Chapter
17
Financial Management
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Learning Objectives
1
Define the role of the financial manager.
5
Identify short-term funding options.
Discuss sources of long-term
6 financing.
2
Describe financial planning.
7
3
Outline how organizations manage their
4 assets.
Discuss the sources of funds and capital
structure.
Describe mergers, acquisitions,
buyouts, and divestitures.
The Business Function of Finance

Finance– planning, obtaining, and
managing the company’s funds in order to
accomplish its objectives




Maximizing overall worth
Meeting expenses
Investing in assets
Increasing profits to shareholders
The Role of the Finance Manager



Implement the firm’s financial plan
Determine the most appropriate source of funds
Many CFOs are members of the board of directors
Risk-Return Tradeoff

The process of maximizing the wealth of the
firm’s shareholders by striking the optimal
balance between risk and return.
Financial Planning


Financial Plan– the inflows and outflows and
sources of funds.
Financial plans are built by answering the
following questions:
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What funds will the firm require during the planning
period?
When will it need additional funds?
Where will it obtain the necessary funds?
Financial plans are based on the forecasts of
costs and expected sales activities for a given
period.
Managing Assets
Sound financial management requires
assets to be managed and acquired.


What a firm owns

Use of funds
Short-Term Assets

Cash

Marketable Securities

Accounts Receivable

Inventory
Capital Investment Analysis

Long-lived assets
Produce economic benefit for more than
one year
Substantial investments

Capital Investment Analysis

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Expansion: new assets
Replacement: upgrading assets
Managing International Assets

Today’s firms have facilities and assets
worldwide.

Sales occur outside of the home country.

International assets require the management
of activities to reduce the financial risk of
exchange rates.

Balance
Sources of Funds and Capital
Structure

Debt Capital– funds obtained through
borrowing.

Equity Capital– investment in the firm in
exchange for ownership.
Leverage and Capital Structure

Goal: increasing
the rate of return
on funds invested
by borrowing funds
Mixing Short and Long-Term
Funds

Short-term funds



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Current liabilities
Less expensive
Volatile interest rates
Long-term funds


Long-term debt and
equity
Used for long-term
assets
Dividend Policy

Dividends are cash payments to
shareholders.


Highest dividend yielding stocks
Financial managers must make decisions
regarding their dividend policy.


Should we pay a dividend?
When should it be paid?
Short-Term Funding Options

Trade Credit

Short-term Loans

Commercial Paper
Sources of Long-Term Financing

Public Sale of Stocks and Bonds

Private Placements

Venture Capitalists

Private Equity Funds

Hedge Funds
Mergers, Acquisitions, Buyouts,
and Divestitures

Financial managers evaluate mergers,
acquisitions, and other opportunities.


Leveraged buyouts
Divestiture

Sell-off/Spin-off