Deck 18: Financial Management

Question 1

What is the primary goal of financial management?

Answer 1

The primary goal of financial management is to maximize a company's value. To achieve this goal, financial managers develop and implement a firm's financial plan. This involves monitoring the firm's cash flow and deciding how to create or use excess funds, budget for current and future expenditures.
It helps the firm to recommend specific investments, develop a plan to finance the enterprise for future growth, and interact with banks and capital markets. In the present day scenario, financial planning forms an inseparable part of the firm's overall plan.

Question 2

What does the company intend to do with the arranged financing-purchase equipment or other assets, finance a construction project, finance growth and expansion, or do something else?

Answer 2

The company used the funds for purchasing new equipment.
Company F was a growing firm and hence it required equipment and machinery for their operations. This would help them in further growth and expansion of business. Thus they used debt financing for the purpose of purchasing these fixed assets.

Question 3

What types of investments and expenditures are typically considered in the capital budgeting process?

Answer 3

Capital budget typically considers expenditures for real estate, new facilities, major equipment and other capital investments. The capital budgets involve allocating the expenditure for the above mentioned uses. It involves planning in the long term so as to implement a good capital budget plan.

Question 4

Assuming the interest rates are roughly the same, would you prefer to finance your new company by getting cash advances on your credit cards or by taking out a second mortgage on your house? Why?

Question 5

What is the difference between a secured loan and an unsecured loan?

Question 6

What is the fundamental difference in the way businesses approach debt and the way consumers approach it?

Question 7

What does it mean when someone refers to a company's capital structure?

Question 8

How can factoring help a company manage its cash flow?

Question 9

Would it be wise for a young company that is growing quickly but still hasn't achieved profitability to attempt to issue bonds as a way to expand its working capital? Why or why not?

Question 10

Why is careful management of accounts receivable and accounts payable so essential to ensuring positive cash flow?

Question 11

Why would a company chose to factor its receivables, given that it will get less money than the receivables are worth?

Question 12

Why do lenders often refuse to finance 100 percent of the cost of a purchase, requiring borrowers to make a down payment that covers a portion (typically from 10 to 25 percent) of the purchase price? After all, a lender could potentially earn more by financing the entire purchase amount.

Question 13

Ethical Considerations. Budget projections always involve a degree of judgment because managers can never predict the future with total accuracy. For instance, one manager with an optimistic view and another with a pessimistic view could look at the same set of facts and arrive at distinctly different conclusions about the company's financial prospects. When budgets will influence decisions made by investors or lenders, how should the people who prepare the budgets deal with the variance between optimistic and pessimistic viewpoints? On the one hand, being too pessimistic could result in lower levels of funding, which could be detrimental to employees, existing investors, existing creditors, and other financial stakeholders. On the other hand, being too optimistic could be detrimental to prospective investors or creditors. How do you find the right balance?

Question 14

The company you cofounded last year is growing rapidly and has strong prospects for an IPO in the next year or two. The additional capital that an IPO could raise would let you hire the brightest people in the industry and continue to innovate with new product research. There is one potential glitch: You and the rest of the executive team have been so focused on launching the business that you haven't paid much attention to financial control. You've had plenty of funds from venture capitalists and early sales, so working capital hasn't been a problem, but an experienced CEO in your industry recently told you that you'll never have a successful IPO unless you clean up the financial side of the house. Your cofounders say they are too busy chasing great opportunities right now, and they want to wait until right before the IPO to hire a seasoned financial executive to put things in order. What should you do and why?

Question 15

Why might a company's board of directors decide to lease office space even though it would be more economical to purchase the property and finance it with a long-term loan?

Question 16

You're getting ready to expand your woodworking hobby into a full-time business of building custom kitchen cabinets. To create top-quality cabinets, you know you'll need to upgrade from the consumer-grade machinery you have now to industrial-grade equipment. The new equipment will be much more expensive, but, if properly cared for, should last for decades, and you hope to be in business for at least 20 years. If the overall costs of leasing this equipment or borrowing money to buy it are roughly the same, which financing method would you choose? Why?

Question 17

How might Visa executives use scenario planning in the budgeting process?

Question 18

Concept Integration. Review the definitions of current and fixed assets in Chapter 17 (see page 407). Why would a potential lender be interested in these two classes of assets when reviewing the balance sheet of a company applying for a long-term loan?

Question 19

Could Visa have accomplished its funding goals through short-term or long-term debt financing instead? Why or why not?

Question 20

What form of financing did the company choose? Does the article indicate why the company selected this form of financing?

Question 21

As Visa continues to explore growth opportunities, should it consider becoming a lender by issuing cards itself or lending money to banks that issue cards? Why or why not?

Question 22

Who provided the financing for the company? Was this arrangement considered unusual, or was it routine?