PART 1 Introduction to Managerial Finance FINANCIAL MARKETS
34 PART 1 Introduction to Managerial Finance FINANCIAL MARKETS
financial markets Financial markets are forums in which suppliers of funds and demanders of funds
Forums in which suppliers of
can transact business directly. Whereas the loans made by financial institutions
funds and demanders of funds
are granted without the direct knowledge of the suppliers of funds (savers), sup-
can transact business directly.
pliers in the financial markets know where their funds are being lent or invested. The two key financial markets are the money market and the capital market. Transactions in short-term debt instruments, or marketable securities, take place in the money market. Long-term securities—bonds and stocks—are traded in the capital market.
private placement The sale of a new security
To raise money, firms can use either private placements or public offerings. A
directly to an investor or group
private placement involves the sale of a new security directly to an investor or
of investors.
group of investors, such as an insurance company or pension fund. Most firms, however, raise money through a public offering of securities, which is the sale of
public offering The sale of either bonds or
either bonds or stocks to the general public.
stocks to the general public.
When a company or government entity sells stocks or bonds to investors and receives cash in return, it is said to have sold securities in the primary market. After
primary market the primary market transaction occurs, any further trading in the security does not
Financial market in which securities are initially issued;
involve the issuer directly, and the issuer receives no additional money from these
the only market in which the
subsequent transactions. Once the securities begin to trade between investors, they issuer is directly involved in the become part of the secondary market. On large stock exchanges, billions of shares
transaction.
may trade between buyers and sellers on a single day, and these are all secondary secondary market
market transactions. Money flows from the investors buying stocks to the investors
Financial market in which
selling them, and the company whose stock is being traded is largely unaffected by
preowned securities (those that
the transactions. The primary market is the one in which “new” securities are sold.
are not new issues) are traded.
The secondary market can be viewed as a “preowned” securities market. THE RELATIONSHIP BETWEEN INSTITUTIONS AND MARKETS
Financial institutions actively participate in the financial markets as both sup- pliers and demanders of funds. Figure 2.1 depicts the general flow of funds through and between financial institutions and financial markets as well as the
Flow of Funds
Financial
Flow of funds for financial
Deposits/Shares
Institutions
Loans
institutions and markets
of Funds
Placement
of Funds
Securities
Securities
Funds
Financial
Funds
Markets
Securities
Securities
CHAPTER 2
The Financial Market Environment
mechanics of private placement transactions. Domestic or foreign individuals, busi- nesses, and governments may supply and demand funds. We next briefly discuss the money market, including its international equivalent—the Eurocurrency market. We then end this section with a discussion of the capital market, which is of key importance to the firm.
Parts
» The Prentice Hall Series in Finance
» 1 Merger Fundamentals 716 Major Causes of Business Failure 738
» The Financial Market Environment INTEGRATIVE CASE 1 Merit Enterprise Corp.
» LG 2 1.1 Finance and Business
» REVIEW QUESTIONS 1–7 What is the goal of the firm and, therefore, of all managers and
» LG 5 1.3 Managerial Finance Function
» PART 1 Introduction to Managerial Finance FINANCIAL MARKETS
» 2.3 Regulation of Financial Institutions and Markets
» 3.1 The Stockholders’ Report
» 3.8 A Complete Ratio Analysis
» LG 2 4.1 Analyzing the Firm’s Cash Flow
» 8 3 Coulson Industries has gathered the following data needed for the preparation of
» 4.5 Preparing the Pro Forma Income Statement
» 4.6 Preparing the Pro Forma Balance Sheet
» Evaluate the simplified approaches to pro forma financial statement
» 5.1 The Role of Time Value in Finance
» Explain yield to maturity (YTM), its calculation, and the procedure used
» LG 3 7.2 Common and Preferred Stock
» 7.4 Decision Making and Common Stock Value
» Explain the relationships among financial decisions, return, risk, and
» LG 4 8.3 Risk of a Portfolio
» 12 3 Consider two assets—Lo and Hi—with the characteristics described in the table below:
» LG 6 8.4 Risk and Return: The Capital Asset Pricing Model (CAPM)
» 15 3 In the preceding example for Benjamin Corporation, the risk-free rate, R F , was
» Explain the capital asset pricing model (CAPM), its relationship to the
» Calculate the weighted average cost of capital (WACC), and discuss
» 10.3 Net Present Value (NPV)
» 10.4 Internal Rate of Return (IRR)
» Discuss NPV and IRR in terms of conflicting rankings and the theoret-
» LG 2 11.1 Relevant Cash Flows
» LG 4 11.2 Finding the Initial Investment
» 11.3 Finding the Operating Cash Inflows
» 11.4 Finding the Terminal Cash Flow
» Determine the terminal cash flow associated with a proposed capital
» 12.3 International Risk Considerations
» LG 6 12.5 Capital Budgeting Refinements
» Explain the role of real options and the objective and procedures for
» LG 4 13.2 The Firm’s Capital Structure
» 19 3 We can plot coordinates on the EBIT–EPS graph by assuming specific EBIT
» 14.1 The Basics of Payout Policy ELEMENTS OF PAYOUT POLICY
» 14.2 The Mechanics of Payout Policy
» 14.4 Factors Affecting Dividend Policy
» Explain stock splits and the firm’s motivation for undertaking them.
» LG 5 15.4 Accounts Receivable Management
» LG 2 16.1 Spontaneous Liabilities
» LG 4 16.2 Unsecured Sources of Short-Term Loans
» LG 6 16.3 Secured Sources of Short-Term Loans
» Describe the various ways in which inventory can be used as short-term-
» 17.4 Stock Purchase Warrants
» LG 4 18.3 Analyzing and Negotiating Mergers
» Explain bankruptcy legislation and the procedures involved in reorgan-
» 19.1 The Multinational Company and Its Environment
» 3 3 Assume that the current exchange rate between the United States and the new
» 19.4 Long-Term Investment and Financing Decisions
» 19.6 Mergers and Joint Ventures
» Review recent trends in international mergers and joint ventures.
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