Financial Management and

the Securities Market

12Chapter

© 2004 by Nelson, a division of Thomson Canada Limited.

2 © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Goals

1. What roles do finance and the financial manager play in the firm’s overall strategy?

2. How does a firm develop its financial plans, including forecasts and budgets?

3. What types of short-term and long-term expenditures does a firm make?

3 © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Goals (cont’d)

4. What are the main sources and costs of unsecured and secured short-term financing?

5. How do the two primary sources of long-term financing compare?

6. What are the major types, features, and costs of long-term debt?

7. When and how do firms issue equity, and what are the costs?

4 © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Goals (cont’d)

8. Where can investors buy and sell securities?

9. What trends are affecting the field of financial management?

5 © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Goal 1

What roles do finance and the financial manager play in the firm’s overall strategy?

6 © 2004 by Nelson, a division of Thomson Canada Limited.

Financial Management:

the art and science of managing the firm’s money so that it can meet its goals

7 © 2004 by Nelson, a division of Thomson Canada Limited.

The Role of the Financial Manager

To maximize the value of the firm to its

owners by:

• financial planning

• investment (spending money)

• financing (raising money)

8 © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Goal 2

How does a firm develop its financial plans, including forecasts and budgets?

9 © 2004 by Nelson, a division of Thomson Canada Limited.

Financial Planning Requirements

• Forecasts– short-term (operating plans)– long-term (strategic plans)

• Budgets– cash budget– capital budget– operating budget

10 © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Goal 3

What types of short-term and long-term expenditures does a firm make?

11 © 2004 by Nelson, a division of Thomson Canada Limited.

How Organizations Use Funds

• Short-term expenses– cash management– accounts receivable– inventory

• Long-term expenditures– capital expenditures– capital budgeting

12 © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Goal 4

What are the main sources and costs of unsecured and secured short-term financing?

13 © 2004 by Nelson, a division of Thomson Canada Limited.

Unsecured Short-Term Financing

• Trade credits (accounts payable)

• Bank loans– line of credit– revolving credit agreement

• Commercial paper

14 © 2004 by Nelson, a division of Thomson Canada Limited.

Secured Short-Term Financing

• Secured loans– pledging specific assets as collateral

• Factoring– selling accounts receivable outright at a

discount

15 © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Goal 5

How do the two primary sources of long-term financing compare?

16 © 2004 by Nelson, a division of Thomson Canada Limited.

Comparing Long-Term Financing

• Debt financing (borrowing)– interest expense is tax deductible– no loss of ownership– requires payment of interest and

principal on specified dates

• Equity financing (ownership)– not required to pay dividends (not tax

deductible) or repay investment– common shareholders have voting rights

17 © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Goal 6

What are the major types, features, and costs of long-term debt?

18 © 2004 by Nelson, a division of Thomson Canada Limited.

Long-Term Debt

• Term loans– secured or unsecured– 5- to 12-year maturity

• Corporate bonds– 10- to 30-year maturity

• Mortgage loans– secured by real estate

19 © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Goal 7

When and how do firms issue equity, and what are the costs?

20 © 2004 by Nelson, a division of Thomson Canada Limited.

Equity Financing

• Common stock– cost includes issuing costs and potential dividend

payments

• Retained earnings– profits reinvested in firm

• Preferred stock– more expensive than debt– dividends not tax-deductible– claims are secondary to those of stockholders– less expensive than common stock

21 © 2004 by Nelson, a division of Thomson Canada Limited.

Debt vs. Equity Financing

Debt Equity

Voice in Management

Creditors have none

Stockholders vote

Claim on income & assets

Greater claim Residual claim

Maturity Stated maturity

No maturity

Tax treatment Interest is deductible

Dividends not deductible

22 © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Goal 8

Where can investors buy and sell securities?

23 © 2004 by Nelson, a division of Thomson Canada Limited.

Securities:

investment certificates issued by corporations or governments that represent either equity or debt

24 © 2004 by Nelson, a division of Thomson Canada Limited.

Types of Markets

• Primary market– new securities are sold (IPO)

• Secondary market– organized stock exchanges

• Toronto Stock Exchange (TSX)• TSX Venture Exchange

– foreign exchanges• New York Stock Exchange (NYSE)

– over-the-counter market

25 © 2004 by Nelson, a division of Thomson Canada Limited.

Trends in Finance

• Finance goes global

• Risk management– credit risk– market risk– operational risk