Transcript sbuweb.tcu.edu

CHAPTER 9: FINANCE
Using Funds To Maximize Value
CHAPTER 10: SECURITIES MARKETS
Trading Financial Resources
Finance Worksheet
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
EVALUATING PERFORMANCE: 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
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.
HOW IT IS
COMPUTED
Current Assets
Current Liabilities
Cost of Good Sold
Average Inventory
Total Debt
Total Owner’s Equity
KEY FINANCIAL RATIOS
RATIO
TYPE
Debt-to- Leverage: measures the extent to
assets which a 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 – Pref Dividends
Avg # of Shares Out
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?
BASIC PLANNING TOOLS
Pro Forma Income Statement –
forecasts the sales,
expenses and net income
Pro Forma Balance Sheet –
forecasts the types and amounts
of assets a firm will need to
carry out plans.
Cash Budget –
detailed projection of
cash flows to determine
when cash shortages
and surpluses will occur.
CASH BUDGET
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
MANAGING CASH



Need cash to pay bills
Cash does not earn returns
Report cash equivalents as cash
Commercial Paper
 T-Bills
 Money Market Mutual Funds

MANAGING 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
SHORT-TERM FINANCING

Spontaneous Financing


Trade Credit
Short-Term Bank Loans
Line of Credit
 Revolving Credit



Factoring
Commercial Paper
BORROWING MONEY
“
“If you want to know the value of
money, go and try to borrow some.”
- Benjamin Franklin
“
CAPITAL BUDGETING: IN IT FOR THE
LONG HAUL

Replace machines and equipment

New machines and equipment


Build a new factory, warehouse
or office
Introduce a new product line
Capital Budgeting – a systematic evaluation
of a firm’s major long-run capital investment
opportunities.
COMPARING CASH FLOWS THAT OCCUR
AT DIFFERENT TIMES
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.
Compounding – earning
interest in the current
period on interest from
previous periods.
USING NET PRESENT VALUE TO EVALUATE
CAPITAL BUDGETING PROPOSALS
• Managers use the process of discounting to calculate the
present value.
• Present value depends on the interest rate the invested
money will earn.
• Net present value is the present value of all cash flows
associated with an investment, including the
initial (negative) cash flow of the investment. Present Value – How much
a given amount of cash
received in a future
period is worth today,
given the time value of
money.
NPV CALCULATION
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.
SOURCES OF DEBT FINANCING

Long-term loans

Private placements

Issuing notes or bonds
SOURCES OF EQUITY FINANCING

Direct contributions by owners
 Owners
directly contribute resources to
unincorporated businesses
 Corporations raise equity capital by issuing stock


Retained earnings
Equity financing provides more flexibility than
debt financing
FINANCIAL LEVERAGE: USING DEBT TO
MAGNIFY GAINS



Heavy debt in capital structure
Potential high returns to owners
Increased risk
SECURITIES MARKETS
Funds
Investors
Stocks & Bonds
Returns to Investors:
Dividends, Interest,
Capital Gains
Primary
Securities
Market
Additional Funds Support:
 Expansion of facilities
 Research and Product
Development
 Adoption of New
Technologies
 Other strategic initiatives
Debt & Equity
Corporations
Securities
Long term financing
COMMON STOCK: A SHARE OF CORPORATE
OWNERSHIP
The basic form of ownership is a corporation

Voting Rights

Right to Dividends

Capital Gains

Preemptive Rights

Right to Residual Claim
on Assets
PREFERRED STOCK

Stock that gives its holder preference over common
stockholders.
No Voting Rights
 Claim on Assets
 Payment of Dividends
 Cumulative Feature

Stock Market Summary
Company
Close
Change
Shares
MarketCap
($M)
Book Value
EPS
Dividend
Yield
P/E
Andrews
$8.89
$4.20
2,879,847
$26
$7.72
$0.59
$0.00
0.0%
15.1
Baldwin
$2.54
($0.94)
2,624,052
$7
$5.09
($0.15)
$0.00
0.0%
-17.2
Chester
$3.47
($6.24)
2,814,010
$10
$6.93
($0.97)
$0.00
0.0%
-3.6
Digby
$0.61
($2.00)
2,879,847
$2
$1.22
($3.56)
$0.00
0.0%
-0.2
Erie
$9.10
$0.44
2,399,873
$22
$8.20
$1.19
$0.25
2.7%
7.7
Ferris
$9.09
($2.71)
2,760,252
$25
$8.83
$0.34
$0.00
0.0%
27.0
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
Close value of a share at the end of a trading day
Change how much higher /lower price today than yesterday (in Foundation- last
year)

Shares outstanding

Dividend cash payment to owners

Yield dividend/ stock price

EPS earnings per share= net income / shares
BONDS: A FORMAL IOU

Long-term debt issued by a corporation or
government
 Maturity
Date
 Par Value
 Coupon Rate
CHARACTERISTICS OF BONDS

Most bonds are secured with a pledge of specific assets

Methods of retiring bonds:
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
Serial bonds have unique maturity dates and help spread out repayments

Companies may establish sinking fund to assist in repayment
Callable bonds have provisions for early redemption
Convertible bonds allow bonds to be transferred into shares of
common stock
Bond Credit Quality Ratings -Rating
Agencies
Credit Risk
Investment grade

Highest quality

High quality (very strong)

Upper medium grade (strong)

Medium grade
Not investment grade
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Lower medium grade (speculative)
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Low grade (speculative)
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Poor quality (may default)
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Most speculative

No interest paid or bankruptcy petition

In default
Moody’s
Standard
& Poor’s
Fitch
Ratings
Aaa
Aa
A
Baa
AAA
AA
A
BBB
AAA
AA
A
BBB
Ba
B
Caa
Ca
C
C
BB
B
CCC
CC
D
D
BB
B
CCC
CC
C
D
JUNK BONDS
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Junk bonds are bonds that are rated Ba or lower in
Moody’s classification
Junk bonds offer a higher rate of interest.
In December, 2006, Delta Airlines, Ford Motor
Company, and General Motors all had bond issues
that were in the junk bond category.
The Wall Street Journal tactfully refers to these
securities as “high yield bonds.”
Bond Market Summary
Company
Andrews
Series#
11.0S2004
12.0S2006
13.0S2008
Baldwin
11.0S2004
12.0S2006
13.0S2008
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BOND MARKET SUMMARY
Face
Yield
$866,667
11.0%
$1,733,333
11.6%
$2,600,000
11.9%
$866,667
$1,733,333
$2,600,000
11.0%
11.6%
11.9%
Close
$100.34
$103.74
$109.36
S&P
BB
BB
BB
$100.34
$103.74
$109.36
BB
BB
BB
Bond series#interest rate S year you pay back
Face
cash you received and how much you will have to pay back at maturity
Yield
bond interest / trading price
Close
what it is trading for today- and what you would pay to retire early
S&P = risk rating AAA – AA- A- BBB-….D
TRADING SECURITIES: THE PRIMARY MARKET

Public Offering
 Initial Public Offering
(IPO)
 Select an Investment bank
 Prepare paperwork
 Arrange for financing
 Carry out the offer

Private Placement
 Quicker, simpler, less
expensive
 Investment bank assistance
 No SEC registration
 Only available to
accredited investors
INVESTMENT BANKS


Financial Intermediary
Assists firm with IPO
 Planning
 Marketing
 Assessment

Determining how to structure the IPO is key role of
Investment Banks
TRADING SECURITIES: THE SECONDARY MARKET

Security Exchanges
 New
York Stock Exchange
 Traditionally
an “auction market”
 NASDAQ
 Electronic


exchange
Over the Counter Market
Electronic Communication Networks
NEW YORK STOCK EXCHANGE
The largest securities
exchange in the United
States. It is typically
referred to as NYSE.
REGULATIONS OF SECURITIES MARKETS:
ESTABLISHING CONFIDENCE


State Regulations
Federal Legislation

Securities Act 1933


Require firms to file registration when issuing stock
Securities Exchange Act of 1934

Securities and Exchange Commission



Established report filing
Registration of brokers and dealers
Prosecution power

Individual and Company Fraudulent Activity (i.e. insider
trading)
PERSONAL INVESTING

What are your short-term and long-term goals?

How much are you able to invest?

How concerned are you about the tax implications?

How much tolerance do you have for risk?
FULL SERVICE VS DISCOUNT BROKERS



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Individuals must use a broker to trade stocks on
the organized exchanges and OTC market
Full Service Brokers
 Provide a range of services like research,
advice and tax planning
Discount Brokers
 Basic buy/sell capabilities
The competition between brokers is intense and
both attempt to offer more services.
DIRECT STOCK PURCHASE PLANS



Many Corporations offer Direct
Stock Purchase Plans
Purchase stock direct from company
Dividend Reinvestment Plans (DRIPS)
allow current stockholders to
reinvest dividends to purchase
additional stock
STRATEGIES FOR INVESTING IN SECURITIES

Investing for Income

Market Timing

Value Investing

Investing for Growth

Buying and Holding
KEEPING TABS ON THE MARKET: STOCK
INDICES
Stock Index – tracks how Standard and Poor’s 500 – tracks
the prices of a specific set 500 stocks and weighs the total
of stocks have changed. market value of each stock.
Dow Jones Industrial Average (DJIA) – most widely followed
index. Tracks 30 stocks picked by the Wall Street Journal
editors.
STOCK QUOTES ONLINE