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Chapter 17

RSM100Y1 Chapter Notes - Chapter 17: Startup Company, Accounts Payable, General Instruction Of The Roman Missal

Rotman Commerce
Course Code
John Oesch

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Finance: the business function of planning, obtaining, and managing the companys funds to
accomplish its objectives as effectively and efficiently as possible
Financial mangers: the executives who develop and carry out their firms financial plan and
decide on the most appropriate sources and uses of funds
Risk-return tradeoff: the process of maxiizig the ealth of the fi’s shaeholdes 
striking the right balance between risk and return
Financial plan: a document that specifies the funds needed by a firm for a period the timing of
cash inflows and outflow, and the most appropriate sources and uses of funds
Capital structure: the i of a fi’s det ad euit apital
Leverage: increasing the rate of return on funds invested by borrowing funds
Venture capitalists: business firms or groups of individual that invest in new and growing firms
in exchange for an ownership stake
Tender offer: a poposal ade  a fi to the taget fi’s shaeholdes speifig a pie ad
the form of payment
Leveraged buyouts, or LBOs: transaction where public shareholder are bought out and the firm
reverts to private status
Divestiture: the sales of assets by a girm
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17.1 Explain the role of financial managers
Financial managers are eeuties ho deelop ad a out thei fi’s fiaial pla ad
decide on the most appropriate sources and uses of funds. Financial structure of a typical
company, at the top is the CEO, and the CFO which is below usually reports directly to the CEO.
3 senior managers report directly to the CFO, they are the vice-president of financial
management, the treasurer and the controller.
Vice-President of Financial management is responsible for preparing financial forecasts and
analyzing major investment decision related to new products, new production facilities or
acquisitions. Treasurer is esposile fo all the opa’s fiaig atiities, that includes
cash management, tax planning and preparation, and shareholder relations. They also work on
sale of new security issues to investors. Controller is the chief accounting manager, their job
iludes keepig the opa’s ooks, pepaig fiaial stateet, ad odutig iteal
In their jobs, financial professionals continually balance risks with expected financial returns.
Risks are uncertainty gain or loss; return are the gain or loss that result from an investment
over a specified period of time. Financial managers try to maximize wealth of the shareholder
by striking a balance between risk and return. This balance is called risk-return trade-off.
If a firm relies heavily on borrowed funds they may increase the return (in the form of cash) to
shareholders. An increase in a fi’s cash on hand reduces the risk of being unable to meet
unexpected cash needs. But cash does not earn much on its own, it does not earn any return.
Firms that fail to invest the surplus funds in an income-earning asset such as securities reduces
their potential return or profitability.
17.2 Describe the parts of a financial plan and the financial planning process
Fiaial aages deelop thei ogaizatio’s fiaial plas. This is a douet that states
the funds that are required for a given period of time, the timing of cash inflow and outflow,
and the most appropriate sources and uses of funds. There are generally two types of financial
pla Opeatig pla ad “tategi pla; opeatig plan are short-term financial plan that
focus on only 1 to 2 years into the future. Strategic plans are long-term which is up to 5 or 10
Financial plans are based on forecasts of: production costs, purchasing needs, plant and
equipment expenses and sales activities for the period covered. Financial managers use
forecasts to decide on the specific amounts needed and the timing of expenses and receipts.
The financial plan is based on answer 3 questions: 1) what funds will the firm require during the
planning period, 2) when will the firm need additional funds, 3) where will the firm obtain the
necessary funds.
The financial plan must reflect both the amounts and timing of inflows and outflows of funds.
Even a profitable firm may face financial difficulties when it needs funds but sales are slow; this
is when volume of credit sales increase or customer are slow in making payments.
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