Transcript FINANCE DECISIONS - Villanova University

Financial Management Decisions
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Investment: What assets to own?
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Financing: How to pay for those
assets?
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Dividend: What to do with Net Income?
Investment Decision: Current
Assets - Cash
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How much cash is needed to meet
monthly expenses? For emergencies?
For unexpected opportunities?
How much cash to keep in checking
account?
Where to invest temporarily excess
cash?
Investment Decision: Current
Assets - Accounts Receivable
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Determine firm’s credit policy:
Who gets credit?
Terms of repayment? Discount for early
payment?
Procedure for collecting from slow
customers? When to write off account
as bad debt (uncollectable)?
Investment Decision: Current
Assets - Inventory
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How much inventory to hold?
Holding costs (carrying costs)
Ordering costs
Want to minimize sum of costs
Trade-off in investing in current
assets
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Liquidity versus Profitability
Investing a lot of $$ in CA makes firm
very liquid
Investing a lot of $$ in CA is not a very
profitable investment of funds
Investment Decision: Fixed
Assets
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Capital Budgeting
Planning for acquisition of Property,
Plant, and Equipment (PPE)
Estimate future cash flows investment
will produce
Discount future cash flows and compare
with current cost to determine whether
to invest
Financing Decision
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How should firm’s assets be financed?
Liabilities (Debt): Short-term and/or
Long-term?
Equity: Sell new stock and/or reinvest
profits?
What is best mix of debt and equity?
Sources of Short-Term Funds
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Trade Credit
Family and Friends
Credit Cards
Bank Loans
Factoring
Purchase-Order Financing
Commercial Paper
Sources of Long-Term Funds
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Debt:
Long-term loan
Issue Bonds
Equity:
Issue new shares Stock
Reinvest profits
Financial Markets: Where firms
go to raise money
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Debt vs. Equity
Primary vs. Secondary
Money vs. Capital
Dividend Decision
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What to do with Net Income?
Pay Dividends.
Reinvest Profits.
Do some combination of both.
Goal of financial management?
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Goal = Maximize profits?
Which measure, time period???
Better goal = Maximize stock price
Easy to measure, all agree what it is
Disadvantage of Stock Price
Maximization as a Goal
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If managers focus solely on short-term
stock price maximization, they may
make decisions harmful to the
corporation in the long-term.
May provide large returns to
stockholders but firm may cease to exist
Need to take interests of all
stakeholders into account
Stakeholders
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Shareholders
Employees
Customers
Suppliers
Community
Creditors
Government
Long-term Decision Making
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Stakeholders have interest in continued
operation of corporation
Managers who make decisions that
maximize stock price in the long-run
will be acting in best interests of all
stakeholders