Fundamentals of corporate finance 5e mcgraw chapter 02
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Fundamentals of
Corporate
Finance
Fifth Edition
Slides by
Matthew Will
McGraw-Hill/Irwin
Chapter 2
Why Corporations Need
Financial Markets and
Institutions
2- 2
Topics Covered
Why Finance Matters
The Flow of Savings to Corporations
Functions of Financial Markets
Functions of Financial Intermediaries
Value Maximization and Cost of Capital
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
2- 3
Financial Markets
Money
Primary
OTC
Markets
Markets
Secondary
Markets
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
2- 4
Financial Markets
Financing Decision
Source
of Funds “Capital”
Capital Structure
Money Markets
Euros
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
2- 5
Financial Markets
(2)
(1)
Investors
Firm's
operations
Financial
Manager
(4a)
Real assets
(timberland)
(4b)
(3)
(stockholders
save and invest
in closely held
firm.)
(1) Investors buy shares with cash
(2)Cash is invested
(3) Timber harvest generates cash
(4a) Cash reinvested
(4b) Cash returned to investors
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
2- 6
Financial Markets
Issue Debt
Company
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Irwin/McGraw-Hill
Cash
Investors
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2- 7
Financial Markets
$
Bank of
America
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Irwin/McGraw-Hill
$
Sells
shares
Windsor
Fund
Investors
Issues
shares
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
2- 8
Financial Markets
Company
Banks
Insurance Cos.
Obligations
Funds
Intermediary
Brokerage Firms
Obligations
Funds
Depositors
Policyholders
Investor
Investors
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2- 9
Financial Markets
Company
Loan
Banks
$2.5 mil
Intermediary
Deposits
Depositors
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Irwin/McGraw-Hill
Cash
Investor
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
2- 10
Financial Markets
Company
Loan
Insurance
Company
$250 mil
Intermediary
Sell policies
Issue Stock
Policyholders
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Irwin/McGraw-Hill
Cash
Investor
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2- 11
Total U.S. Financing
% Holdings of Corporate and Foreign Bonds (Qtr 1, 2005)
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2- 12
Total U.S. Financing
% Holdings of Corporate Equities (Qtr 1, 2005)
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2- 13
Function of Financial Markets
Transporting cash across time
Risk transfer and diversification
Liquidity
Payment mechanism
Provide information
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2- 14
U.S. Financing
Information Provided by Financial Markets
Commodity prices
Interest rates
Company values
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2- 15
Value of Alaska Air Group
Data as of April, 2005
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2- 16
Value Maximization
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
