Chapter Fifteen

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Chapter Fifteen

• Financial Management
• and Securities Markets

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Topic of Chapter

• Financial Management
• Managing Current Assets and Liabilities
• Long-term Asset Planning and Financing
• 2. Securities Markets

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1A. Short-Term Financing

• Cash
• Advantage
• Important to pay off short-term liabilities and
  expenditures
• Disadvantage
• Does not generate profit
• Other assets generate profit
• Management Task keep just enough cash to ensure
  liquidity

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Types of Current Assetsand Current Liabilities

• Cash
• Marketable securities
• Accounts receivable
• Inventory
• Accounts payable
• Wages payable
• Taxes payable
• Notes (loans) payable

• Current assets(Financial resources that can be
  converted to cash within a year)
• Current Liabilities(Short-term debt obligations
  that must be paid within a year)

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Management Actions Current Assets

• Marketable Securities
• Investing idle cash in marketable securities
• Eg. Treasury Bills
• E.g. GICs

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Management Actions Current Assets

• Accounts Receivable
• Encourage early payments through the use of
  discounts
• Inventory
• Minimize carrying costs
• Minimize shortage costs

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Management Actions Current Liabilities

• Accounts Payable
• Take advantage of Trade Discounts
• E.g. 1/10 Net 30
• Notes Payable/Bank Loans
• Consolidation of short-term loans
• E.g. Sears card, Visa, Student loan

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1B. Long-Term Asset Planning and Financing

• Money is required to implement long-term
  decisions. These strategic decisions
• Require substantial investment
• Are Long-Term
• Are Risky
• Have high financial costs
• Ramifications of decision endure
• Are difficult to reverse

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Financing Long-Term Projects

• How will the long-term projects be paid for?
• (How will the assets be purchased?)
• Long-Term Liabilities
• Shareholders Equity
• Stock issuance
• Retained Earnings/Cash? - Unlikely

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Financing Long-Term Projects with Debt

• Two types
• Bank Loans (Chapter 13)
• Bonds on the Securities Market

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Bonds

• Definition A debt instrument of more than one
  year that raises capital by borrowing.
• Bonds are sold on the open markets
• Public becomes creditors to the company.
• Bondholders receive interest and principal from
  the Bonds

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Bonds

• Key Terms
• Indenture The Bond Contract
• Principal Money lent to the company
• Interest Annual cost of lending
• Maturity Date principal is owed
• Coupon rate Interest Rate on the Bond
• Face Value Initial price of a Bond

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Types of Bonds

• Unsecured Debentures, or bonds, that are not
  backed by specific collateral
• Secured Bonds that are backed by specific
  collateral that must be forfeited in the
  event the issuing firm defaults
• Serial A sequence of small bond issues of
  progressively longer maturity

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Types of Bonds

• Floating-rate Bonds with interest rates that
  change with current interest rates
  otherwise available in the economy
• Junk Special type of high interest rate bond
  that carries higher inherent risks

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Financing Long-Term Projects with Equity

• Private or Public Corporations
• Smaller Corporations can raise substantial
  capital by going public
• Initial Public Offering (IPO)
• Larger Corporations can raise additional capital
  by issuing shares

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2. Securities Markets

• Perspective owners of corporations can buy and
  sell their shares of companies (stocks)
• Individuals can also lend money to companies
  (bonds)
• Individuals, groups and companies can purchase
  shares.
• Purpose to make a profit and turn assets into
  cash.

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Securities Markets

• Primary Markets
• Companies sell directly to the public
• Secondary Markets
• Buyers and Sellers can exchange shares with one
  another
• Organized Exchanges
• Over-The-Counter Markets

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Securities Markets

• Measuring Performance
• Deciding when and what to buy or sell
• Indexes
• TSE 300
• Dow Jones
• Individual Indicators
• Earnings per Share
• Price/Earnings Ratio

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A Basic Bond Quote
Issuer (1) Coupon (2) Maturity (3) Price
(4) Yield - (5) Price Change -
(6) Canada 11.750 Feb 01/03 109.37 2.41 -0.04 Ro
yal Bank 5.400 April 07/03 102.99 2.84 -0.034 Su
ncor 6.700 Aug. 22/11 100.88 6.57 -0.05 Domtar 1
0.000 April 15/22 108.53 8.63 -0.05

• Issuer the name or abbreviation of the name of
  the government or corporation issuing the bond
• Coupon the annual percentage rate specified on
  the bond certificate. Domtars rate is 10, so a
  1,000 bond will receive 100 per year.
• Maturity the bonds maturity date the date on
  which the issuer will repay the bondholders the
  face value of each bond April 15, 2011 for
  Domtar.
• Price the closing price. For Domtar, 108.58
  percent of the face value or 1,085.58 per bond.
• Yield percentage return from interest, based on
  the closing price (column 4). If you buy a Domtar
  bond at todays closing price of 108.85
  (1,085.58) and receive 100 per year, your rate
  of return to maturity will be 8.63.
• Price Change - - the change in price from the
  close of the precious trading day. Domtars bond
  price decreased by 0.05.

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A Basic Stock Quote
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The Stocks in the TSE Index

• Abitibi-Consolidated Canadian
  Pacific Placer Dome
• Barrick Gold Canadian Tire Corp. Research
  in Motion
• Alcan Dofasco Inc. Royal Bank of
  Canada
• Bombardier Inc. Husky Energy Shaw
  Communications
• BCE Inc. Magna International Suncor
  Energy
• Bank of Montreal Inco Ltd. TELUS
• Bank of Nova Scotia National Bank of
  Canada TransAlta Corp.
• Biovail Nova Chemicals Corp. Teck Corp.
• Celestica Noranda Inc. TD Bank
• CIBC Nortel Networks Corp. Talisman
  Energy
• Canadian National Railway Nexen Thomson
  Corporation
• Petro Canada TransCanada Pipelines

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The 30 Stocks in the Dow Jones Industrial Average
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The Major Indices Created for the TSE

• TSE 300 Composite Index
• TSE 300 Capped Composite Index
• TSE 200 Index
• TSE 100 Index
• SP/TSE 60 Index
• SP/TSE 60 Capped Index
• SP/TSE Canadian SmallCap Index
• SP/TSE Canadian MidCap Index
• Toronto 35 Index

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