Chapter
17
Financial Management
Learning Objectives
LO 17.1 Define finance, and explain
the role of financial managers.
LO 17.2 Describe the parts of a
financial plan and the financial
planning process.
LO 17.3 Outline how organizations
manage their assets.
LO 17.4 Compare the two major
sources of funds for a business, and
explain the concept of leverage.
LO 17.5 Identify sources of shortterm financing for business
operations.
LO 17.6 Discuss long-term financing
options.
LO 17.7 Describe mergers,
acquisitions, buyouts, and
divestitures.
Financial Management
Finance: The business function of planning,
obtaining, and managing the company’s funds to
accomplish its objectives as effectively and
efficiently as possible
Maximizing overall worth
Meeting expenses
Investing in assets
Increasing profits to shareholders
The Role of the Financial Manager
Financial managers: The executives who develop and
carry out their firm’s financial plan and decide on the
most appropriate sources and uses of funds
The Role of the Financial Manager

Risk-return trade-off: the process of
maximizing the wealth of the firm’s shareholders
by striking the right balance between risk and
return.
Financial Planning
Financial plan: a document that specifies the funds
needed by a firm for a period of time, the timing of cash
inflows and outflows, and the most appropriate sources
and uses of funds
Financial plans are built by answering the following
questions:
What funds will the firm require during the planning period?
When will the firm need additional funds?
Where will the firm obtain the necessary funds?
Based on the forecasts of production costs, purchasing
needs, plant/equipment expenses, and sales activities
for a given period.
Managing Assets
Sound financial management requires assets
to be managed and acquired effectively and
efficiently.
Assets
What a firm owns
Use of funds
Short-Term Assets
Also known as current assets
Cash
Marketable securities
Accounts receivable
Inventory
Test Your Knowledge
All of the following are short-term assets
except
a.
b.
c.
d.
inventory.
accounts receivable.
equipment.
cash.
Test Your Knowledge
All of the following are short-term assets
except
a.
b.
c.
d.
inventory.
accounts receivable.
equipment.
cash.
Answer: C
Capital Investment Analysis
Long-lived assets
Produce economic benefit for more than
one year
Substantial investments
Capital investment analysis
Expansion: new assets
Replacement: upgrading assets
Managing International Assets
Today’s firms have facilities and assets
worldwide.
Sales occur outside of the home country.
International assets require the management
of activities to reduce the financial risk of
exchange rates.
Sources of Funds and
Capital Structure
Debt capital consists of funds obtained through
borrowing.
Equity capital consists of funds provided by
the firm’s owners when they reinvest their
earnings, make additional contributions,
liquidate assets, issue shares to the general
public, or raise capital from outside investors.
Leverage and Capital Structure
Decisions
Goal: increasing
the rate of return
on funds invested
by borrowing funds
Mixing Short and Long-Term
Funds
Short-term funds
Current liabilities
Less expensive
Volatile interest rates
Long-term funds
Long-term debt and
equity
Used for long-term
assets
Dividend Policy
Dividends are periodic cash payments to
shareholders.
Highest dividend yielding stocks
Financial managers must make decisions
regarding their dividend policy.
Should we pay a dividend?
When should it be paid?
Short-Term Funding Options
Trade credit
Short-term loans
Commercial paper
Test Your Knowledge
Trade credit is a source of long-term
financing.
a. True
b. False
Test Your Knowledge
Trade credit is a source of long-term
financing.
a. True
b. False
Answer: B
Sources of Long-Term Financing
Public sale of shares and bonds
Private placements
Venture capitalists
Private equity funds
Hedge funds
Test Your Knowledge
Why would a firm prefer to sell its bonds through private
placement rather than an initial public offering?
a. Firms typically receive more favorable repayment terms
from private holders.
b. There are more buyers for private placements than
publicly traded bonds.
c. It is often cheaper for the firm to sell securities privately.
d. Private placements reduce the risk of default.
Test Your Knowledge
Why would a firm prefer to sell its bonds through private
placement rather than an initial public offering?
a. Firms typically receive more favorable repayment terms
from private holders.
b. There are more buyers for private placements than
publicly traded bonds.
c. It is often cheaper for the firm to sell securities privately.
d. Private placements reduce the risk of default.
Answer: C
Mergers, Acquisitions,
Buyouts, and Divestitures
Financial managers evaluate mergers,
acquisitions, and other opportunities by
comparing costs and benefits.
Tender offer
Leveraged buyouts (LBOs)
Divestiture
Selloff
Spinoff