Financial Managers - Answer- Examine financial data and recommend strategies for
improving financial performance
Financial managers are responsible for: - Answer- - Paying company bills
- Collecting payments
- Assuring accounting accuracy
- Keeping the company afloat
________________________ involves analyzing short-term and long-term money flows
to and from the company. - Answer- Financial planning
3 Key Steps of Financial Planning: - Answer- -Forecasting the firm's short-term and
long-term financial needs
-Developing budgets (plans) to meet those needs.
- Establishing spending controls to ensure the company is achieving its goals and not
overspending.
Budget - Answer- A plan that sets forth management's expectations for revenues and
allocates the use of specific resources ($$) throughout the firm
The ____________ is the guide for financial operations and expected financial needs. -
Answer- Budget
Pro forma statement - Answer- A projection, prediction of revenues, expenses, and
profits, into the future (5 years, etc.)
If we have $100,000 now, what will we have in 5 years, etc.?
Capital Budget - Answer- Highlights a firm's spending plans for major asset purchases
that often require large sums of money (big, expensive stuff)
Cash Budget - Answer- Estimates cash inflows and outflows during a particular period
like a month or quarter
Operating (Master) Budget - Answer- Ties together all the firm's other budgets and
summarizes its proposed financial activities
,Financial Managers are typically focused on the ___________ side of the balance
sheet. - Answer- RIGHT
What is on the right side of the balance sheet? - Answer- Liabilities, owner's equity
External Financing - Answer- Stock, loans, etc.
Why is external financing needed? - Answer- Firms (like individuals) cannot usually pay
for big ticket items- cars, houses, new facilities, etc.- with the funds generated by day-
to-day operations
Short term financing - Answer- Funds needed for a year or less
Long term financing - Answer- Funds needed for more than a year.
Debt Financing - Answer- The funds raised through various forms of borrowing that
must be repaid
Equity Financing - Answer- The funds raised from within the firm from operations or
through the sale of ownership in the firm (such as stock)
Each type of ______________ has different benefits and COSTS!!! - Answer- Financing
Balance Sheet - Answer- Total amount of assets, liabilities, and owners' equity as of a
certain date
We are now focusing on the liabilities and owners' equity side of things for this chapter. -
"The Sources"
Liabilities - Answer- Debts, payables, what we owe 9the interest on the debt is tax
deductible)
Owners' Equity- Contributed capital; proceeds from sale of stock
What are benefits and disadvantages of liabilities and owners' equity? - Answer-
Liabilities- Interest on debt is a "business expense" and is tax deductible, ca build credit
(or bring it down), don't have to give up ownership, - the main disadvantage is actually
needing to pay off a loan
Owners' Equity- No loans, but you give up ownership of company
The best thing to do is a little mix of both debt and equity
Conditions for types of financing (debt and equity) - Answer- Management influence
Debt- There's usually none unless special conditions have been agreed upon
Equity- Common stockholders have voting rights
Repayment
, Debt- Debt has a maturity date; principal must be repaid
Equity- Stock has no maturity date; the company is never required to repay equity
Yearly obligations
Debt- Payment of interest is a contractual obligation
Equity- The firm isn't legally liable to pay dividends
Tax benefits
Debt- Interest is tax deductible
Equity- Dividends are paid from after-tax income and aren't deductible
Leverage - Answer- The amount of debt used to finance a firm's assets
You use the borrowed money like a lever to make more money (hopefully)
A firm that has significantly more debt compared to the amount of equity is said to be
__________________. - Answer- "Highly leveraged"
One of the main tasks of financial managers. - Answer- Finding the OPTIMAL
combination of debt and equity.
Optimal - Answer- Lowest total cost of borrowing
The PROPORTION of Debt vs Equity financing at any given time is known as the
______________________ of the firm. - Answer- CAPITAL STRUCTURE
Capital structure is measured by the ____________________________. - Answer-
Debt to equity ratio (or "D/E Ratio")
Debt to equity ratio is a measure of a firm's ____________________. - Answer- Capital
structure
A company that has more ________ than equity is "highly leveraged". - Answer- Debt
Firms use CONSTANTLY CHANGING _______________ of Debt and Equity
Financing. - Answer- COMBINATIONS
The proportional mix of debt and equity financing is known as the
___________________ of the firm. - Answer- Capital Structure
There are different benefits and costs to using each type of financing, and this ratio
fluctuates constantly in each firm; financial managers seek the ideal mix!
Firms are constantly tweaking this mix to achieve the LOWEST POSSIBLE COST OF
____________!! - Answer- CAPITAL
Capital Structure - Answer- The proportion of debt vs. equity financing of a firm at any
given time
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