Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Chapter Why Corporations Need Financial Markets and Institutions 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- Financial Markets Money Primary OTC Markets Markets Secondary Markets McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved 2- 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- 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- Financial Markets Issue Debt Company McGraw-Hill/Irwin Irwin/McGraw-Hill Cash Investors Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved 2- Financial Markets $ Bank of America McGraw-Hill/Irwin Irwin/McGraw-Hill $ Sells shares Windsor Fund Investors Issues shares Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved 2- Financial Markets Company Banks Insurance Cos Obligations Funds Intermediary Brokerage Firms Obligations Funds Depositors Policyholders Investor Investors McGraw-Hill/Irwin Irwin/McGraw-Hill Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved 2- Financial Markets Company Loan Banks $2.5 mil Intermediary Deposits Depositors McGraw-Hill/Irwin 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 McGraw-Hill/Irwin Irwin/McGraw-Hill Cash Investor Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved 2- 11 Total U.S Financing % Holdings of Corporate and Foreign Bonds (Qtr 1, 2005) McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved 2- 12 Total U.S Financing % Holdings of Corporate Equities (Qtr 1, 2005) McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved 2- 13 Function of Financial Markets Transporting cash across time Risk transfer and diversification Liquidity Payment mechanism Provide information McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved 2- 14 U.S Financing Information Provided by Financial Markets Commodity prices Interest rates Company values McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved 2- 15 Value of Alaska Air Group Data as of April, 2005 McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved 2- 16 Value Maximization McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved [...]...2- 11 Total U.S Financing % Holdings of Corporate and Foreign Bonds (Qtr 1, 2005) McGraw- Hill/Irwin Copyright © 2007 by The McGraw- Hill Companies, Inc All rights reserved 2- 12 Total U.S Financing % Holdings of Corporate Equities (Qtr 1, 2005) McGraw- Hill/Irwin Copyright © 2007 by The McGraw- Hill Companies, Inc All rights reserved 2- 13 Function of Financial Markets Transporting cash across... information McGraw- Hill/Irwin Copyright © 2007 by The McGraw- Hill Companies, Inc All rights reserved 2- 14 U.S Financing Information Provided by Financial Markets Commodity prices Interest rates Company values McGraw- Hill/Irwin Copyright © 2007 by The McGraw- Hill Companies, Inc All rights reserved 2- 15 Value of Alaska Air Group Data as of April, 2005 McGraw- Hill/Irwin Copyright © 2007 by The McGraw- Hill... rights reserved 2- 15 Value of Alaska Air Group Data as of April, 2005 McGraw- Hill/Irwin Copyright © 2007 by The McGraw- Hill Companies, Inc All rights reserved 2- 16 Value Maximization McGraw- Hill/Irwin Copyright © 2007 by The McGraw- Hill Companies, Inc All rights reserved