Chapter 02.ppt


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  • Chapter 02.ppt

    1. 1. Chapter 2 Fundamentals of Corporate Finance Fourth Edition The Financial Environment PRESENTED BY D-R EVGENI ZOGRAFSKI Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
    2. 2. Topics Covered <ul><li>The Flow of Savings to Corporations </li></ul><ul><li>Functions of Financial Markets </li></ul><ul><li>Functions of Financial Intermediaries </li></ul>
    3. 3. The Flow of Savings to Corporations <ul><li>The ultimate source of financing is individual’s savings </li></ul><ul><li>Two forms of financing: internal and external </li></ul><ul><ul><li>Internal-retained cash and selling new shares </li></ul></ul><ul><ul><li>External-loans and bonds </li></ul></ul><ul><li>Savings flow through financial markets (stock exchanges) and financial intermediaries (mutual funds, pension funds, insurance companies) </li></ul>
    4. 4. The Flow of Savings to Corporations Financial Manager Firm's operations Investors Real assets (timberland) (stockholders save and invest in closely held firm.) (1) Investors buy shares with cash (1) (2)Cash is invested (2) (3) Timber harvest generates cash (3) (4a) Cash reinvested (4a) (4b) Cash returned to investors (4b)
    5. 5. Financial Markets <ul><li>Financial market -a market where securities are issued and traded </li></ul><ul><ul><li>Securities – a traded financial assets (shares; bonds) </li></ul></ul><ul><ul><li>Shares -a proportion of ownership claim on the firm, with no maturity </li></ul></ul><ul><ul><li>Bonds -debt securities issued by a company representing a obligation to investors to make regular interest payments and principal on a specified date in the future </li></ul></ul><ul><ul><li>Stock market (stock exchange ) is the most important financial market </li></ul></ul><ul><ul><li>Stock market or equity market – trading own common equity (ordinary shares) of the firm </li></ul></ul>
    6. 6. Financial Markets <ul><li>Primary market - market for sale of new issue of securities (shares, bonds); its organized in banks, brokerage co. (outside the exchange) </li></ul><ul><li>Secondary market - market in which previously issued securities are traded among investors </li></ul><ul><li>Secondary market: Stock exchange and OTC </li></ul><ul><ul><li>Stock exchange- organized market for trading securities </li></ul></ul><ul><ul><li>OTC- over the counter market </li></ul></ul>
    7. 7. Financial Markets Primary Markets Secondary Markets OTC Markets Money
    8. 8. Other Financial Markets <ul><li>Fixed income market- market for debt securities (bonds) </li></ul><ul><li>Capital market - market for long-term financing </li></ul><ul><li>Money market - market for short-term financing (less than 1 year) </li></ul><ul><li>Foreign-exchange market - inter bank market for trading foreign currencies </li></ul><ul><li>Commodities market - organized market for trading commodities (corn, wheat, cotton, oil) </li></ul><ul><li>Derivatives market- organized market for trading derivatives (options, futures, warrants, forwards, swaps) </li></ul>
    9. 9. Financial Markets Irwin/McGraw-Hill Company Issue Debt Cash Investors
    10. 10. Financial Intermediaries <ul><li>Financial intermediaries - an organization that rises money from investors and provide financing for individuals, companies e t.c. </li></ul><ul><ul><li>mutual funds, </li></ul></ul><ul><ul><li>pension funds, </li></ul></ul><ul><ul><li>insurance co., </li></ul></ul><ul><ul><li>banks </li></ul></ul>
    11. 11. Mutual Funds <ul><li>Mutual funds- pools the savings of many investors and invests in a portfolio of securities; </li></ul><ul><ul><li>mutual funds offer investors low-cost diversification and professional management; </li></ul></ul><ul><ul><li>Two types: Open-end funds and Close-end funds </li></ul></ul><ul><ul><li>funds pursue a wide variety of investment strategies (only stocks, only bonds, only’s,high-tech growth stocks, mixture of stock and bonds “balanced” funds, funds of funds) </li></ul></ul>
    12. 12. Mutual Funds Irwin/McGraw-Hill Bank of America Windsor Fund Investors $ $ Sells shares Issues shares
    13. 13. Pension Funds <ul><li>Pension funds - investment plan set up by employer (companies) for providing employees retirement </li></ul><ul><ul><li>Defined contribution pension plan (a % of monthly pay is contributed to a pension fund-partly by employer, partly by employee) </li></ul></ul><ul><ul><li>Defined benefit pension plan (the employer invest to the pension fund) </li></ul></ul><ul><ul><li>Tax advantages </li></ul></ul><ul><ul><li>Macedonian experience </li></ul></ul>
    14. 14. Other financial institutions <ul><li>Insurance companies - sells insurance policies and with cash finance companies </li></ul><ul><li>Banks - collect deposits and lend money to individuals and companies (short term and long term loans) </li></ul>
    15. 15. Functions of Financial Markets <ul><li>Financial markets and intermediaries channel savings to real investment </li></ul><ul><li>Financial markets and intermediaries provide financing for business </li></ul><ul><li>Other functions </li></ul><ul><ul><li>Transporting cash across time </li></ul></ul><ul><ul><li>Provide liquidity </li></ul></ul><ul><ul><li>Reduce and reallocate risk </li></ul></ul>
    16. 16. Financial Markets Irwin/McGraw-Hill Company Intermediary Investor Funds Funds Banks Insurance Cos. Brokerage Firms Obligations Depositors Policyholders Investors Obligations
    17. 17. Financial Markets Irwin/McGraw-Hill Banks Depositors $2.5 mil Cash Loan Deposits Company Intermediary Investor
    18. 18. Financial Markets Irwin/McGraw-Hill Insurance Company Policyholders $250 mil Cash Loan Sell policies Issue Stock Company Intermediary Investor
    19. 19. Information Provided by Financial Markets <ul><li>Securities and commodity prices </li></ul><ul><li>Interest rates </li></ul><ul><li>Company values </li></ul>
    20. 20. Opportunity Cost of Capital <ul><li>Cost of capital- minimum acceptable rate of return of invested capital; </li></ul><ul><li>The cost of capital for corporate investment is set by the rates of return on investment opportunities in financial market; it’s an opportunity cost-the safest form of investment (yield on treasury bills) </li></ul><ul><li>Investment projects offering higher return that the cost of capital are acceptable </li></ul>
    21. 21. Key Words <ul><li>Securities - hartii od vrednost </li></ul><ul><li>Shares(Stocks) - akcii </li></ul><ul><li>Bonds - obvrznici </li></ul><ul><li>Derivatives- derivati na hartii od vrednost(opcii,fju~ersi) </li></ul><ul><li>Stock market (stock exchange ) -berza </li></ul><ul><li>Mutual fund -investicionen fond </li></ul><ul><li>Opportunity cost of capital - oportunitetna stapka na povrat na kapitalot </li></ul>
    22. 22. Web Resources Click to access web sites Internet connection required Web Links