Financial Management and Securities Markets (Managing Current Assets and…
Financial Management and Securities Markets
Managing Current Assets and Liabilities
Short-term financial management
is sometimes called
working capital management
because current assets and liabilities continually flow (“work”) through the
are short-term debt obligations—accounts payable, wages payable,
taxes payable, and notes (loans) payable
include cash, investments, accounts receivable, and inventory.
Managing Current Liabilities
is money an organization owes to suppliers for goods and
, the most widely used and important source of short-term
financing, is credit extended by suppliers for the purchase of their goods and
line of credit
is an arrangement by which a bank agrees to lend a
specified amount of money to the organization upon request—provided that
the bank has the required funds to make the loan.
are backed only by the borrower’s good reputation and
previous credit rating.
are backed by collateral that the bank can claim if the
borrower does not repay the loan.
is the interest rate banks charge their best customers for
Some companies sell their accounts receivable to a finance company called a
, which gives the selling organizations cash and assumes responsibility
for collecting accounts.
Financing with Long-term Liabilities
are debts that will be repaid over a number of years, such as
long-term loans and bond issues.
is a debt instrument that a company sells to raise long-term funds.
are bonds in which the issuing company pledges specific
assets to bondholders as a guarantee should it be unable to make the interest
and principal payments
are a sequence of small bond issues of progressively longer
are debentures, or bonds not backed up by specific collateral.
have coupon rates that change with current interest rates.
offers higher rates of return than other bonds but at higher risk
because of the greater likelihood of default.
Managing Fixed Assets
Capital Budgeting and Project Selection
is the process of analyzing the needs of business and
selecting the assets that will maximize its value.
Long-term (fixed) assets
are those assets expected to last for many years, such as
plants and equipment
Pricing Long-Term Money
A company that needs more money may be able to obtain financing by
New issues are sold directly to the public and to institutions through the
, the market where firms raise financial capital.
are stock exchanges where investors trade their securities with
other investors rather than the company that issued the stock or bonds.
is the sale of stocks and bonds for corporations.
The Securities Markets
The mechanism for buying and selling securities
Liquidity—the ability to turn securities into cash.
Secondary markets permit the trading of previously issued securities.
Financing with Owners’ Equity
is the owners’ investment in an organization
gives owners preference in the distribution of the company’s profits,
but not voting privileges
, the single most important source of capital for most new companies,
represents ownership in a corporation that gives the stock owners voting rights.
When a company has profits left over after paying expenses and taxes, it can retain
some or all of the earnings to invest in corporate expansion or pay out some of the
earnings to stockholders in the form of
are retained and reinvested in the assets of the firm; they
belong to the owners in the form of equity.
is the dividend per share divided by the stock price.