ch. 5 strategic financial management

financing decision vs. investment decision
financing: involves long term debt and Shareholders equity
investment: involves long term asset decisions
key areas of financial decision making
1. working capital management
2. capital budgeting
3. capital structure
working capital management
managing short term financial position of firm
-current assets and liabilities
-day to day financial activities
-operational side of finance
-involves cash mgmt, cash conversion cycle, and CA&CL
-works with suppliers for efficiency
cash conversion cycle
the number of days from when you pay suppliers until when you get paid by customer
new paradigm for wcm
working capital is bad
reflects poor planning
expensive to have (carrying costs, shortage costs, inventory costs)
capital budgeting
managing a firms long term investments
-long term assets (property, plant, equipment)
-Capital expenditures – investment in tangible assets
-R&D spending – investment in intangible assets
-Return on investment > cost of capital for you to invest
-Cash flows initially negative but turn positive in the future
capital structure
managing financing mix b/t debt and equity
-cost of capital
cost of capital
weighted avg cost of debt and equity capital
-70% of capital is generated from operations, rest is from capital markets
using debt to raise capital
90% of capital raised from markets
-interest is tax deductible but you have to have a fixed financial obligation (can lead to financial distress)
using equity (common stock) to raise capital
-no fixed financial obligation (no interest payments) but dilutes ownership
-costs more than debt
optimal capital structure
minimal cost is where the tax advantage of debt is equal to cost of financial distress
dividend payments
-cash payouts to investors
-companies expected to maintain dividends
-high return investments=low dividends
stock buybacks
-use cash to buyback shares
-way to return cash to investors
-viewed positively by investors
-have become more popular than dividends
stock splits
get stock price is a lower trading range for small investors
-no actual impact on stock value
-2 for 1 split= 1 share at $100 becomes 2 shares at $50