Financial Management Chapter 16

Managing Current Assets

• Financial managers must coordinate inventory purchases to manage cash flows
• Optimal inventory levels depend on the method of production
• Excess inventory ties up money unnecessarily, but inventory shortages could drive customers to competitors
• RFID technology helps companies manage inventory

Accounts Payable

• Trade credit is credit extended by suppliers for the purchase of goods and services
• Most widely used source of short-term financing
• Suppliers often offer discounts for early payment (e.g., "1/10 net 30")

Bank Loans

• Line of credit: a short-term financing option
• Secured loans require collateral, while unsecured loans do not
• Principal and interest must be repaid
• Prime rate is the interest rate at which banks lend to their best customers

Nonbank Liabilities

• Factor: a finance company that buys accounts receivable from businesses
• Taxes owed to the government and wages owed to employees are also nonbank liabilities
• Financial managers must plan to meet these debt obligations as they come due

Managing Fixed Assets

• Long-term assets include production facilities, offices, and equipment
• These assets require long-term financing and can be expensive
• Leasing is an alternative to owning assets, involving regular fee payments

Financing with Long-Term Liabilities

• Two common sources of long-term funds: equity financing and debt financing
• Long-term liabilities include debts that will be repaid over several years (e.g., long-term loans and bond issues)
• Heavily indebted companies may not survive a recession and may face bankruptcy

Bonds: Corporate IOUs

• Bonds are debt instruments sold to raise long-term funds
• Bondholders receive regular interest payments and the face value of the bond at maturity
• The bond contract (indenture) specifies the terms of the agreement
• The annual interest rate (coupon rate) is the percentage of face value paid yearly

Types of Bonds

• Unsecured bonds
• Secured bonds
• Serial bonds
• Floating-rate bonds
• Junk bonds

Financing with Owners' Equity

• Stockholder's equity includes:
  • Common stock (par value and capital in excess of par)
  • Preferred stock
  • Retained earnings
  • Dividend yield

The Securities Markets

• The New York Stock Exchange (NYSE) and NASDAQ are the two largest stock exchanges
• Both exchanges are now publicly traded organizations
• Electronic markets have grown quickly due to speed, low cost, and efficiency
• The Over-the-Counter (OTC) Market is a network of dealers linked by computers and telephones, accounting for the largest total dollar value of all secondary markets