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Chapter 10

chap 10 (additional notes)

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Ryerson University
ECN 510

Chapter 10 • Financial Managers oversee the financial resources of a firm, their objective is to increase the firms’ value and thus shareholder’s wealth. • Finance (corporate finance) is the business function of making decisions about a firm’s long term investments, how to pay for the them and managing risks. Responsibilities of Financial Managers (3 Major Ones) • Cash Flow Management: the pattern in which cash flows into and out of the firm must be managed so that there is always enough cash on hand to seize opportunity and operate o Idle cash represent loss of potential profits • Financial Control: checking actual performance against plans, budgets are the backbone of financial control. • Financial Planning: how a business will reach a financial goal in the future. Short-Term (Operating) Expenses • Accounts Payable: unpaid bills owed to suppliers plus wages and taxes due within the upcoming year. Largest single category of short-term debt for most firms. • Accounts Receivable: funds due from customers who have bought on credit, tie up funds. o Credit policies control which buyers are eligible for which type of credit. • Inventories: goods currently held that will sell thing the year. Too little results in lost sales while too much inventory results in opportunity costs of tied up cash. 3 types of inventories: o Raw materials o Work-in-process: partway through production process o Finished goods • Working Capital: current assets minus current liabilities, 20% of sales income is devoted to working capital by large companies, reducing it add to earnings. • Long-term capital expenses are not normally sold, require large investments, and commit funds over a long period of time. Sources of Short-Term Funds • Trade Credit: credit granted from selling firm to buying firm o Open-book credit: seller ships without a formal agreement o Promissory notes: before merchandise is shipped, buyer signs legal binding to pay o Trade draft: buyer signs trade acceptance to take acceptance of the shipped goods • Secured Short-Term Loans differ in terms of what the nature of the collateral is: o Inventory Loans: Inventory is more valuable as collateral when it can be readily converted into cash. o Accounts Receivable as Collateral: called “pledging accounts receivable,” important to service companies that do not maintain inventories (e.g. a low office_ • Factoring Accounts Receivable (is discussed in Ch.8) ‘ • Unsecured Short-term loans usually require that the borrower maintain a ‘compensating balance’ (keeping a portion of the loan with the lender in a non-interest account). o Line of credit: borrow can draw money up to a maximum amount. o Revolving Credit Agreements: line of credit in which the borrower pays interest on the fluctuating line of credit, plus a fee for extending the credit (commitment fee). o Commercial paper: unsecured notes sold for
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