Short Term Financial Budgets

..Extension of Financial Planning

Budget
A Budget is a detailed schedule of the financial activity and it can be of the following types as per the need and requirement of the business:
Sales Budget Advertising Budget Cash Budget A Budget can be a short term as well as long term but usually it is perceived to be a short term plan of business work.

Budget
Clearly stated strategic, operating and financial objectives. Assumptions on which the plan is based. Description of underlying strategies. Contingency plans for emergencies. Budgets, classified by
time period division type

Cash Budget
Cash budgets
Project and summarize cash inflows and outflows. Show monthly cash balances. Show any short-term borrowing needed to cover cash shortfalls.

They are usually based on sales forecasts. They are usually constructed on a monthly basis.
More frequent planning may be warranted.

Problem
As a cash manager of Tyler Paints, you are required to prepare a cash budget for April, May, and June. Sales in the first three months of the year were $400,000, $500,000, and $600,000, respectively. Projected sales for April through July are given below. Mark Accounts receivable level at the end of June,
Month: Projected Sales: April May June July $1,200,000 $1,000,000 $1,000,000 $500,000

Continue.
Tyler collects 20% of its sales in the month of the sale. An additional 45% is collected in the month following the sale, and the remaining 35% is collected two months after the sale. Purchases amount to 60% of next months sales, and are paid for in the month prior to the sale. Wages equal 20% of the current months sales, while other fixed expenses (such as rent) are $120,000 per month. Tyler expects to pay taxes of $200,000 in June. Tylers policy is to have a monthly cash balance of $450,000 for liquidity reasons. Any shortages will be met by short-term borrowings. Surplus cash will be used to pay off such loans.

1) Overview of Corporate Finance. 2) How Corporation Issues shares.

Common Stock
Treasury Stock Stock that has been repurchased by the company and held in its treasury. Issued Shares Shares that have been issued by the company. Outstanding Shares Shares that have been issued by the company and held by investors.

Common Stock
Authorized Share Capital Maximum number of shares that the company is permitted to issue, as specified in the firms articles of incorporation.

Par Value Value of security shown on certificate.

Retained Earnings Earnings not paid out as dividends.

Common Stock
Book Value vs. Market Value Book value is a backward looking measure. It tells us how much capital the firm has raised from shareholders in the past. It does not measure the value that shareholders place on those shares today. The market value of the firm is forward looking, it depends on the future dividends that shareholders expect to receive.

Common Stock
Example - H.J. Heinz Book Value vs. Market Value (1/2001) Total Shares outstanding = 350 million

Common Shares ($.25 par) 108 Additional paid in capital 344 Retained earnings 4,887 Treasury shares at cost - 2,908 Other - 888 Net common equity (Book Value) 1,543

Common Stock
Example - H.J. Heinz Book Value vs. Market Value (1/2001) Total Shares outstanding = 350 million

January 2001 Market price = # of shares

$40/sh x 350

Market Value $14.0 billion

Preferred Stock
Preferred Stock - Stock that takes priority over common stock in regards to dividends. Net Worth - Book value of common shareholders equity plus preferred stock. Floating-Rate Preferred - Preferred stock paying dividends that vary with short term interest rates.

Corporate Debt
Debt has the unique feature of allowing the borrowers to walk away from their obligation to pay, in exchange for the assets of the company. Default Risk is the term used to describe the likelihood that a firm will walk away from its obligation, either voluntarily or involuntarily. Bond Ratings "are issued on debt instruments to help investors assess the default risk of a firm.

Patterns of Corporate Finance

Firms may raise funds from external sources or plow back profits rather than distribute them to shareholders. Should a firm elect external financing, they may choose between debt or equity sources.

Venture Capital
Venture Capital Money invested to finance a new firm

Since success of a new firm is highly dependent on the effort of the managers, restrictions are placed on management by the venture capital company and funds are usually dispersed in stages, after a certain level of success is achieved.

Initial Offering
Initial Public Offering (IPO) - First offering of stock to the general public. Underwriter - Firm that buys an issue of securities from a company and resells it to the public. Spread - Difference between public offer price and price paid by underwriter. Prospectus - Formal summary that provides information on an issue of securities. Underpricing - Issuing securities at an offering price set below the true value of the security.

General Cash Offer

Seasoned Offering - Sale of securities by a firm that is already publicly traded. General Cash Offer - Sale of securities open to all investors by an already public company. Shelf Registration - A procedure that allows firms to file one registration statement for several issues of the same security. Private Placement - Sale of securities to a limited number of investors without a public offering.

Rights Issue - Issue of securities offered only to current stockholders.

Example - YRU Corp currently has 9 million shares outstanding. The market price is $15/sh. YRU decides to raise additional funds via a 1 for 3 rights offer at $12 per share. If we assume 100% subscription, what is the value of each right? Current Market Value = 9 mil x $15 = $135 mil Total Shares = 9 mil + 3 mil = 12 mil Amount of new funds = 3 mil x $12 = $36 mil New Share Price = (135 + 36) / 12 = $14.25/sh Value of a Right = 15 - 14.25 = $0.75