk bonds are bonds that are rated Ba or lower in Moody’s classification
Junk bonds offer a higher rate of interest (and risk).
In 2007, only 22 companies in the world defaulted on their bonds.
During the recession in 2008, the number soared to 126.
The Wall Street Journal tactfully refers to these securities as “high yield bonds.”

34. Foundations Bond Market Summary
Bond series#- interest rate S year you pay back
Face cash you received and how much you will have to pay back at maturity
Yield bond interest / trading price
Close what it is trading for today- and what you would pay to retire early
S&P = risk rating AAA – AA- A- BBB-….D

35. TRADING SECURITIES: THE PRIMARY MARKET
Public Offering
Initial Public Offering (IPO)
Select an Investment bank
Prepare paperwork
Arrange for financing
Carry out the offer
Private Placement
Quicker, simpler, less expensive
Investment bank assistance
No SEC registration
Only available to accredited investors

36. INVESTMENT BANKS Financial Intermediary Assists firm with IPO
Planning
Marketing
Assessment
Determining how to structure the IPO is key role of Investment Banks

37. TRADING SECURITIES: THE SECONDARY MARKET
Security Exchanges
New York Stock Exchange
The largest securities exchange in the United States.
Traditionally an “auction market”
NASDAQ
Electronic exchange
Over the Counter Market
Electronic Communication Networks

38. REGULATIONS OF SECURITIES MARKETS: ESTABLISHING CONFIDENCE
State Regulations
Federal Legislation
Securities Act 1933
Prohibits misrepresentation, deceit or other forms of fraud
Require firms to file registration when issuing stock
Securities Exchange Act of 1934
Securities and Exchange Commission
Established report filing
Registration of brokers and dealers
Prosecution power
Individual and Company Fraudulent Activity (i.e. insider trading)

39. PERSONAL INVESTING What are your short-term and long-term goals?
Given your budget, how much are you able to invest?
How long can you leave your money invested?
How concerned are you about the tax implications of your investments?
How much tolerance do you have for risk?
DIVERSIFICATION

40. DIRECT STOCK PURCHASE PLANS
Many Corporations offer Direct Stock Purchase Plans
Purchase stock direct from company
Dividend Reinvestment Plans (DRIPS) allow current stockholders to reinvest dividends to purchase additional stock

41. STRATEGIES FOR INVESTING IN SECURITIES
Investing for Income
Market Timing
Value Investing
Investing for Growth
Buying and Holding

42. KEEPING TABS ON THE MARKET: STOCK INDICES
Stock Index – tracks how the prices of a specific set of stocks have changed.
Standard and Poor’s 500 – tracks 500 stocks and weighs the total market value of each stock.
Dow Jones Industrial Average (DJIA) – most widely followed index. Tracks 30 stocks picked by the Wall Street Journal editors.