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Understanding business 8th by mcchugh nickels chapter 18

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Financial
Management

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CHAPTER

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18

Nickels

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McHugh

McGraw-Hill/Irwin

Understanding Business, 8e

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McHugh
1-1

18-1

© 2008 The McGraw-Hill Companies, Inc., All Rights


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Finance & Managers

• What is Financial
Management?
• Finance

• Financial Manager

• Importance of
Finance

18-2


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Most Important
Skills Needed by CFOs

Source: CIO Enterprise

18-3




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Women CFOs




As of May 2006, 35 of the 500 largest companies in the US had a female
CFO
Five largest companies with female
CFO: Citigroup, Home Depot,
Verizon, Marathon Oil, and Medco Health Solutions
Top 3 reasons that helped women achieve their current position:
Supportive boss, Supportive spouse, and culture of the organization

Source:: cfo.com, June 1, 2006

18-4


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Non-Finance
Functions of CFOs

Source: CIO Enterprise

18-5


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What Financial Managers Do

18-6


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Where CFOs Get
Their Financial Information

Source:: USA Today

18-7


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Financial Managers:
Ask Your Clients

1. What are the client's goals in areas like

lifestyle, retirement, saving for college
education and their health care as well as that
of their dependents?

2. When do they want to reach their goals?
3. What steps have they already taken toward
achieving their goals?

4. How do they feel about taking investment risks
for a potential higher rate of return?

5. How involved do they want to be in monitoring
Source:: Fpanet.org

their progress toward their goals?

18-8


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Financial Planning
Short-term
Forecasting

Capital
Budget
Feedback

Financial
Plan

Operating
Budget

Financial
Controls

Long-term
Forecasting
Cash
Budget
Feedback

18-9


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Budget Process

• Financial Plan- Financial Statements
• Types of Budgets
• Capital
• Cash
• Operating (Master)

• Financial Controls- Feedback
18-10


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Need for Operating Funds

• Manage Daily Operations
• Controlling credit operations
• Acquire Inventory
• Capital Expenditures
18-11


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Why Firms Need Funds
Short-Term Funds
• Meeting monthly
expenses
• Unanticipated
emergencies
• Cash-flow problems
• Expanding current
inventory
• Temporary
promotional
programs

Long-Term Funds
• New product
development
• Replacing capital
expenditure
• Mergers or
acquisitions
• Expansion into new
markets
• Building new
facilities
18-12


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Daily Profits Of Companies
With The Highest Revenue

• Wal-Mart - $24.8 Million
• ExxonMobil - $58.9 Million
• General Motors - $10.5 Million
• Ford - $1.4 Million
• General Electric - $41.1 Million
• ChevronTexaco - $19.8 Million
Source: World Feature Syndicate, 2005

18-13


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Sources of Funds
Short-Term
• Trade Credit
• Promissory Notes
• Family/Friends
• Banks, etc.








Secured Loan
Unsecured Loan

Factoring
Commercial Paper
Credit Cards

Long-Term
• Debt






Term-Loan
Bonds
• Secured
• Unsecured

Equity





Stock
Retained Earnings
Venture Capital
18-14


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Who Can Issue Bonds?
1. Federal, state, and local
governments
2. Federal government
agencies
3. Corporations
4. Foreign governments and
corporations
18-15


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Sources of Equity Financing
Internal
Internal
Sources
Sources
Equity
Equity
Capital
Capital

External
External
Sources
Sources

Retained
Retained
Earnings
Earnings
Owner
Owner
Contribution
Contribution
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Sale
Sale of
of
Partnerships
Partnerships
Venture
Venture
Capital
Capital
Public
Public Sale
Sale of
of
Stock
Stock

18-16


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IPO
Summer of 2006
• 89 companies filed plans to raise money
through IPO – looking to raise $16.3 billion
• 17 companies withdrew their plans to proceed
with their IPO – were hoping to raise $3.89
billion
• Withdrawing – Go Daddy Group and PNY
Technologies
• Filing – Double-Take Software and
Hansen Medical
Source:: redherring.com, August 18, 2006

18-17


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Google IPO








Launched – August 2004
IPO Price -- $ 85 per share
Seeking to raise $2.7 billion
Unusual auction-style offering
With IPO, the company must
shed light on the inner workings
Key competitors – Yahoo and Microsoft
As of March 31, 2004 Google employed about 1,900 employees

Source:: cnet news.com, April 30, 2004; Forbes, September 17, 2004

18-18


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Venture Capitalists







Finance new and rapidly growing companies
Purchase equity securities
Assist in the development of new products or
services
Add value to the company through active
participation
Take higher risks with the expectation of higher
rewards
Have a long-term orientation

Source:: NVCA.com

18-19


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Making Use of Leverage
Leverage- Selling
Bonds

Equity- Sale of Stock

Common Stock
Bonds (@10%)

$ 50,000
$450,000

Common Stock
Bonds (@10%)

$500,000
0

Funds Raised

$500,000

Funds Raised

$500,000

Earnings
Less: Bond Interest

$ 125,000
$ 45,000

Earnings

$ 125,000

Total Earnings

$ 80,000

Total Earnings

$ 125,000

Return to

=

Stockholders

$80,000
$50,000

= 160%

Return to

=

Stockholders

$125,000
$500,000

= 25%

18-20



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