Fundamentals of

Chapter 2 Corporate Finance

Fourth Edition

The Financial
Environment

Slides by
Matthew Will

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Topics Covered

The Flow of Savings to Corporations

Functions of Financial Markets
Functions of Financial Intermediaries

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Financial Markets

Money

Primary OTC
Markets Markets
Secondary
Markets
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Financial Markets

Financing Decision
Source of Funds “Capital”
Capital Structure
Money Markets
Euros

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Financial Markets

(2) (1)
Firm's Investors
Financial
operations (4a)
Manager (stockholders
save and invest
Real assets in closely held
firm.)
(timberland) (4b)
(3)

(1) Investors buy shares with cash

(2)Cash is invested
(3) Timber harvest generates cash
(4a) Cash reinvested
(4b) Cash returned to investors

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Financial Markets

Issue Debt

Company Investors
Cash

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Financial Markets

$ $
Bank of Windsor
Investors
America Fund
Sells Issues
shares shares

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Financial Markets
Company

Banks Obligations Funds

Insurance Cos. Intermediary

Brokerage Firms
Obligations Funds
Depositors
Investor
Policyholders
Investors

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Financial Markets
Company

Loan $2.5 mil

Banks Intermediary

Deposits Cash

Investor
Depositors

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Financial Markets
Company

Loan $250 mil

Insurance
Company Intermediary

Sell policies Cash

Issue Stock

Investor
Policyholders

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Total U.S. Financing

% Holdings of Corporate and Foreign Bonds (Qtr 1, 2002)

8.4 11.9 Households

10.6
Rest of world
21.9 Banks
Insurance Cos
11.7
Pension Funds
Mutual Funds
8.8 Other
26.7

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Total U.S. Financing

% Holdings of Corporate Equities (Qtr 1, 2002)

1.4 Households
19.7
Rest of world
37.7
Banks
Insurance Cos
Pension Funds
20.7 Mutual Funds
7.3 1.7 11.5 Other

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U.S. Financing

Information Provided by Financial Markets

 Commodity prices
 Interest rates
 Company values

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Web Resources
Click to access web sites
Internet connection required

www.nyse.com
www.nasdaq.com
www.federalreserve.gov/releases/h15/update
www.federalreserve.gov/releases
www.federalreserve.gov/releases/Z1/Current/zlr-3.pdf
www.investorlinks.com
www.indexfunds.com

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