BUSN Ch.9 Finance: Acquiring and Using Funds to Maximize Value

LEARNING OBJECTIVES After studying this chapter, you will be able to: 9-1Identify the goal of financial management, and explain the issues financial managers confront as they seek to achieve this goal 9-2Describe the tools financial managers use to evaluate their company’s current financial condition and develop financial plans 9-3Evaluate the major sources of funds available to meet a firm’s short-term and long-term financial needs 9-4Identify the key issues involved in determining a firm’s capital structure 9-5Describe how financial managers acquire and manage current assets 9-6Explain how financial managers evaluate capital budgeting proposals to identify the best long-term investment options for their company

Finance

The functional area of business that is concerned with finding the best sources and uses of financial capital.

financial capital

The funds a firm uses to acquire its assets and finance its operations.

risk

The degree of uncertainty regarding the outcome of a decision.

risk-return trade-off

The observation that financial opportunities that offer high rates of return are generally riskier than opportunities that offer lower rates of return.

financial ratio analysis

Computing ratios that compare values of key accounts listed on a firm's financial statements.

liquid asset

An asset that can quickly be converted into cash with little risk of loss.

liquidity ratios

Financial ratios that measure the ability of a firm to obtain the cash it needs to pay its short-term debt obligations as they come due.

asset management ratios

Financial ratios that measure how effectively a firm is using its assets to generate revenues or cash.

financial leverage

The use of debt in a firm's capital structure.

leverage ratios

Ratios that measure the extent to which a firm relies on debt financing in its capital structure.

profitability ratios

Ratios that measure the rate of return a firm is earning on various measures of investment.

financial planning

The process of developing plans that build on a firm's financial strengths and correct its weaknesses.

internal vs. external financing

Determining how much financing a firm can generate internally versus what it must obtain from external sources.

planning process collaboration

The cooperative effort where financial managers work closely with accountants and managers from various functional areas.

budgeted income statement

A projection showing how a firm's budgeted sales and costs will affect expected net income. (Also called a pro forma income statement.)

budgeted balance sheet

A projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets. (Also called a pro forma balance sheet.)

cash budget

A detailed forecast of future cash flows that helps financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash.

trade credit

Spontaneous financing granted by sellers when they deliver goods and services to customers without requiring immediate payment.

spontaneous financing

Financing that arises during the natural course of business without the need for special arrangements.

factor

A company that provides short-term financing to firms by purchasing their accounts receivables at a discount.

line of credit

A financial arrangement between a firm and a bank in which the bank pre-approves credit up to a specified limit, provided that the firm maintains an acceptable credit rating.

revolving credit agreement

A guaranteed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement.

commercial paper

Shortterm (and usually unsecured) promissory notes issued by large corporations.

retained earnings

The part of a firm's net income it reinvests.

covenant

A restriction lenders impose on borrowers as a condition of providing long-term debt financing.

equity financing

Funds provided by the owners of a company.

debt financing

Funds provided by lenders (creditors).

capital structure

The mix of equity and debt financing a firm uses to meet its permanent financing needs.

Dood-Frank Act

A law enacted in the aftermath of the financial crisis of 2008-2009 that strengthened government oversight of financial markets and placed limitations on risky financial strategies such as heavy reliance on leverage.

cash equivalents

Safe and highly liquid assets that many firms list with their cash holdings on their balance sheet.

U.S. Treasury bills (T-bills)

Short-term marketable IOUs issued by the U.S. federal government.

money market mutual funds

A mutual fund that pools funds from many investors and uses these funds to purchase very safe, highly liquid securities.

capital budgeting

The process a firm uses to evaluate long-term investment proposals.

time value of money

The principle that a dollar received today is worth more than a dollar received in the future.

certificate of deposit(CD)

An interest-earning deposit that requires the funds to remain deposited for a fixed term. Withdrawal of the funds before the term expires results in a financial penalty.

present value

The amount of money that, if invested today at a given rate of interest (called the discount rate), would grow to become some future amount in a specified number of time periods.

net present value (NPV)

The sum of the present values of expected future cash flows from an investment, minus the cost of that investment.