1. FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. part CHAPTER 15 Money and the Financial System 6 FHF 16-2 CHAPTER 14 Accounting and Financial Statements CHAPTER 16 Financial Management and Securities Markets

3. FHF Working Capital Management The management of short-term assets and 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 16-3

4. [] FHF Transaction Balance Cash kept on hand by a firm to pay normal daily expenses such as employee wages and bills for supplies and utilities 16-4

5. [] FHF LockboxLockbox An address, usually a commercial bank, at which a company receives payments in order to speed collections from customers 16-5

6. FHF Electronic Funds Transfer  Frequently used to speed up collections  Also being used to pay bills online  Companies want to collect bills quickly and pay them slowly Paying electronically increases the speed of collections and disbursements to one day Checks are the slowest way to pay bills (generally 3-4 days) 16-6

7. FHF Investing Idle 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 loans Treasury Bills (T-bills)  Short-term debt obligations the U.S. government sells to raise money  Maturities between 1 week to 1 year 16-7 …continued on next page

8. FHF Investing Idle Cash Eurodollar Market – (foreign currency market)  A market for trading U.S. dollars or other currencies in foreign countries  Any U.S. dollar-denominated deposit in non-U.S. bank is called eurodollar 16-8

9. FHF Accounts Receivable and Inventory  Occurs on the balance sheet after cash and marketable securities Accounts Receivable  Money owed to a business by credit customers  Companies often offer discounts for early payment and penalties for late payments Optimizing Inventory  Objective is to minimize firm’s investment in inventory without experiencing production cutbacks  Radio frequency identification (RFID) technology helps firms track and optimize their inventories 16-9

10. FHF Managing 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 The most important account payable and most widely used source of short-term financing 16-10

11. FHF Current Liabilities: Bank Loans Line of Credit  An arrangement by which a bank agrees to lend a specified amount of money to an organization upon request  Similar to a credit card, but often for millions of dollars Secured Loans  Loans backed by collateral that the bank can claim if the borrowers do not repay the debt 16-11 …continued on next page

12. FHF Current Liabilities: Bank Loans Unsecured Loans  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  Interest rates on commercial loans can be fixed or variable (floating- rate loan)  Floating rate loans are appealing when interest rates are falling, but not when they rise 16-12

13. FHF Non-Bank Liabilities  Short-term loans from insurance companies, pension funds, money market funds, or finance companies Factor  An organization that purchases accounts receivables at a discount and assumes responsibility for collecting the accounts Taxes and Employees’ Wages  Debt obligations to the firm  Additional nonbank liabilities that must be efficiently managed to ensure maximum profitability 16-13

14. FHF Managing Long-Term (Fixed) Assets  Expected to last for many years Production facilities (plants), offices and equipment  Tend to be high-cost, making financing critical Organizations need the most high-tech, up-to-date facilities and equipment they can afford in order to be competitive  Obtaining long-term financing can be difficult Leasing is a way of obtaining assets without purchasing them 16-14

15. FHF Capital Budgeting  The process of analyzing the needs of business and selecting the assets that will maximize its value Not an exact process  Managers must be flexible as new information becomes available  Assets and projects must be continuously reevaluated 16-15

16. FHF 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 16-16

17. FHF Financing with Long-Term Liabilities  Debts that will be repaid over a number of years Long-term loans Bond issues  Companies must raise money in the form of lines of credit or loans  Relying too heavily on debt can be dangerous Companies may not earn enough to cover interest payments 16-17

18. FHF BondsBonds  Common form of long-term debt  Sold by large companies to raise long-term funds Like corporate IOUs Bondholders basically loan the issuer cash  Indenture : The bond contract specifying all terms of agreement between the bondholder and the issuing organization Specifies interest payments, maturity date, repayment methods, etc. 16-18

19. FHF Financing with Owner’s Equity Owner’s Equity is the owner’s investment in an organization  All money and assets owners have brought into an organization 16-21

20. FHF Common Stock  The most important source of capital for most new companies  Gives stockholders voting and control rights Par Value : The amount printed on the stock certificate Market Value : The price at which the stock is trading Capital in Excess of Par : The difference between the market value and the par value 16-22

21. FHF Financing with Owner’s Equity Preferred Stock  Gives the stockholder preference in distribution of profits, but not voting and control rights  Is a safer investment than common stock Retained Earnings  Earnings after expenses and taxes  Are reinvested in the assets of the firm and belong to the owners in the form of equity  The only long-term funds a company generates internally 16-23

22. FHF When a Company Has Profits Left Over Retained Earnings  Reinvested in the assets of the firms Dividend Yield  The dividend per share divided by the stock price  Not all companies pay dividends 16-24

23. FHF Financing Through Issuing Stock Primary Market  New issue (first-time sale of stock) or initial public offering (IPO– when a company offers stock for sale for the first time)  Raise cash for issuing corporation Secondary Market  Stock exchanges and OTC markets  Investors trade securities with each other  Does not raise cash for corporation 16-25

24. FHF Investment Banking  Is the sale of stocks and bonds for corporations  Helps companies raise funds by matching people and institutions who have money to invest with corporations needing resources  A way for corporations to obtain financing 16-26

25. FHF Securities Markets  Provide the mechanism for buying and selling securities The Stock Market  Dramatic shifts in structure of exchanges  NY Stock Exchange and NASDAQ now are for-profit businesses  Most exchanges are or are becoming electronic– making organized exchanges less centralized and faster Over-the-Counter Market (OTC)  A network of dealers all over the country and world  No central location  Small stocks, illiquid bank stocks and penny stocks 16-27

26. FHF Measuring Market Performance  How are investments performing relative to the whole market?  Performance measures make comparison possible Index: Compares current stock prices with a base price Average: The average of certain stock prices, usually calculated with complicated formulas  Financial bubbles can be hard to recognize, even with performance measures  Investors must stay well informed of business news 16-28