Business a changing world 7e by ferrell chap016

Current Assets and Current Liabilities• Current assets -- short-term resources... Current AssetsWorking capital management – managing of short-term assets and liabilities... Treasury bil

Business in a Changing World

Chapter 16

Financial Management and Securities Markets

Sears Holding Corporation – Using brand names to create bonds

and Sears, Roebuck and Co

Current Assets and Current Liabilities

• Current assets short-term resources

Current Assets

Working capital management – managing of

short-term assets and liabilities.

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

Managing Cash

Lockbox – an address, usually a commercial bank, at

which a company receives payments in order to

speed collections from customers

Going Green or Greenwashing?

Eco Chic line – products made with organic materials The Pottery Barn

collection.

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.

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

Managing Cash

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

Treasury bills 90 days U.S Government 1.82% Excellent

Treasury bills 180 days U.S Government 1.87% Excellent

Commercial

Paper 30 days Major Corporations 2.19% Very GoodCDs 90 days U.S commercial banks 2.62% Very Good CDs 180 days U.S commercial banks 2.80% Very Good Eurodollars 90 days European commercial banks 2.75% Very Good

Managing Cash

Eurodollar market – a market created in London

for trading U.S dollars in foreign countries.

Accounts Receivable

Accounts Receivable – money owed to a business

by credit customers

Optimizing Inventory

Optimizing inventory – minimize firm’s investment

in inventory without experiencing production

cutbacks

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

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

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

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

Managing Fixed Assets

Long-term (fixed) assets – production facilities

(plants), offices, and equipment—all of which

are expected to last for many years

Budgeting & Planning

Frequently Occasionally Rarely

Capital Budgeting

Capital budgeting is the process of analyzing

the needs of business and selecting the assets

that will maximize its value

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

Highest Risk

– Supply of funds available for investment

– Accurately identifying opportunities with the greatest

potential for ROI

Financing with Long-Term Liabilities

• Debts that will be repaid over a number of years

– Long-term loans

– Bond issues

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

A Basic Bond Quote

Types of Bonds

backed by specific collateral

that must be forfeited in the event the issuing firm defaults

progressively longer maturity

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

Financing With Owners’ Equity

Owners’ equity the owners’ investment in an

organization

– Common stock

– Preferred stock

– Retained earnings

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

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

Securities Markets

buying and selling securities

investors buy and sell securities

dealers all over the country, and world, linked by

computers, telephones, and teletype machines

Measuring Market Performance

• Indexes

• Averages

• Bull market

• Bear market