Textbook Notes (368,333)
Canada (161,803)
RSM100Y1 (431)
John Oesch (214)
Chapter 20

RSM 100 - Chapter 20 - Summary Notes

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Department
Rotman Commerce
Course
RSM100Y1
Professor
John Oesch
Semester
Fall

Description
RSM 100Y – Chapter 20: Financial Decisions and Risk Management Role of the Financial Manager Managers responsible for the planning and controlling of the acquisition and dispersal of the companies financial assets, with 4 duties: - Determining a firm’s long-term investments - Obtaining funds to pay for those investments - Conducting the firm’s every day financial activities - Helping to manage the risks that the firm takes Objectives of the Financial Manager is to INCREASE a FIRM’S VALUE Responsibilities of the Financial Managers Cash Flow Management Managers must ensure that it always has enough funds to purchase the materials and human resources needed in production. Any cash that is not needed immediately should be invested. Financial Control Process of checking actual performance against plans to ensure that the desired financial status occurs (adjustments made daily to financial environment) Financial Planning Firm’s strategies for reaching a future financial position, answering: - What amount of funds does the company need for immediate plans? - When will it need more funds? - Where can it get the funds to meet short/long-term needs? Short-Term Fund Needs (Operating Expenditures) Accounts Payable Unpaid bills, taxes due, wages  All known before hand Accounts Receivable Customers who have bought on credit, must know their payment schedule  This prediction is a function of “Credit Policy” Inventories Raw Materials, Work-in-process inventory (unfinished goods) and finished goods Working Capital (= Current Assets – Current Liabilities) 20 cents of every sale is tied up into this; reducing Working Capital – saves cash Long-Term Fund Needs (Capital Expenditures) Used in the purchase of fixed assets like factories or machinery; differ from ST: - Long-term assets are not normally sold or converted into cash - Their acquisition requires large investment - Binding commitment of company funds into the future - Usually much more carefully planned than short-term expenditures Sources of Short-Term Funds Trade Credit Credit extended to a buying firm from a selling firm (a short term loan) - Open Book Credit (Most Common) o Based on faith of payment, an invoice is shipped w/ credit terms - Promissory Notes o Buyers sign an agreement of payment - Trade Draft (Used for international Transactions o Similar to promissory note, outlines date and amount due o Must be signed before items can be received o Becomes a “trade acceptance” once signed Secured Short Term Loans The borrower must put up collateral (seizable assets) in case of default.  Most short term loans secured by inventory or accounts rec. Inventory Loans Inventory is used as collateral, only useful if inventory is liquid Accounts Receivable as Collateral Known as pledging accounts receivable (Useful to service firms) Factoring Accounts Receivable Selling the firms accounts receivable, with the buyer being known as a “factor” for a percentage of the total value of AR Unsecured Short-Term Loans No collateral needed, but sometimes banks require a compensating balance (a portion of the loan) must remain in deposit with the bank at all times Lines of Credit Agreement for a bank to lend a firm X$ at any time Revolving Credit Similar to credit card, must pay interest and annual fees Commercial paper Sells unsecured notes at discount, and rebuys at par  Usually 270 days, but can be less Sources of Long-Term Funds Debt Financing Raising money by borrowing outside of company through loans & bonds Long-Term Loans Usually gotten from a chartered bank, attractive because o Few parties involved allowing for quick loan arrangements o No need for public disclosure of financial standing (Bonds do) o The duration of the loan is flexible o As needs change, loan terms can usually change Disadvantages  Large borrows may find it hard to get a lender  May have restrictions placed on them as conditions  May have to pledge long-term assets as collateral  May agree to take on no more debt until loan is paid off Interest Rates: Negotiated, usually @ Prime +1 Corporate Bonds (MAJOR SOURCE OF FUNDS) Contract like Commercial Paper; it’s a promise to pay a certain amount of money on a certain date, usually in 30 years Bond In
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