Introduction to Finance: Markets, Investments, and Financial Management, 15th Edition

PART 3

FINANCIAL MANAGEMENT

INTRODUCTION

Part 3 deals with the applications of finance within a business firm. The practice of financial management requires businesspeople to work with financial institutions in the context of the financial market. If Wal-Mart needs a short-term loan to help finance inventory for the Christmas selling season, it can go to a bank for the loan, but the interest rate that Wal-Mart pays will be affected by the current level of interest rates in the economy, which is determined by a variety of economic conditions. If Wal-Mart needs to raise millions of dollars to finance new expansion and construction, it can work with another type of financial institution, an investment bank, which will help Wal-Mart sell bonds or shares of common stock to raise the needed funds. The interest rate on the bonds and the price of the stock are determined by the conditions of the financial markets.

Institutions and investors pay close attention to a firm's financial management policies. Market participants glean information from a firm's financial statements, namely its balance sheet, income statement, and statement of cash flows. Changes in a firm's financial condition inform investors of a firm's strengthening or weakening position against its competitors. Investors and lending institutions may express concern if a firm's financing policy changes so it begins to use ...