Financial Management Decisions

1
Financial Management Decisions

• Investment What assets to own?
• Financing How to pay for those assets?
• Dividend What to do with Net Income?

2
Investment Decision Current Assets - Cash

• How much cash is needed to meet monthly expenses?
  For emergencies? For unexpected opportunities?
• How much cash to keep in checking account?
• Where to invest temporarily excess cash?

3
Investment Decision Current Assets - Accounts
Receivable

• Determine firms credit policy
• Who gets credit?
• Terms of repayment? Discount for early payment?
• Procedure for collecting from slow customers?
  When to write off account as bad debt
  (uncollectable)?

4
Investment Decision Current Assets - Inventory

• How much inventory to hold?
• Holding costs (carrying costs)
• Ordering costs
• Want to minimize sum of costs

5
Trade-off in investing in current assets

• Liquidity versus Profitability
• Investing a lot of in CA makes firm very
  liquid
• Investing a lot of in CA is not a very
  profitable investment of funds

6
Investment Decision Fixed Assets

• Capital Budgeting
• Planning for acquisition of Property, Plant, and
  Equipment (PPE)
• Estimate future cash flows investment will
  produce
• Discount future cash flows and compare with
  current cost to determine whether to invest

7
Financing Decision

• How should firms assets be financed?
• Liabilities (Debt) Short-term and/or Long-term?
• Equity Sell new stock and/or reinvest profits?
• What is best mix of debt and equity?

8
Sources of Short-Term Funds

• Trade Credit
• Family and Friends
• Credit Cards
• Bank Loans
• Factoring
• Purchase-Order Financing
• Commercial Paper

9
Sources of Long-Term Funds

• Debt
• Long-term loan
• Issue Bonds
• Equity
• Issue new shares Stock
• Reinvest profits

10
Financial Markets Where firms go to raise money

• Debt vs. Equity
• Primary vs. Secondary
• Money vs. Capital

11
Dividend Decision

• What to do with Net Income?
• Pay Dividends.
• Reinvest Profits.
• Do some combination of both.

12
Goal of financial management?

• Goal Maximize profits?
• Which measure, time period???
• Better goal Maximize stock price
• Easy to measure, all agree what it is

13
Disadvantage of Stock Price Maximization as a Goal

• If managers focus solely on short-term stock
  price maximization, they may make decisions
  harmful to the corporation in the long-term.
• May provide large returns to stockholders but
  firm may cease to exist
• Need to take interests of all stakeholders into
  account

14
Stakeholders

• Shareholders
• Employees
• Customers
• Suppliers
• Community
• Creditors
• Government

15
Long-term Decision Making

• Stakeholders have interest in continued operation
  of corporation
• Managers who make decisions that maximize stock
  price in the long-run will be acting in best
  interests of all stakeholders