Chapter 18 – Financial Management
18-46
PPT 18-48
Differences between Debt and
Equity Financing
TEXT FIGURE 18.6
Differences between Debt and
Equity Financing
DIFFERENCES BETWEEN
DEBT and EQUITY FINANCING
18-48
LO 18-5
PPT 18-49
Using Leverage for Funding Needs
USING LEVERAGE for
FUNDING NEEDS
18-49
• Leverage — Raising funds through borrowing to
increase the firm
’
s rate of return.
• Cost of Capital — The rate of return a company
must earn in order to meet the demands of its lenders
and expectations of equity holders.
LO 18-5
PPT 18-50
Lessons of the Financial Crisis
TEXT FIGURE 18.7
Using Leverage (Debt) versus
Equity Financing
USING DEBT vs. EQUITY FINANCING
18-50
LO 18-5
PPT 18-51
Lessons of the Financial Crisis
• The recent financial crisis was the worst fall since
the Great Depression.
LESSONS LEARNED from the
RECENT FINANCIAL CRISIS
18-51
• Led to the passage of
sweeping financial
reform.
• Government is
increasing involvement
and intervention.
LO 18-5
lecture enhancer 18-6
AMERICA’S DANGEROUS LACK OF
FINANCIAL FACTS
Some believe the recent financial chaos could have been
avoided if more companies were transparent with their finan-
cial facts. (See the complete lecture enhancer on page 18.72 of
this manual.)
lecture enhancer 18-7
REAL ESTATE WOES FOR RE-
GIONAL BANKS
Before the recession, local banks lacked the clout to diversify
their investments like the big banks. Instead they turned to
commercial real estate, and that led to big problems. (See the
complete lecture enhancer on page 18.73 of this manual.)
Chapter 18 – Financial Management
18-47
ed more restrictions.
3. Financial managers will have to earn back the
public’s trust.
VI. SUMMARY
Chapter 18 – Financial Management
18-48
test
prep
PPT 18-52
Test Prep
TEST PREP
18-52
• What are the two major forms of debt financing
available to a firm?
• How does debt financing differ from equity
financing?
• What are the three major forms of equity financing
available to a firm?
• What is leverage, and why do firms choose to use
it?
Chapter 18 – Financial Management
18-49
PowerPoint slide notes
PPT 18-1
Chapter Title
PPT 18-2
Learning objectives
PPT 18-3
James Reinhart
Chapter 18 – Financial Management
18-50
PPT 18-4
Name That Company
PPT 18-5
What’s Finance?
PPT 18-6
Financial Management
Chapter 18 – Financial Management
18-51
PPT 18-7
Financial Managers
1. This slide provides insight into the role of financial
management.
2. One point that is critical to communicate to stu-
dents, is that financial managers must understand
accounting (and in fact many of them have back-
grounds in accounting), but they are not account-
ants within the company. They are decision-makers
and managers in the truest sense of the word.
PPT 18-8
Who’s Who in Finance
1. This slide presents the positions a person in finance
might hold.
2. Help students understand that there are a variety of
positions a person in finance might strive to obtain.
3. Ask students: What are some of the func-
tions/responsibilities of each of these positions?
How are these positions alike? How might they be
different?
Chapter 18 – Financial Management
18-52
PPT 18-9
What Financial Managers Do
1. This slide gives the students a broad overview of
what responsibilities financial managers have with-
in a corporation. The CFO’s responsibilities are
rooted in the functions of “control” and “treasury.”
2. The control function has its basis in the budgeting
process:
• The budget represents the quantification of the
goals and missions of the company as mani-
fested by the resources required to attain those
goals.
• The budget becomes the scorecard by which
the company as a whole is measured.
3. The other area of responsibility for CFOs is the
treasury function.
• Procurement of financial resources available
to the company
• Ongoing communication with financial
sources, investors, and debt holders who must
be kept apprised of the firm’s financial per-
formance
• Allocation of resources within the context of
the company budget
PPT 18-10
What Worries Financial Managers
1. This slide highlights the things that worry financial
managers.
2. Financial managers are required to wear many hats
in the organization. While specific responsibilities
of a CFO will vary between large and small com-
panies, and public and closely held companies, the
principles of control and treasury responsibilities
transgress all boundaries.
3. The number of issues that financial managers face
is one reason why they are so well compensated.
Chapter 18 – Financial Management
18-53
PPT 18-11
Why Do Firms Fail Financially?
PPT 18-12
Top Financial Concerns of Company
CFOs—Macro
1. This slide highlights the top concerns of company
CFOs in the macro economy.
2. The Chief Financial Officers of companies must
concern themselves with a multitude of issues.
PPT 18-13
Top Financial Concerns of Company
CFOs—Micro
1. This slide highlights the top concerns of company
CFOs within their own businesses.
2. The Chief Financial Officers of companies must
concern themselves with a multitude of issues.
Chapter 18 – Financial Management
18-54
PPT 18-14
Financial Planning
PPT 18-15
Financial Forecasting
PPT 18-16
Budgeting
1. Budgeting is critical for the organization to control
expenses and to understand revenue expectations.
2. Think of a budget as a guidepost or a reference point
for the organization’s managers.
Chapter 18 – Financial Management
18-55
PPT 18-17
Types of Budgets
PPT 18-18
Financial Planning
The capital and cash budgets are part of the operating
(master) budget.
PPT 18-19
Establishing Financial Control
Financial controls also help reveal which specific accounts;
departments and people are varying from the financial plan.
Chapter 18 – Financial Management
18-56
PPT 18-20
Factors Used in Assessing Financial
Control
1. This slide highlights the factors used in assessing
financial control.
2. Financial control is used in conjunction with the
firm’s budget to ensure the organization is meeting
its commitments and goals.
3. Ask students: Why is it important for the CFO to
maintain financial control?
PPT 18–21
Progress Assessment
1. The three finance functions are: financial planning,
budgeting, and the establishment of financial
control.
2. The three primary financial problems causing firms
to fail are: undercapitalization, poor control of cash
flow, and inadequate expense control.
3. Short-term forecasts attempt to project revenue,
costs, and expenses for a period of one year or less,
while long-term forecasts are for a period greater
than one year.
4. A budget sets forth management’s expectations for
revenues and becomes the organization’s primary
guide for the financial operations as well as ex-
pected financial needs. The three types of budgets
are: capital, cash, and operating.
Chapter 18 – Financial Management
18-57
PPT 18-22
Key Needs for Operational Funds in a
Firm
PPT 18-23
How Small Businesses Can Improve
Cash Flow
1. The slide lists methods small businesses use to im-
prove cash flow.
2. Lack of cash flow can impact a business of any size
and may lead to the business shutting its doors.
3. It is critical that students understand cash is king
for a business of any size.
PPT 18-24
Good Finance or Bad Medicine?
Chapter 18 – Financial Management
18-58
PPT 18-25
Using Alternative Sources of Funds
PPT 18-26
Short and Long-Term Financing
PPT 18-27
Why Firms Need Financing
1. This slide is based on Figure 18.5.
2. It is important for management to understand that
they need capital for a variety of short-term and
long-term situations.
Chapter 18 – Financial Management
18-59
PPT 18-28
Progress Assessment
1. Time value of money means money can grow over
time through interest earned.
2. Providing credit to customers is often necessary to
keep current customers happy and to attract new
customers. The problem with selling on credit is
that as much as 25 percent of the firm’s assets
could be tied up in accounts receivable. This forc-
es the business to use it own funds to pay for goods
or services sold to customers who bought on credit.
3. To attract customers a firm must purchase invento-
ry as well as invest in tangible long-term assets
such as land, buildings, and equipment, or intangi-
ble assets such as patents, trademarks, and copy-
rights.
4. The primary difference between debt and equity fi-
nancing is that debt must be repaid at maturity,
while there is no obligation to repay equity financ-
ing. Interest must be paid on debt while the com-
pany is under no obligation to issue dividends on
equity financing. The interest paid is tax deducti-
ble while dividends are not. Finally, debt holders
do not have the right to vote on company matters as
equity holders do.
PPT 18-29
Types of Short-Term Financing
Trade credit is the most common form of financing. 2/10
net 30 means a firm can receive a 2% discount if the bill is
paid within 10 days. If they choose not to take the discount,
the net amount is due in 30 days.
Chapter 18 – Financial Management
18-60
PPT 18-30
Types of Short-Term Financing
PPT 18-31
Difficulty of Obtaining Short-Term Fi-
nancing
PPT 18-32
Finding Funding Online
1. Securing capital is the lifeblood to a small busi-
ness.
2. Students can learn more about Lendio on their web
site: www.lendio.com.