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Financial
Management
CHAPTER
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18
Nickels
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McGraw-Hill/Irwin
Understanding Business, 8e
McHugh
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McHugh
1-1
18-1
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Finance & Managers
• What is Financial
Management?
• Finance
• Financial Manager
• Importance of
Finance
18-2
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Most Important
Skills Needed by CFOs
People Development
10%
19%
Building Relationships
Communication Skills
26%
Creativity
27%
38%
Objectivity
51%
Leadership
Strategic Planning
55%
Analytical Thinking
75%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Source: CIO Enterprise
18-3
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Women CFOs
• As of May 2006, 35 of the 500 largest
companies in the US had a female CFO
• Five largest companies with female
CFO: Citigroup, Home Depot, Verizon,
Marathon Oil, and Medco Health
Solutions
• Top 3 reasons that helped women
achieve their current position:
Supportive boss, Supportive spouse, and
culture of the organization
Source: cfo.com, June 1, 2006
18-4
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Non-Finance
Functions of CFOs
Business Development
60%
P & L Responsibility
53%
MIS
49%
Reengineering
39%
Revenue Growth
25%
HR & Admin.
18%
Other Skills
5%
Sales
Marketing
2%
1%
0%
10%
20%
30%
40%
50%
60%
70%
Source: CIO Enterprise
18-5
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What Financial Managers Do
18-6
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Where CFOs Get
Their Financial Information
Magazines
9%
Radio
5%
Don't Know
1%
Internet
11%
Television
12%
Newspaper
47%
Colleagues
15%
Source: USA Today
18-7
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Financial Managers:
Ask Your Clients
1. What are the client's goals in areas like
lifestyle, retirement, saving for college
education and their health care as well as that
of their dependents?
2. When do they want to reach their goals?
3. What steps have they already taken toward
achieving their goals?
4. How do they feel about taking investment
risks for a potential higher rate of return?
5. How involved do they want to be in
monitoring their progress toward their goals?
Source: Fpanet.org
18-8
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Financial Planning
Short-term
Forecasting
Capital
Budget
Feedback
Financial
Plan
Long-term
Forecasting
Operating
Budget
Financial
Controls
Cash
Budget
Feedback
18-9
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Budget Process
• Financial Plan- Financial Statements
• Types of Budgets
• Capital
• Cash
• Operating (Master)
• Financial Controls- Feedback
18-10
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Need for Operating Funds
• Manage Daily Operations
• Controlling credit operations
• Acquire Inventory
• Capital Expenditures
18-11
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Why Firms Need Funds
Short-Term Funds
• Meeting monthly
expenses
• Unanticipated
emergencies
• Cash-flow problems
• Expanding current
inventory
• Temporary
promotional
programs
Long-Term Funds
• New product
development
• Replacing capital
expenditure
• Mergers or
acquisitions
• Expansion into new
markets
• Building new
facilities
18-12
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Daily Profits Of Companies
With The Highest Revenue
•
•
•
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Wal-Mart - $24.8 Million
ExxonMobil - $58.9 Million
General Motors - $10.5 Million
Ford - $1.4 Million
General Electric - $41.1 Million
ChevronTexaco - $19.8 Million
Source: World Feature Syndicate, 2005
18-13
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Sources of Funds
Short-Term
• Trade Credit
• Promissory Notes
• Family/Friends
• Banks, etc.
• Secured Loan
• Unsecured Loan
• Factoring
• Commercial Paper
• Credit Cards
Long-Term
• Debt
• Term-Loan
• Bonds
• Secured
• Unsecured
• Equity
• Stock
• Retained Earnings
• Venture Capital
18-14
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Who Can Issue Bonds?
1. Federal, state, and local
governments
2. Federal government agencies
3. Corporations
4. Foreign governments and
corporations
18-15
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Sources of Equity Financing
Internal
Sources
Retained
Earnings
Owner
Contributions
Sale of
Partnerships
Equity
Capital
External
Sources
Venture
Capital
Public Sale of
Stock
18-16
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IPO
Summer of 2006
• 89 companies filed plans to raise money
through IPO – looking to raise $16.3 billion
• 17 companies withdrew their plans to proceed
with their IPO – were hoping to raise $3.89
billion
• Withdrawing – Go Daddy Group and PNY
Technologies
• Filing – Double-Take Software and
Hansen Medical
Source: redherring.com, August 18, 2006
18-17
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Google IPO
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Launched – August 2004
IPO Price -- $ 85 per share
Seeking to raise $2.7 billion
Unusual auction-style offering
With IPO, the company must
shed light on the inner workings
• Key competitors – Yahoo and Microsoft
• As of March 31, 2004 Google employed
about 1,900 employees
Source: cnet news.com, April 30, 2004; Forbes, September 17, 2004
18-18
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Venture Capitalists
• Finance new and rapidly growing companies
• Purchase equity securities
• Assist in the development of new products or
services
• Add value to the company through active
participation
• Take higher risks with the expectation of
higher rewards
• Have a long-term orientation
Source: NVCA.com
18-19
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Making Use of Leverage
Leverage- Selling Bonds
Equity- Sale of Stock
Common Stock
Bonds (@10%)
$ 50,000
$450,000
Common Stock
Bonds (@10%)
$500,000
0
Funds Raised
$500,000
Funds Raised
$500,000
Earnings
Less: Bond Interest
$ 125,000
$ 45,000
Earnings
$ 125,000
Total Earnings
$ 80,000
Total Earnings
$ 125,000
Return to
=
Stockholders
$80,000
$50,000
= 160%
Return to
=
Stockholders
$125,000
$500,000
= 25%
18-20