1. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-1 Financial Management and Institutions

2. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-2 The Role of the Financial Manager ●Chief financial officer—top finance executive of a corporation; usually reports directly to the firm’s CEO. –VP for Financial Management –Treasurer –Controller ●All address the risk-return trade-off

3. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-3 ●Organizational Structure of the Finance Function

4. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-4 The Role of the Financial Manager ●The Financial Plan –Document specifying the funds a firm will need for a period of time, the timing of inflows and outflows, and the most appropriate sources and uses of funds.  What funds will the firm require during the appropriate period of operations?  How will it obtain necessary funds?  When will it need more funds?

5. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-5 Financial Management ●Short-term Uses for Excess Cash –Will need back within a year –Investments:  U.S. Treasury bills  Commercial paper  Repurchase agreements  Certificates of deposit

6. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-6 Sources of Funds ●Short-Term Sources of Funds –Repaid within one year –Includes:  Trade credit  Short-term loans  Commercial paper  Repurchase agreements

7. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Uses for Long-Term Excess Cash ●What does a business do with it’s excess cash? –Cash not needed for investing in the business 1-7

8. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-8 Sources of Long-term Cash ●Long-term –Repaid over many years ●Include: –Long - term loans –Bonds - similar to loans –Equity financing – sell ownership in the business  IPO – initial public offering  Primary market  Secondary market

9. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-9 Comparison of Debt and Equity Capital

10. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Exercise ●Need to raise $100M ●Do you sell stocks or bonds? 1-10

11. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-11 Leverage ●The greater the percent you borrow, the greater your returns on equity –Also the greater your loss ●Example –Flip a house Firm AFirm B Stock $10,000$100,000 Bonds (10%) 90,0000 Total $100,000 Earnings $30,000 Bond Int. (9,000)0 Net Inc. $21,000$30,000 Ret. To shareholders 210%30%

12. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-12 The Federal Reserve System ●Central bank of the United States. Has four basic responsibilities: –Regulating commercial banks –Performing banking-related activities for the U.S. Treasury –Servicing member banks –Monetary policy