2. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 Finance: Acquiring and Using Funds to Maximize Value Identify the goal of financial management and explain the issues financial managers confront as they seek to achieve this goal Describe the tools financial managers use to evaluate their company’s current financial condition and develop financial plans Evaluate the major sources of funds available to meet a firm’s short-term and long-term financial needs 2 9-1 9-2 9-3

3. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 Identify the key issues involved in determining a firm’s capital structure Describe how financial managers acquire and manage current assets Explain how financial managers evaluate capital budgeting proposals to identify the best long-term investment options for their company 3 Finance: Acquiring and Using Funds to Maximize Value 9-4 9-5 9-6

4. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Management: An Overview 4 Funds a firm uses to acquire its assets and finance its operations Financial capital Functional area of business responsible for finding the best sources of funds and the best ways to use them Finance

5. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Needs: Evaluation and Planning 5 Comparing values of key accounts listed on a firm’s financial statements Financial ratio analysis Use of debt in a firm’s capital structure Financial leverage

6. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Key Financial Ratios 6 Ratio nameTypeHow it is computed CurrentLiquidity Measures ability to pay short- term liabilities as they come due Current Assets/Current Liabilities Inventory turnover Asset management Measures how effectively a firm is using its assets to generate revenue Cost of Goods Sold/Average Inventory Average collection period Asset management Measures how effectively a firm is using its assets to generate revenue Accounts Receivable/(Annual Credit Sales/365)

7. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Key Financial Ratios 7 Ratio nameTypeHow it is computed Debt-to- assets Leverage Measures the extent to which a firm relies on debt to meet its financing needs Total Debts/Total Assets Return on equity Profitability Compares the amount of profit to some measure of resources invested Net Income – Preferred Dividend/Average Common Stockholders Equity Earnings per share Profitability Compares the amount of profit to some measure of resources invested Net Income – Preferred Dividend/Average Number of Common Shares Outstanding

8. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Planning Tools Projection showing how a firm’s budgeted sales and costs will affect expected net income Budgeted income statement Projected statement forecasting: Types and amounts of assets a firm will need to implement future plans Amount of additional financing required to acquire these assets Budgeted balance sheet Detailed forecast of future cash flows Helps identify periods of temporary shortages or surpluses of cash Cash budget 8

9. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Funds and Finance: An Overview Granted by sellers when they deliver goods and services to customers without requiring immediate payment Spontaneous financing: Granted when the company places its orders without requiring any special arrangements Trade credit Cash owed to a firm during credit sales, shown in accounts receivable on the company’s balance sheet Factor: Purchases the accounts receivables of other firms at a discount Factoring 9

10. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Funds and Finance: An Overview Line of credit: Pre-approved credit up to a specified limit if the firm maintains an acceptable credit rating Revolving credit agreement: Bank makes a formal, legally binding commitment to provide the agreed-upon funds Short-term bank loans Promissory notes issued by large corporations Commercial paper 10

11. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Funds and Finance: An Overview ￭ Direct investments from owners ￭ Retained earnings: Profits that a firm reinvests ￭ Long-term debt  Term loans Covenant: Restriction lenders impose on borrowers as a condition of the loan ￭ Corporate bond 11

12. Reality TV Video Slide 12 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. http://www.cengage.com/introbusiness/book_content/ 9781285187822_kelly/videos/09startupjunkies.html

13. © iStockphoto.com / DNY59 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ￭ In your opinion, why did Earth Class Mail seek venture capital funding before seeking venture debt financing from a bank? ￭ Describe the major advantage and the major disadvantage for Earth Class Mail in seeking additional financing through venture debt funding rather than additional venture capital investment. 13

14. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Capital Structure ￭ Mix of equity and debt financing a firm uses to meet its permanent financing needs  Equity financing: Funds provided by the owners of a company  Debt financing: Funds provided by lenders 14

15. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Debt Financing Advantages Interest payments a firm makes on debts are a tax-deductible expense Firm acquires additional funds without: Making stockholders invest more Sale of stock to new investors Disadvantages Required interest payments: Take up most of a firm’s earnings in a bad financial situation leading to bankruptcy Covenants hamper a firm’s flexibility Restrictions on dividends make it difficult for the firm to raise money 15

16. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Equity Financing Advantages More flexible and less risky than debt financing Does not impose: Required payments Covenants Disadvantages Does not yield tax benefits Existing owners might not want a firm to issue more stock Firm forgoes the opportunity to use financial leverage 16

17. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.3 - How Financial Leverage Affects the Return on Equity 17

18. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Dodd-Frank Act ￭ Monitors financial markets to identify and respond to emerging risks  Places limitations on risky financial strategies such as heavy reliance on leverage 18

19. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Web-link: Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act ￭ The web-link provides references to all the rules that have been proposed or adopted in connection with the Dodd- Frank Act http://www.sec.gov/spotlight/dodd- frank.shtml 19

20. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Current Assets Handling Safe and highly liquid assets that are listed with cash holdings on a balance sheet Cash equivalents Short-term marketable IOUs issued by the U.S. federal government U.S. Treasury bills (T-bills) Pools funds from many investors to purchase safe and highly liquid securities Money market mutual funds 20

21. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Current Assets Handling ￭ Key elements of managing credit sales  Set credit terms  Establish credit standards  Appropriate collection policy ￭ Firms keep inventories low to reduce costs and improve efficiency 21

22. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How to Evaluate Budget Proposals 22 Used to evaluate long-term investment proposals Capital budgeting Principle that a dollar received today is worth more than a dollar received in the future Time value of money Interest-earning deposit requiring funds to remain deposited for a fixed term Certificate of deposit (CD)

23. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How to Evaluate Budget Proposals 23 Amount of money invested today at a given rate of interest would grow to become some future amount in a specified time Present value Higher discount rate computed for present values of cash flows of risky projects Risk-return tradeoff Sum of the present values of expected future cash flows from an investment, minus the cost of that investment Net present value (NPV)

24. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.5 - Decision Rule for Capital Budgeting 24

25. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Identify the goal of financial management and explain the issues financial managers confront as they seek to achieve this goal Describe the tools financial managers use to evaluate their company’s current financial condition and develop financial plans Evaluate the major sources of funds available to meet a firm’s short-term and long-term financial needs 25 9-1 9-2 9-3

26. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Identify the key issues involved in determining a firm’s capital structure Describe how financial managers acquire and manage current assets Explain how financial managers evaluate capital budgeting proposals to identify the best long-term investment options for their company 26 9-4 9-5 9-6