Page 1
2- 1
Fundamentals of Corporate
Finance
Sixth Edition
Richard A. Brealey
Stewart C. Myers
Alan J. Marcus
Slides by
Matthew Will
Chapter 2
McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved
Why Corporations Need Financial Markets and
Institutions
Page 2
2- 2
Topics Covered
The Importance of Financial Markets and Institutions
The Flow of Savings to Corporations Functions of Financial Markets and of
Financial Intermediaries Value Maximization and the Cost of Capital
Page 3
2- 3
Financial Markets
Primary
Markets
Secondary
Markets
OTC
Markets
Money
Page 4
2- 4
Financial Markets
Financing Decision Source of Funds “Capital” Capital Structure Money Markets Euros
Page 5
2- 5
Financial Markets
Company
Issue Securities
Cash
InvestorsCash Reinvested
Page 6
2- 6
Corporation
Investment in real assets
Investorsworldwide
Financial markets
Stock marketsFixed-income marketsMoney marketsMarkets for Commodities Foreign exchange Derivatives
Financial Intermediaries
Mutual Funds Pension funds
Financial Institutions
Banks Insurance companies
Reinvestment
Financial Markets
Page 7
2- 7
Financial Institutions
Company
Intermediaries
Banks
Insurance Cos.
Brokerage Firms
ObligationsFunds
Page 8
2- 8
Financial Institutions
Intermediaries
Investors
Depositors
Policyholders
Investors
ObligationsFunds
Page 9
2- 9
Financial Markets
Bank of AmericaBank of America
Explorer Fund
Explorer Fund
Investors
Investors
$ $
Sells shares
Issues shares
Page 10
2- 10
Financial Markets
Funds
Funds
Banks
Insurance Cos.
Brokerage Firms
Obligations
Depositors
Policyholders
Investors
Obligations
Company
Intermediary
Investor
Page 11
2- 11
Financial Markets
Banks
Depositors
$2.5 mil
Cash
Loan
Deposits
Company
Intermediary
Investor
Page 12
2- 12
Financial Markets
Insurance Company
Policyholders
$2.5 mil
Cash
Issue Debt
Sell policies
Company
Intermediary
Investor
Page 13
2- 13
Total U.S. Financing
9.5
28.1
1020.6
5.4
14.2
12.3 HouseholdsRest of worldBanksInsurance CosPension FundsMutual FundsOther
% Holdings of Corporate and Foreign Bonds (Qtr 3, 2007)
Page 14
2- 14
Total U.S. Financing
27.1
12.6
0.3822.3
28.3
1.4 HouseholdsRest of worldBanksInsurance CosPension FundsMutual FundsOther
% Holdings of Corporate Equities (Qtr 3, 2007)
Page 15
2- 15
Function of Financial Markets
Transporting cash across time Risk transfer and diversification Liquidity Payment mechanism Provide information
Page 16
2- 16
U.S. Financing
Information Provided by Financial Markets Commodity prices Interest rates Company values
Credit Rating Interest RateAAA 5.71%AA 5.78A 6.38BBB 7.12BB 9.84B 10.82
Source: Bloomberg Composite Corporate BondIndexes.
Interest rates on 30-year corporate bonds,February 2008.
Page 17
2- 17
Value of Alaska Air Group
Data as of January, 2008
Page 18
2- 18
Value Maximization
Page 19
2- 19
Web Resources