Fundamentals of Corporate Finance Third Canadian Edition prepared

Fundamentals of Corporate Finance Third Canadian Edition prepared by: Sujata Madan Mc. Gill University Copyright © 2006 Mc. Graw Hill Ryerson Limited 2 -

Chapter 2 The Financial Environment n The Flow of Savings to Corporations n Functions of Financial Markets and Intermediaries Copyright © 2006 Mc. Graw Hill Ryerson Limited 2 -2 2

Flow of Savings to Corporations (2) Firm's operations Real assets (1) Financial Manager Investors (4 a) (3) (4 b) (1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations (4 a) Cash reinvested (4 b) Cash returned to investors Copyright © 2006 Mc. Graw Hill Ryerson Limited 2 -3 3

Flow of Savings to Corporations n Definitions w Financial Market – Market where securities are issued and traded. w Primary Market – Market for the sale of new securities by corporations. w Secondary Market – Market in which already issued securities are traded among investors. Copyright © 2006 Mc. Graw Hill Ryerson Limited 2 -4 4

Flow of Savings to Corporations n Definitions w Fixed-income Market – Market for debt securities. w Capital Market – Market for long-term financing. w Money Market – Market for short-term financing. Copyright © 2006 Mc. Graw Hill Ryerson Limited 2 -5 5

Functions of Financial Markets and Intermediaries n Definitions w Financial Intermediary – An organization that raises money from investors and provides financing for individuals, corporations, or other organizations. $ Corporat ion Security $ Intermed iary Investors Security Copyright © 2006 Mc. Graw Hill Ryerson Limited 2 -6 6

Functions of Financial Markets and Intermediaries Company Banks Insurance Cos. Obligations Funds Intermediary Brokerage Firms Obligations Funds Depositors Policyholders Investors Copyright © 2006 Mc. Graw Hill Ryerson Limited 2 -7 7

Functions of Financial Markets and Intermediaries Holdings of Canadian corporate equities, 2003 Copyright © 2006 Mc. Graw Hill Ryerson Limited 2 -8 8

Functions of Financial Markets and Intermediaries n Transporting cash across time n Offering liquidity n Creating a payment mechanism n Reducing risk Copyright © 2006 Mc. Graw Hill Ryerson Limited 2 -9 9

Functions of Financial Markets and Intermediaries n Information provided by Financial Markets w w w Commodity Prices Interest Rates Company Value Copyright © 2006 Mc. Graw Hill Ryerson Limited 2 -10 10

Summary of Chapter 2 w A financial market is one where securities are issued and traded. w A financial intermediary is an organization that raises money from investors and provides financing for individuals, corporations, or other organizations. w Financial markets provide information regarding commodity prices, interest rates, and company values. Copyright © 2006 Mc. Graw Hill Ryerson Limited 2 -11 11