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Business Essentials
Eighth Canadian Edition

Chapter 15
Financial Decisions and Risk
Management

Copyright © 2017 Pearson Canada Inc. 15 - 1

Learning Objectives (1 of 2)
• Describe the responsibilities of a financial
manager.
• Distinguish between short-term
(operating) and long-term (capital)
expenditures.
• Identify three sources of short-term
financing for businesses.
• Identify three sources of long-term
financing for businesses.

Copyright © 2017 Pearson Canada Inc. 15 - 2

Learning Objectives (2 of 2)
• Discuss the value of common stock and
preferred stock to stockholders, and
describe the secondary market for each
type of security.
• Explain the process by which securities
are bought and sold.

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The Role of the Financial Manager (LO 15-1)

(1 of 5)

Finance involves four key responsibilities:

Determine a firm’s long-term

investments

Obtain funds to pay for

those investments

Conduct the firm’s everyday

financial activities

Help manage the risks that a

firm takes

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The Role of the Financial Manager (LO 15-1)

(2 of 5)

• The Financial Manager

– responsible for planning and overseeing the financial resources of
a firm including:

cash-flow management

financial planning

financial control

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The Role of the Financial Manager (LO 15-1)

(3 of 5)

Cash-Flow Management

• Managing the pattern of cash inflows (revenues) and

outflows (debt payments)
• Investing funds that are not needed to service debt
• Funds must either be committed to maintaining the firm, or
earning interest, not sitting idle

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The Role of the Financial Manager (LO 15-1)

(4 of 5)

Financial Control

• Checking performance against strategic plans

• Making adjustments
• Preparing budgets to ensure that sufficient cash is on hand
to meet operational and debt-service needs

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The Role of the Financial Manager (LO 15-1)

(5 of 5)

Financial Planning

• a plan to achieve a desired financial status:

– projections of revenue flows
– sources and planned uses of funds to meet both short- and long-
term goals
– timing of when funds will be required

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Why Do Businesses Need Funds? (LO 15-2) (1 of 2)

Short-Term (Operating) Expenses

accounts payable

accounts receivable
• credit policy

inventory
• raw materials
• work in process
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Why Do Businesses Need Funds? (LO 15-2) (2 of 2)

• Long-Term (Capital) Expenditures
– funding fixed assets that have a long life and a lasting value: land,
buildings, machinery
– not normally sold or converted to cash
– acquisition requires a large investment
– ties up the firm’s resources for a long period of time

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Sources of Short-Term Funds (LO 15-3) (1 of 4)

• Short-Term Funds
– allows firms to cover operational expenses and implement short-
term plans

factoring
secured unsecured
trade credit accounts
loans loans
receivable

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Sources of Short-Term Funds (LO 15-3) (3 of 4)

• Secured Short-Term Loans
– a short-term loan for which the borrower is required to put up
collateral
 interest rates are usually lower than for unsecured loans
 appeals to firms whose credit rating is not sufficient (or who are too
new) to qualify for unsecured loans

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Sources of Short-Term Funds (LO 15-3) (4 of 4)

Unsecured Short-Term Loans

Line of Credit

Revolving Credit Agreements

Commercial Paper

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Sources of Long-Term Funds (LO 15-4) (1 of 4)

Debt Financing

Equity Financing

Hybrid Financing

Risk-Return Relationship

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Sources of Long-Term Funds (LO 15-4) (2 of 4)

Debt Financing

Long-Term Loans
• borrowing money for 3 to 10 years at a
fixed or floating rate

Corporate Bonds
• a promise by the borrower to pay the
lender an amount of money on the maturity
date

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Sources of Long-Term Funds (LO 15-4) (3 of 4)

Bonds

Unsecured
Secured
(debentures)

Bearer
Registered
(coupon)
bonds
bonds

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Equity Financing (LO 15-5) (1 of 4)

Common Stock

• a firm sells ownership rights

by issuing shares
• investors buy the stock
hoping that it will appreciate

Retained Earnings

• financing by retaining
profits in the firm and not
paying dividends to
shareholders
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Equity Financing (LO 15-5) (2 of 4)

Common Stock

Market Value
• current price of a share on the secondary securities
market
Book Value
• shareholders’ equity divided by the number of
shares outstanding

Par Value
• arbitrary value set by the company’s board of
directors and stated on stock certificates
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Equity Financing (LO 15-5) (3 of 4)

Hybrid Financing: Preferred Stock

Preferred Shares

• require fixed payments, as do bonds

• unlike bonds, they do not have a maturity date
• have no voting rights, so control of the firm is not
affected

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Equity Financing (LO 15-5) (4 of 4)

• Choosing between Debt and Equity Financing

capital structure: the mix of debt versus equity

financial plans usually include a target for the debt–

equity mix

equity is expensive, but the company has no formal

obligations to the shareholders

debt is cheaper, but the company may not be able to

service the debt

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Securities Markets (LO 15-5) (2 of 7)

• Stock Exchanges
– organizations that provide a setting for
members to buy and sell stock in
accordance with the rules of the exchange

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Securities Markets (LO 15-5) (3 of 7)

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Securities Markets (LO 15-5) (6 of 7)

Toronto Stock Exchange (TSX)
• the largest exchange in Canada with 110 members
• the securities of most major Canadian companies are
listed here

Foreign Exchanges
• there are major exchanges around the world such as
the:
– New York Stock Exchange
– London Stock Exchange

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Buying and Selling Securities (LO 15-6) (1 of 6)

Stock Quotations

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Buying and Selling Securities (LO 15-6) (3 of 6)

• Market Indexes
– summarize trends in the stock market and specific industries:

Dow Jones
S & P Composite NASDAQ
Industrial Average S&P/TSX index
Index (S&P 500) Composite
(DJIA)

Bear market • a period of falling stock prices

Bull market • a period of rising stock prices

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Other Investments (LO 15-7) (2 of 6)

Ethical Funds

Stress socially responsible investing

Focus on companies that produce safe

and useful products
(no cigarettes, weapons etc.)

Emphasize good employee relations,

environmental practices, and human
rights
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Other Investments (LO 15-7) (3 of 6)

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Securities Regulations (LO 15-7)

• Canadian Securities Regulations
– Canada does not have federal securities legislation; regulation is
primarily provincial
– Blue-sky law
 laws regulating how firms back up securities
– Prospectus
 detailed registration statement about a new stock filed with a
provincial securities exchange

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Financial Management for Small Business

(LO 15-7)

• Small business owners must strive to get credit, manage it

well, build their credit rating, and manage cash flow.

Establish bank credit and

trade credit

The Venture Capital

approach

Planning for cash flow

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Risk Management (LO 15-8) (1 of 5)

• Conserving a firms financial power or assets by minimizing
the financial effect of accidental losses

Risk
• uncertainty about future events

Speculative risk
• the chance for gain or loss

Pure risk
• only the chance of loss (a
warehouse fire)
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Risk Management (LO 15-8) (2 of 5)

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Quick-Check Questions (1 of 10)

1) Meagan is comparing her firm's actual quarterly results to the
budget projection that was completed six months ago. When
analyzing these documents, she discovers that sales were
lower than the firm had anticipated. Meagan is involved in
_____________.
A) financial control
B) cash flow management
C) financial planning
D) management accounting

Copyright © 2017 Pearson Canada Inc. 15 - 32

Quick-Check Questions (2 of 10)

1) Meagan is comparing her firm's actual quarterly results to the
budget projection that was completed six months ago. When
analyzing these documents, she discovers that sales were
lower than the firm had anticipated. Meagan is involved in
_____________.
A) financial control
B) cash flow management
C) financial planning
D) management accounting

Answer:
A) financial control

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Quick-Check Questions (3 of 10)

2) Crystal, an owner of a travel agency, is beginning to worry that
her cash flows are not going to cover her current operating
expenses. With the cold weather approaching, Crystal knows
that her cash inflows will pick up very quickly as people begin
to book vacations to the sunny south. Crystal can resolve her
current cash flow concerns by obtaining ________ financing.
A) immediate
B) short-term
C) contingency
D) long-term

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Quick-Check Questions (4 of 10)

2) Crystal, an owner of a travel agency, is beginning to worry that
her cash flows are not going to cover her current operating
expenses. With the cold weather approaching, Crystal knows
that her cash inflows will pick up very quickly as people begin
to book vacations to the sunny south. Crystal can resolve her
current cash flow concerns by obtaining ________ financing.
A) immediate
B) short-term
C) contingency
D) long-term

Answer:
B) short-term

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Quick-Check Questions (5 of 10)

3) Azim has been approved for a bank loan; however the bank
manager requires Azim’s signature allowing the bank to seize
his car if payment is not made as agreed. Azim’s car is being
used as __________.
A) security
B) a promissory note
C) equity
D) collateral

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Quick-Check Questions (6 of 10)

3) Azim has been approved for a bank loan; however the bank
manager requires Azim’s signature allowing the bank to seize
his car if payment is not made as agreed. Azim’s car is being
used as __________.
A) security
B) a promissory note
C) equity
D) collateral

Answer:
D) collateral

Copyright © 2017 Pearson Canada Inc. 15 - 37

Quick-Check Questions (7 of 10)

4) Businesses may seek long-term financing from these major
sources:
A) debt, equity and insurance financing
B) debt, equity and hybrid financing
C) government funds and bank loans
D) commercial paper and promissory notes

Copyright © 2017 Pearson Canada Inc. 15 - 38

Quick-Check Questions (8 of 10)

4) Businesses may seek long-term financing from these major
sources:
A) debt, equity and insurance financing
B) debt, equity and hybrid financing
C) government funds and bank loans
D) commercial paper and promissory notes

Answer:
B) debt, equity and hybrid financing

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Quick-Check Questions (9 of 10)

5) Extended periods where most stock prices are increasing is
characterized as a ________ market; periods where most
prices are falling is characterized as a ________ market.
A) growth; decline
B) recovery; recession
C) bull; bear
D) bear; bull

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Quick-Check Questions (10 of 10)

5) Extended periods where most stock prices are increasing is
characterized as a ________ market; periods where most
prices are falling is characterized as a ________ market.
A) growth; decline
B) recovery; recession
C) bull; bear
D) bear; bull

Answer:
C) bull; bear

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