Chapter 16: Mastering Financial Management
16-6 Sources of Equity Financing
16-6a Selling Stock
-Initial Public Offering and The Primary Market
- Initial public offering (IPO) occurs when a corporation sells common stock to the general public for the first time
-Primary market is a market in which an investor purchases financial securities (via an investment bank) directly from the issuer of the securities.
-Investment Banking Firm is an organization that assists corporations in raising funds, usually by helping to sell new issues of stocks, bonds, or other financial securities.
-The Secondary Market is a market for existing financial securities that traded between investors.
-Securities Exchange is a marketplace where member brokers meet to buy and sell securities.
-Over-the-counter (OTC) market is a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange.
-Common stock: stock whose owners may vote on corporate matters but whose claims on profits and assets are subordinate to the claims of others
-Preferred stock: stock whose owners usually do not have voting rights but whose claims on dividends and assets are paid before those of common-stock owners
16-6b Retained Earnings- the portion of a corporation's profit not distributed to stockholders.
16-6c Venture Capital, Angel investors, and Private Placements.
-Angel Investor is an investor who provides financial backing for small business startups or entrepreneurs.
-Private placement occurs when stock and other corporate securities are sold directly to insurance companies, pension funds, or large institutional investors.
16-7 Sources of Long-Term Debt Financing
Financial leverage is the use of borrowed funds to increase the return on owners' equity.
16-7a Long-Term Loans
-Term-loan agreements is a promissory note that requires a borrower to repay a loan in monthly, quarterly, semiannual, or annual installments.
16-7b Corporate Bonds - is a corporation's written pledge that it will repay a specified amount of money with interest.
-A registered bond is a bond registered in the owner's name by the issuing company.
-Maturity Date is the date on which the corporation is to repay the borrowed money.
Types Of Bonds
-Debenture bond is a bond backed only by the reputation of the issuing corporation.
-Mortgage Bond is a corporate bond secured by various assets of the issuing firm.
-Convertible bond can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock.
-Repayment Provisions For Corporate Bonds
-Bond Indenture is a legal document that details all the conditions relating to a bond issue.
-Serial bonds are bonds of a single issue that mature on different dates.
-Sinking fund is a sum of money to which deposits are made each year for the purpose of redeeming a bond issue.
-Trustee is an individual or an independent firm that acts as a bond owner's representative.
16-7c Cost Comparisons
16-1 the need for financial management
Financial management-all the activities concerned with obtaining money and using it effectively.
Proper financial management must also ensure that:
-financing priorities are established in line with organzational goal and objectives
-spending is planned and controlled
-sufficient financing is available when it is needed both now and in the future
-a firms credit customers pay their bills on time and the number of past due accounts is reduced
-bills are paid promptly to protect the firm’s credit rating and its ability to borrow money
-the funds required for paying the firm’s taxes are available when needed to meet tax deadlines
-excess crash is
President Obama signed the Dodd frank act Wall Street reform and consumer protection act into law on July 21,2010
new regulations to protect American families from unfair,abusive financial and banking practices
The Dodd-frank act
good-
-hold Wall Street firms accountable for their actions
-end taxpaper bailout
-tighten regulations for major financial firms
-increase government oversight
Bad
-limiting executive pay and bonuses
-limiting the size of the largest firms
-curbing previously used speculative investment techniques
Chief financial officer (CFO)-a high-leve corporate executive who manages a firm’s finances and reports directly to the company’s reports directly to the company’s chief executive officer or president
Managers and employees in the finance area must:
1.have a strong background in accounting or mathematics
2.know how to use a computer to analyze data
3.be an expert at both written and oral communication
16-2 the need for financing
Short-term financing -money that will be used for one year or less
cash flow-the movement of money into and out of an organization
speculative production-the time lag between the actual production of goods and when the goods are sold
-to increase production
Short term financing needs
cash-flow problems
speculative production
current inventory needs
monthly expenses
short term promotional needs
unexpected emergenies
Long term financing-money that will be used for longer than one year
-involves larger amount of money
long term financing needs
business start up costs
mergers and acquisitions
new product development
long term marketing activities
replacement of equipment
expansion of facilities
Risk-return ratio-a ratio based on the principle that a high risk decision should generate higher financial returns for a business and more conservative decisions often generate lower returns
16-3 Planning- The Basis of Sound Financial Management: Financial Plan for obtaining and using the money needed to implement an organization's goals and objectives.
16-3a Developing the Financial Plan- Financial planning begins with establishing a set of valid goals and objectives. There are Three steps of Financial Planning: 1. Established organizational goals and objectives 2. Budget the money needed to accomplish the goals and objectives 3. Identify the sources of funds -Sales revenue - Equity capital- Debt capital - Sale assets. Establishing Organizational and Objectives a goal is an end result that an organization expects to achieve over one-to ten-year period. Budgeting for Financial Needs a budget is a financial statement that protects income, expenditures, or both over a specific future period.
Cash budget estimates cash receipts and cash expenditures over a specified period. Zero-base budgeting is a budgeting approach in which every expense in every budget must b justified. Capital budget estimates a firm's expenditures for major assets, including new product development expansion of facilities, replacement replacement of absolete equipment, and mergers and acquisitions.
Identifying sources of Funds- are sales revenue, equity capital, debt capital, and proceeds from sale assets. Equity capital is a sole proprietorship or partnership, equity capital is provided by the owner of the business. Debt Capital is borrowed money., may be borrowed for either short- or long-term use- and a short-term loans seems made to order for Starts and Stripes clothing's shortfall problem.
16-3b Monitoring and Evaluating Financial Performance: it is important to ensure that financial plans are implemented properly and to catch potential problems before they become major ones.
16-4 Financial Services Provided by Banks and Other Financial Institutions:b Banking services can be divided into three categories: 16-4a Traditional Banking Services for Business Clients- traditional services provided by banks and other financial institutions include savings and checking accounts, loans, processing credit- and debit-card transactions, and providing professional advice. Savings and Checking accounts- savings accounts provide a safe place to store money and very conservative means of investing. Business loans-banks, savings and loan associations, credit unions, and other financial institutions provide short- and long-term loans to business. Line of credit is a loan that is approved before the money is actually needed. Revolving credit agreement is a guaranteed line of credit. Collateral s a real estate or property pledged as security for a loan.
16-4b Credit and Debit Card Transactions: do not confuse debit cards with credit cards. Although they may look alike there are important differences. A debit card electronically subtracts the amount of a customer's purchase from her or his bank account at the moment the purchase is made. By contrast when you use your credit card, the credit-card company extends short-term financing, and you do not make payment until you receive your next statement.
16-4c Electronic Banking Services- An electronic funds transfer (EFT) system is a means of performing financial transactions through a computer terminal. The following four EFT applications are changing how banks help firms do business: 1. Automatic teller machines (ATMs) is a machine that provides almost any service a human teller can provide. 2. Automated clearinghouses (ACHs) is designed to reduce the number of paper checks, recurring bill payments, Social security benefits, and employee salaries. 3. Point-of-Sale (POS) terminals is a computarized cash register located in a retail store and connected to a bank's computer 4. Electronic check conversion (ECC) is a process used to convert information from a paper check into an electronic payment for merchandise, service, or bills.
16-4d International Banking Services- a letter of credit is a legal document issued by a bank or other financial financial institution guaranteeing to pay a seller a stated amount for a specified period of time. Banker's acceptance is a written order for a bank to pay a third party a stated amount of money on a specific date.
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