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MGM101H5 (300)

MGM101H5 Chapter Notes -Unsecured Debt, Asset, Revolving Credit

Course Code
Clarence J Swanton

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Financial Management
Finance: the function in a business that acquires funds fort he firm and manages
those funds within the firm
Financial Management: job of the managing a firm’s resources so it can meet its
goals and objectives
Financial Managers: managers who make recommendations to top executives
regarding strategies for improving the financial strength of a firm
Vital to stay alongside of changes and opportunities in finance and adjust
to them
Carefully analyze tax implications of various managerial decisions in
attempt to minimize taxes paid by business
Financial Planning
1. Forecasting both short-term and long-term financial needs
Short-term forecast: predicts revenues, costs, and expenses for a
period of one year or less
o Cash flow forecast: predicts cash inflows and outflows in
future periods, usually months or quarters
Long-term forecast: predicts revenues, costs, and expenses for a
period longer than one year, sometimes as far as five or ten years
into the future
2. Developing budgets to meet those needs
Operating (master) budget: ties together all of firm’s other
budgets; the projection of dollar allocations to various costs and
expenses needed to run or operate the business, given projected
Capital Budget: budget that highlights a firm’s spending plans for
major asset purchases that often require large sums of money
Cash Budget: budget that estimates a firm’s projected cash
inflows and outflows that the firm can use to plan for any cash
shortages or surpluses during a given period

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3. Establishing financial control to see how well company is doing what it
set out to do
Financial Control: process in which a firm periodically compares
its actual revenues, costs, and expenses with its projected ones
The Need for Funds
- Managing day to day needs of the business
o To see that funds are available to meet daily cash needs
o Money has time value
- Controlling credit operations
o Issuing credit cards
- Acquiring needed inventory
- Making capital expenditures
o Capital expenditures: major investments in either tangible long-
term assets such as land, buildings, and equipment, or intangible
assets such as patents, trademarks, and copyrights
Alternative Sources of Funds
Debt financing: funds raised through various forms of borrowing that must be
Equity financing: funds raised from operations within the firm or through the
sale of ownership in the firm
Short-term financing: borrowed funds that are needed for one year or less
- Trade Credit: practice of buying goods and services now and paying for
them later
- Promissory Notes: written contract with promise to pay
- Family/Friends
1. Agree on specific load terms
2. Put agreement in writing
3. Arrange for repayment in same way they would for a bank loan
- Banks
o Secured loan: loan backed by something valuable, such as
o Unsecured loan: loan not backed by any specific assets
o Line of credit: a given amount of unsecured funds a bank will lend
to a business (good for unexpected cash needs)
o Revolving credit agreement: line of credit that is guaranteed by
the bank (good for unexpected cash needs)
o Commercial finance companies: organizations that make short-
term loans to borrowers who offer tangible assets as collateral
- Factoring: process of selling accounts receivable for cash
- Commercial Paper: unsecured promissory notes of $100,000 and up that
mature in 365 days or less
Long-term financing: borrowed funds that are needed for a period longer than
one year
1. What are the organization’s long-term goals and objectives?
2. What are the financial requirements needed to achieve these long-term
goals and objectives?

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3. What sources of long-term capital are available, and which will best fit
our needs?
- Debt
o Term-Loan: promissory note that requires borrower to repay
loan in specified installments
o Risk/Return trade-off: principle that the greater the risk a lender
takes in making a loan, the higher the interest rate required.
o Bonds: corporate certificate indicating that a person has lent
money to a firm
Secured: backed by some tangible asset
Unsecured (debenture bonds): not backed by any
Institutional investors: Large organizations (pension
funds, mutual funds, insurance companies, and banks) that
invest their own funds or funds of others
Interest: payment the issuer of the bond makes to the
bondholders for use of the borrowed money
Maturity date: exact date the issuer of a bond must pay the
principal to the bondholder
Special Bond Features
Sinking Fund: a reserve account in which the issuer of a
bond periodically retires some part of the bond principal
prior to maturity so that enough capital will be accumulated
by the maturity date to pay off bond
Provide orderly payment of bond issue
Reduce risk of bond not being repaid
Creditor, not owners
Interest paid on bonds is tax deductible
When bonds are repaid, debt obligation is eliminated
Can be repaid before maturity date
Increase debt
Paying interest on bonds is a legal obligation
Face value of bonds must be repaid on maturity date
- Equity
o Stock: shares of ownership in a company
Initial Public Offering (IPO): first public offering of a
corporation’s stock
Stock certificate: evidence of stock ownership that
specifies name of company, number of shares it represents,
and type of stock being issued
Dividends: part of a firm’s profits that may be distributed
to share holders as either cash payments or additional
shares of stock
Common shares: most basic form of ownership in firm
Right to vote for company board directors and
important issues affecting company
Share in firm’s profit through dividends
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