16-1 Business in a Changing World Chapter 16 Financial Management and Securities Markets McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc All rights 16-3 Sears Holding Corporation – Using brand names to create bonds Sears Holding Corporation (SHC) parent of Kmart and Sears, Roebuck and Co 16-4 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 16-5 Current Assets Working capital management – managing of short-term assets and liabilities 16-6 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 16-7 Managing Cash Lockbox – an address, usually a commercial bank, at which a company receives payments in order to speed collections from customers 16-8 Going Green or Greenwashing? Eco Chic line – products made with organic materials The Pottery Barn collection 16-9 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 16-10 Managing Fixed Assets Long-term (fixed) assets – production facilities (plants), offices, and equipment—all of which are expected to last for many years 16-20 Budgeting & Planning Frequently Occasionally Rarely How Reliable is Budgeting and Planning? 21 16-21 Capital Budgeting Capital budgeting is the process of analyzing the needs of business and selecting the assets that will maximize its value 16-22 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 16-23 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 16-24 Financing with Long-Term Liabilities • Debts that will be repaid over a number of years – Long-term loans – Bond issues 16-25 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 16-26 A Basic Bond Quote 16-27 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 16-28 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 16-29 Financing With Owners’ Equity Owners’ equity the owners’ investment in an organization – Common stock – Preferred stock – Retained earnings 16-30 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 16-31 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 16-32 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 16-33 Measuring Market Performance • • • • Indexes Averages Bull market Bear market 16-34 ... capital management – managing of short-term assets and liabilities 16-6 Managing Cash Transaction balances – cash kept on hand by a firm to pay normal daily expenses such as employee wages and... 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... goods and services 16-16 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