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Business in a
Changing World

Chapter 16
Financial Management and Securities
Markets

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McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.
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Sears Holding Corporation –
Using brand names to create
bonds

Sears Holding Corporation (SHC) parent of Kmart


and Sears, Roebuck and Co.

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Current Assets and Current Liabilities
• Current assets -- short-term resources
– Cash
– Investments
– Accounts receivable
– Inventory

• Current liabilities -- short-term debts


– Accounts payable
– Accrued salaries
– Accrued taxes
– Short-term bank loans

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Current Assets

Working capital management – managing of


short-term assets and liabilities.

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Managing Cash

Transaction balances – cash kept on hand by a firm


to pay normal daily expenses such as employee
wages and bills for supplies utilities.

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Managing Cash

Lockbox – an address, usually a commercial bank,


at which a company receives payments in order
to speed collections from customers.

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Going Green or Greenwashing?

Eco Chic line – products made with organic


materials. The Pottery Barn collection.

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Managing Cash

Marketable securities – temporary investment of


extra cash by organizations up to one year in U.S.
Treasury bills, certificates of deposit, commercial
paper, or Eurodollar.
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Managing Cash
Treasury bills– short-term debt obligations the U.S.
government sells to raise money.

Commercial certificates of deposit (CD’s) – issued


by commercial banks and brokerages available in
minimum amounts of $100,000 and can be traded
prior to maturity

Commercial paper – a written promise from one


company to another to pay a specific amount of
money

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Managing Cash
Type of Maturity Seller of Security Interest Rate Safety Level
Security 5/23/08

Treasury bills 90 days U.S. Government 1.82% Excellent

Treasury bills 180 days U.S. Government 1.87% Excellent

Commercial Major
30 days 2.19% Very Good
Paper Corporations
U.S. commercial
CDs 90 days 2.62% Very Good
banks
U.S. commercial
CDs 180 days 2.80% Very Good
banks

European
Eurodollars 90 days 2.75% Very Good
commercial banks

Short-term Investment Possibilities for Idle Cash


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Managing Cash

Eurodollar market – a market created in London


for trading U.S. dollars in foreign countries.

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Accounts Receivable

Accounts Receivable – money owed to a


business by credit customers.

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Optimizing Inventory

Optimizing inventory – minimize firm’s


investment in inventory without experiencing
production cutbacks.

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Maximizing Current Liabilities

Accounts payable – money an organization


owes to suppliers for goods and services.

Trade credit – credit extended by suppliers for


the purchase of their goods and services

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Bank Loans

Line of Credit -- An arrangement by which a


bank agrees to lend a specified amount of
money to an organization upon request

Secured Loans -- Loans backed by collateral that


the bank can claim if the borrowers do not
repay the debt
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Bank Loans

Unsecured loan – loans backed only by the


borrower’s good reputation and previous credit
rating

Prime rate – the interest rate that commercial


banks charge their best customers for short
term loans
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Non-Bank Liabilities
• Short-term loans from insurance companies,
pension funds, money market funds, or
finance companies

• Factoring organization
– Purchases accounts receivable at a discount

• Taxes and employees’ wages

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Managing Fixed Assets

Long-term (fixed) assets – production facilities


(plants), offices, and equipment—all of which
are expected to last for many years.

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Budgeting & Planning

Frequently

Occasionally

Rarely

How Reliable is Budgeting and Planning?


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Capital Budgeting

Capital budgeting -- is the process of analyzing


the needs of business and selecting the assets
that will maximize its value

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Highest Risk

Introduce a New Product in Foreign Markets (risk


depends on stability of country)

Expand into a New Market

Introduce a New Product in a Familiar Area

Add to a Product Line

Buy New Equipment for


an Established Market

Repair Old Machinery

Lowest Risk

Qualitative Assessment of Capital Budgeting Risk


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Long-term Money

Profitability & Pricing Long Term Money


-Factors to Consider:
– How much cash will be generated
– Cost of financing
– Supply of funds available for investment
– Accurately identifying opportunities with the
greatest potential for ROI

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Financing with Long-Term Liabilities

• Debts that will be repaid over a number of


years
– Long-term loans
– Bond issues

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Bonds

Corporate IOU’s -- Debt instruments that larger


companies sell to raise long-term funds.
– Indenture:
• The bond contract specifying all terms of agreement
between bondholder and the issuing organization

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A Basic Bond Quote

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Types of Bonds

Unsecured Bonds -- Debentures, or bonds, that are not


backed by specific collateral

Secured Bonds -- Bonds that are backed by specific collateral


that must be forfeited in the event the issuing firm defaults

Serial Bonds -- A sequence of small bond issues of


progressively longer maturity

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Types of Bonds

Floating-rate -- Bonds with interest rates that


change with current interest rates otherwise
available in the economy

Junk Bonds -- Special type of high interest rate


bond that carries higher inherent risks
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Financing With Owners’ Equity

Owners’ equity -- the owners’ investment in an


organization
– Common stock
– Preferred stock
– Retained earnings

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Financing With Owners’ Equity

Retained earnings – earnings after expenses and


taxes that are reinvested in the assets of the firm and
belong to the owners in the form of equity

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Investment Banking

Primary market -- new issue or initial public


offering (IPO)

Secondary market -- Stock exchanges and OTC


markets where investors trade securities with
each other
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Securities Markets
Securities markets -- provide a mechanism for
buying and selling securities
Organized exchanges -- Central locations where
investors buy and sell securities

Over-the-counter market (OTC) -- A network of


dealers all over the country, and world, linked by
computers, telephones, and teletype machines

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Measuring Market Performance

• Indexes
• Averages
• Bull market
• Bear market

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