After reading this chapter, you will be able to: Define current assets and describe some common methods of managing them; identify some sources of short-term financing (current liabilities); summarize the importance of long-term assets and capital budgeting; specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds;...
Trang 1Financial Management and Securities Markets
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Types of Current Assets and Current Liabilities
Current assets (Financial resources that can be converted to cash within a year)
Current Liabilities (Shortterm debt obligations that must be paid within a year)
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• Cash
• Marketable securities
• Accounts receivable
• Inventory
• Accounts payable
• Wages payable
• Taxes payable
• Notes (loans) payable
Trang 3Shortterm Investment Possibilities for Idle Cash
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Type of Security Maturity Issuer of Security Interest Rate (March/02)
Treasury Bill 1 month Bank of Canada 1.99%
Treasury Bill 3 months Bank of Canada 2.01%
Treasury Bill 6 months Bank of Canada 2.27%
Treasury Bill 1 year Bank of Canada 2.88%
Govt. of Canada Bonds 2 years Govt. of Canada 3.70%
Short Term Deposits 3059 days Banks, Trust and Loan cos. 0.90 – 1.90 %
Short Term Deposits 6099 days Banks, Trust and Loan cos. 0.90 – 1.90 %
Short Term Deposits 90119 daysBanks, Trust and Loan cos. 0.90 – 1.90 %
Fixed Term Deposits 1 year Banks, Trust and Loan cos. 1.30 – 2.50 %
Fixed Term Deposits 2 years Banks, Trust and Loan cos. 2.25 – 3.37 %
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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
Unsecured loans Loans backed only by the borrowers’
good reputation and previous credit rating
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Trang 5American Express extends lines of
credit to its Small Business Services customers.
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Qualitative Assessment of Capital Budgeting Risk
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Introduce a New Product in
a Familiar Area
Introduce a New Product in Foreign Markets (risk depends
on stability of country)
Expand into a New Market
Add to a Product Line
Buy New Equipment for
an Established Market Repair Old Machinery
Highest Risk
Lowest Risk
Trang 7The Impact of Organizational Performance on Investment Decisions
0%
5%
10%
15%
20%
Cost of Money Return on Investment
15% 14% 12% 14%
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Types of Bonds
Unsecured Debentures, or bonds, that are not
backed by specific collateral
Secured Bonds that are backed by specific
collateral that must be forfeited in the event the issuing firm defaults
Serial A sequence of small bond issues
of progressively longer maturity
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Trang 9Floatingrate Bonds with interest rates that
change with current interest rates otherwise available in the
economy
Junk Special type of high interest rate
bond that carries higher inherent risks
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Trang 10
A Basic Bond Quote
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Issuer (1) Coupon (2) Maturity (3) Price (4) Yield % (5) Price Change $ (6) Canada 11.750 Feb 01/03 109.37 2.41 0.04
Royal Bank 5.400 April 07/03 102.99 2.84 0.034
Suncor 6.700 Aug. 22/11 100.88 6.57 0.05
Domtar 10.000 April 15/22 108.53 8.63 0.05
(1) Issuer – the name or abbreviation of the name of the government or corporation issuing the bond (2) Coupon – the annual percentage rate specified on the bond certificate. Domtar’s rate is 10%, so a
$1,000 bond will receive $100 per year
(3) Maturity – the bond’s maturity date; the date on which the issuer will repay the bondholders the face
value of each bond; April 15, 2011 for Domtar
(4) Price – the closing price. For Domtar, 108.58 = percent of the face value or $1,085.58 per bond (5) Yield – percentage return from interest, based on the closing price (column 4). If you buy a Domtar
bond at today’s closing price of 108.85 ($1,085.58) and receive $100 per year, your rate of return to maturity will be 8.63%
(6) Price Change $ the change in price from the close of the precious trading day. Domtar’s bond
price decreased by $0.05
Trang 111. 365day
high
1. 365
day low
2. Stock 3. Sym 4.
Div
5.
High
6. Low 7.
Close
8.
Chg
9. Vol 100s
10.
Yld
11. P/e ratio 10.35 1.15 Air Canada ACA 3.89 3.66 3.68 0.27 189
10.90 0.80 Imax IMX 5.15 4.90 4.90 0.10 205
30.81 18.75 Intrawest ITW 0.16 24.25 23.70 23.85 +0.25 390 0.7 12.1 15.95 9.55 Linamar LNR 0.16 13.58 13.15 13.30 +0.16 889 1.2 20.1 13.89 5.85 Magna MIE.A 13.24 12.85 13.00 0.05 296 72.2 61.10 7.50 Nortel Networks NT 12.40 11.45 11.58 0.32 94,644
115.00 18.69 Research in
Motion
RIM 35.90 33.94 34.07 0.87 7,435
53.25 41.60 Royal Bank of
Canada
RY 1.44 50.35 49.56 49.63 0.66 7,270 2.9 14.0
1. Highest and lowest intra
day price in the past 52
weeks.
2. Abbreviated company name 3. Ticker symbol assigned to
the issue by the exchange. 4. Indicated annual dividend as reported by the exchange.
5. Highest intraday trading
price. 6. Lowest intraday trading price. 7. The closing price. 8. Number of shares traded in 100s.
9. Change between the 10. Yield expressed as a 11. Price/earnings ratio;
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The 30 Stocks in the Dow Jones Industrial Average
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AT&T Du Pont McDonald's Allied Signal Eastman Kodak Merck
Alcoa Exxon Minnesota Mining &
Manufacturing American Express General Electric J.P. Morgan Boeing General Motors Philip Morris Caterpillar Goodyear Procter & Gamble Chevron Oil HewlettPackard Sears
Citigroup IBM Union Carbide CocaCola International Paper United Technologies Walt Disney Johnson & Johnson WalMart
Trang 13AbitibiConsolidated Canadian Pacific Placer Dome Barrick Gold Canadian Tire Corp Research in Motion
Alcan Dofasco Inc Royal Bank of Canada
Bombardier Inc Husky Energy Shaw
Communications
BCE Inc Magna International Suncor Energy Bank of Montreal Inco Ltd TELUS
Bank of Nova Scotia National Bank of Canada TransAlta Corp Biovail Nova Chemicals Corp Teck Corp.
Celestica Noranda Inc TD Bank
CIBC Nortel Networks Corp Talisman Energy Canadian National Railway Nexen Thomson
The Stocks in the TSE Index
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The Major Indices Created for the TSE
• TSE 300 Composite Index
• TSE 300 Capped Composite Index
• TSE 200 Index
• TSE 100 Index
• S&P/TSE 60 Index
• S&P/TSE 60 Capped Index
• S&P/TSE Canadian SmallCap Index
• S&P/TSE Canadian MidCap Index
• Toronto 35 Index
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Trang 1516-11
Time it took for the industrial average to go from:
5,168 days
357 days
1,000 to 2,000
9,000 to 10,000
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Solve the Dilemma
a Normally, rapidly increasing sales is a good
thing. What seems to be the problem here?
b List the important components of a firm’s
working capital. Include both current assets and current liabilities.
c What are some management techniques applied
to current liabilities that Glasspray might use to improve its working capital position?
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Trang 17What types of skills would be most useful to a financial manager? What are some of the most stressful aspects
of the job?
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Additional Discussion Questions and Exercises
1 Why would a business use a lockbox to receive payments?
2 What are the advantages of a firm using electronic funds
transfer rather than traditional checkclearing procedures?
3 What is a junk bond? Why do investors buy junk bonds?
4 What do companies do with retained earnings?
5 Why is the prime rate of interest important for business
firms?
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Trang 1916-15a 1 Which one of the following is an example of a current liability?
a accounts receivable
b marketable securities
c wages payable
d inventory
2 Which of the following is an example of a current asset?
a cash
b accounts payable
c accrued salaries
d shortterm bank loans
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Chapter 16 Quiz
16-15b 3 Which of the following is where new issues of stocks and bonds are
sold directly to the public?
a primary market
b secondary market
c overthecounter market
d investment banks
4 The payout ratio refers to
a the dividend rate divided by the stock market average.
b dividends per share divided by earnings per share.
c the percentage of return an investor has earned on the original
investment.
d the coupon rate on bonds that change with current interest rates.