Dynamic’s Short-Term Financial Plan

Our next task is to develop a short-term financial plan that covers the forecasted requirements in the most economical way. We move on to that topic after two general observations: The large cash outflows in the first two quarters do not necessarily spell trouble for Dynamic Mattress. In part, they reflect the capital investment

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Long-Term Financial Planning

It’s been said that a camel looks like a horse designed by a committee. If a firm made every decision piecemeal, it would end up with a financial camel. That is why smart financial managers also need to plan for the long term and to consider the financial actions that will be needed to

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Growth and External Financing

We started this chapter by noting that financial plans force managers to be consistent in their goals for growth, investment, and financing. Before leaving the topic of financial planning, we should look at some general relationships between a firm’s growth objectives and its financing needs. We saw in Table 29.9 that with a 20%

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The Composition of Working Capital

The financial manager cannot freely choose the amount of investment in inventories or accounts receivable or the size of accounts payable; the amounts will depend in large part on the nature of the firm’s operations and the industry it is in. Figure 30.1 shows the relative importance of working capital in different industries. For

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Inventories and Working Capital Management

Most firms keep inventories of raw materials, work in process, or finished goods awaiting sale and shipment. But they are not obliged to do so. For example, they could buy materials day by day, as needed. But then they would pay higher prices for ordering in small lots, and they would risk production delays

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Credit Management

We continue our tour of current assets with the firm’s accounts receivable. When one com­pany sells goods to another, it does not usually expect to be paid immediately. These unpaid bills, or trade credit, compose the bulk of accounts receivable. The remainder is made up of consumer credit, that is, bills that are awaiting

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Cash and Cash Management

In June 2018, Amazon held $16.7 billion in cash and $8.3 billion in short-term securities. Short-term securities pay interest; cash doesn’t. So why do firms such as Amazon hold such large amounts of cash? Why don’t they arrange for the bank to “sweep” the cash at the end of the day into an interest-bearing

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Marketable Securities

In December 2017, Apple was sitting on a $285 billion mountain of cash and fixed-income investments, amounting to about 70% of the company’s total assets. Of this sum, $9.5 billion was kept as cash and the remainder was invested as follows: Apple’s massive investments in securities came from the torrent of free cash flow

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Sensible Motives for Mergers

Mergers can be horizontal, vertical, or conglomerate. A horizontal merger is one that takes place between two firms in the same line of business. Most of the mergers listed in Table 31.1 are horizontal. A vertical merger involves companies at different stages of production. The buyer expands back toward the source of raw materials

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Some Dubious Reasons for Mergers

The benefits that we have described so far all make economic sense. Other arguments some­times given for mergers are dubious. Here are a few of the dubious ones. 1. Diversification We have suggested that the managers of a cash-rich company may prefer to see it use that cash for acquisitions rather than distribute it

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Estimating Merger Gains and Costs

Suppose that you are the financial manager of firm A and you want to analyze the possible purchase of firm B. The first thing to think about is whether there is an economic gain from the merger. There is an economic gain only if the two firms are worth more together than apart. For

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The Mechanics of a Merger

Buying a company is a much more complicated affair than buying a piece of machinery. Thus we should look at some of the problems encountered in arranging mergers. In practice, these arrangements are often extremely complex, and specialists must be consulted. We are not trying to replace those specialists; we simply want to alert

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Proxy Fights, Takeovers, and the Market for Corporate Control

The shareholders are the owners of the firm. But most shareholders do not feel like the boss, and with good reason. Try buying one share of IBM stock and marching into the boardroom for a chat with your employee, the CEO. (However, if you own 50 million IBM shares, the CEO will travel to

Merger Waves and Merger Profitability

1. Merger Waves Look back at Figure 31.1, which shows the number of mergers in the United States for each year since 1985. Notice that mergers come in waves. There was an upsurge in merger activ­ity from 1967 to 1969 and then again in the late 1980s and 1990s. Another merger boom got under

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Leveraged Buyouts

Leveraged buyouts (LBOs) differ from ordinary acquisitions in two immediately obvious ways. First, the target company goes private, and its shares no longer trade on the open mar­ket. Second, the acquirer finances a large fraction of the purchase price by bank loans and bonds, which are secured by the assets and cash flows of

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The Private-Equity Market

1. Private-Equity Partnerships Figure 32.1 shows how a private-equity investment fund is organized. The fund is a partner­ship, not a corporation. The general partner sets up and manages the partnership. The limited partners put up almost all of the money. Limited partners are generally institutional investors, such as pension funds, endowments, and insurance companies.

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Fusion and Fission in Corporate Finance

Figure 32.2 shows some of AT&T’s acquisitions and divestitures. Before 1984, AT&T con­trolled most of the local and virtually all of the long-distance telephone service in the United States. (Customers used to speak of the ubiquitous “Ma Bell.”) Then in 1984, the company accepted an antitrust settlement requiring local telephone services to be spun

Bankruptcy

Some firms are forced to reorganize by the onset of financial distress. At this point they need to agree to a reorganization plan with their creditors or file for bankruptcy. We list the largest nonfinancial U.S. bankruptcies in Table 32.6. The credit crunch also ensured a good dollop of large financial bankruptcies. Lehman Brothers

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Financial Markets and Institutions

In most of this book, we have assumed that a large part of debt financing comes from public bond markets. Nothing in principle changes when a firm borrows from a bank instead. But in some countries, bond markets are stunted and bank financing is more important. Figure 33.1 shows the total values of bank

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Ownership, Control, and Governance

Who owns the corporation? In the United States and United Kingdom, we just say “the stock­holders.” There is usually just one class of common stock, and each share has one vote. Some stockholders may have more influence than others, but only because they own more shares. In other countries, ownership is not so simple,

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