BUSN 3rd kelly mcgowen chapter9

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BUSN

Finance: Acquiring and Using Funds to Maximize Value

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance:
Acquiring and Using Funds to
Maximize Value

• How does maximizing financial value relate to social
responsibility?
• How do financial managers use key ratios?
• How do financial managers use budgeted financial
statements and cash budgets?
• Why is working capital management important?
• How do financial managers evaluate capital budgeting
proposals?
• How do financial managers determine the firm’s capital
structure?
BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in

part.

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Finance: Acquiring and Using Funds to Maximize Value

What Motivates Financial Decisions?

What types of assets do we need to achieve goals?
How do we get the funds we need?

• Evaluate financial
performance
• Plan financial resources
• Manage working capital
• Evaluate investment
opportunities
• Determine appropriate
strategy
BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Shareholder Value and Social Responsibility: Does
Good Behavior Pay Off?

• Historically, the goal of the firm has been to:
Maximize the value of the firm to its owners

• Publicly traded firms aim to maximize their stock
price
• The emphasis on shareholder value may seem to
conflict with social responsibility
• But, a long-term perspective can balance value with
responsibility
BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Evaluating Current Conditions:
Where Do We Stand?

• Financial ratios provide insight into financial strengths

and weaknesses

%

• Use financial data from balance sheet and income
statement
• Companies can compare their ratios with other
businesses

BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Key Financial Ratios

RATIO

TYPE

Current Liquidity: ability to pay short-term
liabilities
Inventory Asset Management: how firm is using
Turnover assets to generate revenue

Debt-to-equity Leverage: extent to which a firm relies
on debt

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HOW IT IS
COMPUTED
Current Assets
Current Liabilities
Cost of Good Sold
Average Inventory
Total Debt
Total Owner’s Equity

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Key Financial Ratios

RATIO

TYPE

Debt-to- Leverage: measures the extent to

assets which a firm relies on debt

HOW IT IS
COMPUTED
Total Debt
Total Assets

Return on Profitability: compares the amount of
equity profit compared to resources invested

Net Income – Preferred Div
Avg Common Stock Equity

Return on Profitability: compares the amount of
assets profit compared to resources invested

Net Income
Average Total Assets

Earnings per Profitability: compares the amount of
share profit compared to resources invested

Net Income – Preferred Div
Avg # of Shares Out

BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Choose Your Poison:
Toxic Assets as Executive Bonuses

Credit Suisse suffered from toxic assets of
bad mortgages as well as public backlash
against bonuses paid to top management.
They created a three step strategy:
Remove toxic assets from balance sheet to
a new fund called Partner Asset Facility
Pay bonuses to its top managers by giving
them shares in the fund
Pay bonuses from the fund over a period of
years dependent on long-term performance

BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Financial Planning:
Providing a Road Map for the Future

• What assets must be obtained?
• How much additional
financing is needed?
• How much can the firm
generate Internally?
Externally?
• When will external financing
be required?
BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Basic Planning Tools:
Budgeted Financial Statements and Cash Budget

Budgeted Income Statement –
forecasts the sales,
expenses and net income
Budgeted Balance Sheet –

forecasts the types and amounts
of assets a firm will need to
carry out plans

BUSN

Cash Budget –
detailed projection of
cash flows to determine
when cash shortages
and surpluses will occur

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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BUSN

Finance: Acquiring and Using Funds to Maximize Value

Cash Budget for Oze-Moore

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Managing Working Capital: Current Events

Net Working Capital:
 Difference between current assets and
liabilities

Working capital must be managed
 Appropriate level of current assets
 Current liabilities needed to finance activities

BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Managing Current Assets: Cash

• Need cash to pay bills
• Cash does not earn returns
• Report cash equivalents as cash

• Commercial Paper
• T-Bills
• Money Market Mutual Funds

BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Managing Current Assets: Cash

Commercial Paper
• Short-term unsecured promissory note (IOUs)
• Issued by major corporations with excellent credit rating
• Sold at a discount; price plus interest is paid when the paper
comes due

T-bills
•
•
•
•

Short-term IOUs issued by the U.S. government

Mature in 4, 13, or 26 weeks
Sold at a discount; face value is paid at maturity
Good market for T-Bills since they are backed by the government

Money Market Mutual Funds
• Pooled funds to purchase a portfolio of short-term, liquid
securities
• Affordable way for small investors to get into the market

BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Managing Current Assets: Accounts Receivable

Accounts Receivable - Money which is owed to a
company by a customer for products and services
provided on credit.

 Set Credit Terms
 Establish Credit
Standards
 Design Appropriate

Collection Policy

BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Managing Current Assets: Inventory

• Inventory: finished goods, work-in-process, parts and
materials
• Customers are disappointed when they cannot find
desired products on the shelves
• But, inventory ties up cash and it is a major investment
• Inventory management is a part of overall working
capital management
• Inventory policies are included in operations strategy

BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

T-Bills: Why Lots of Investor Interest Meant Earning
Zero Interest

• The U.S. Treasury issues new T-Bills via competitive auction
• Investors lend the government money when they purchase TBills
• When the bill is due, the Treasury pays the investor the par
value
• The difference between the bid and the par value is the interest
• On December 8, 2008, investors bid the price of a 4-week T-Bill
to par value; an interest free loan was paid to the government
• Although the negative rates vanished, taxpayers benefited by the
government gaining interest free loans
BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Short-term Financing: Arranging for Quick Cash

• Spontaneous Financing
Trade Credit

• Short-Term Bank Loans
Line of Credit
Revolving Credit

• Factoring
• Commercial Paper

BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Capital Budgeting: In It for the Long Haul

• Replace machines and equipment
• New machines and equipment
• A new factory, warehouse or office
• Introduce a new product line

BUSN

Capital
Budgeting
a systematic
evaluation of a
firm’s major
long-run
capital
investment
opportunities

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Evaluating Capital Budgeting Proposals:
Time Value of Money

Managers must evaluate costs and benefits of investment
that occur over a period of many years.
Time Value of Money
– a dollar received
today is worth more
than a dollar received
in the future

BUSN

Compounding –
earning interest in the
current period on
interest from previous
periods

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Evaluating Capital Budgeting Proposals:
Net Present Value

• Managers must compare the
amount of cash an
investment generates and
when it generates the cash
• Time value of money – a
dollar received today is worth
more than a dollar received
in the future

BUSN

Present Value – How
much a given amount
of cash received in a
future period is worth
today, given the time
value of money

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Using Net Present Value to Evaluate Capital
Budgeting Proposals

Net present value is the present value of all cash
flows associated with an investment, including the
initial (negative) cash flow of the
investment.
BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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BUSN

Finance: Acquiring and Using Funds to Maximize Value

How a Present Value of $1,000 Grows to a Future
Value in 4 years

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Why You Should Have a Personal “Interest” in the
Time Value of Money

Net present value is an important to for personal finance and
understanding how to grow your nest egg
• The longer your money has to
work for you, the stronger the
results
• You earn interest on the amount
you contribute and on the
accumulated interest—

COMPOUNDING

Investing early pays!
BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Finance: Acquiring and Using Funds to Maximize Value

Choosing the Sources of Long-term Capital: Loaners
vs. Owners

Capital Structure – the mix of equity and debt
financing a firm uses for financing needs
Debt Financing – creditors

Equity Financing – owners

BUSN

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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