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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 NeedFinancial Markets and

Institutions


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Topics Covered

The Importance of Financial Markets andInstitutions

The Flow of Savings to Corporations

Functions of Financial Markets and ofFinancial Intermediaries

Value Maximization and the Cost of Capital


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Financial Markets

Primary

Markets

Secondary

Markets

OTC

Markets

Money


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Financial Markets

Financing DecisionSource of Funds Capital

Capital Structure

Money MarketsEuros


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Financial Markets

Company

Issue Securities

Cash

InvestorsCashReinvested


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Corporation

Investment

in real assets

Investorsworldwide

Financial markets

Stock marketsFixed-income markets

Money markets

Markets for

Commodities

Foreign exchange

Derivatives

Financial

Intermediaries

Mutual FundsPension funds

Financial Institutions

Banks

Insurance companies

Reinvestment

Financial Markets


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Company

Intermediaries

Banks

Insurance Cos.

Brokerage Firms

Obligations

Funds


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Intermediaries

Investors

Depositors

Policyholders

Investors

Obligations

Funds


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Financial Markets

Bank ofAmerica

ExplorerFund

Investors

$ $

Sells

shares

Issues

shares


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Financial Markets

Funds

Funds

Banks

Insurance Cos.

Brokerage Firms

Obligations

Depositors

Policyholders

Investors

Obligations

Company

Intermediary

Investor


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Financial Markets

Banks

Depositors

$2.5 mil

Cash

Loan

Deposits

Company

Intermediary

Investor


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Financial Markets

Insurance

Company

Policyholders

$2.5 mil

Cash

Issue Debt

Sell policies

Company

Intermediary

Investor


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Total U.S. Financing

9.5

28.1

1020.6

5.4

14.2

12.3 Households

Rest of world

Banks

Insurance Cos

Pension Funds

Mutual Funds

Other

% Holdings of Corporate and Foreign Bonds (Qtr 3, 2007)


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Total U.S. Financing

27.1

12.6

0.3822.3

28.3

1.4Households

Rest of world

Banks

Insurance Cos

Pension Funds

Mutual Funds

Other

% Holdings of Corporate Equities (Qtr 3, 2007)


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Function of Financial Markets

Transporting cash across time Risk transfer and diversification

Liquidity

Payment mechanism Provide information


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U.S. Financing

Information Provided by Financial Markets Commodity prices

Interest rates

Company values

Credit Rating Interest Rate

AAA 5.71%

AA 5.78

A 6.38

BBB 7.12BB 9.84

B 10.82

Source: Bloomberg Composite Corporate Bond

Indexes.

Interest rates on 30-year corporate bonds,

February 2008.


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Value of Alaska Air Group

Data as of January, 2008


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Value Maximization


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Web Resources
http://www.fmcenter.org/http://www.federalreserve.gov/http://www.cftc.gov/cftc/cftchome.htmhttp://www.sec.gov/http://www.us-banker.com/http://www.americanbanker.com/http://www.fmcenter.org/http://www.federalreserve.gov/http://www.cftc.gov/cftc/cftchome.htmhttp://www.sec.gov/http://www.us-banker.com/http://www.us-banker.com/http://www.us-banker.com/http://www.americanbanker.com/http://www.morningstar.com/http://www.ici.org/http://www.fibv.com/http://www.rba.co.uk/sources/stocks.htmhttp://www.nasdaq.com/http://www.nyse.com/http://www.morningstar.com/http://www.ici.org/http://www.fibv.com/http://www.rba.co.uk/sources/stocks.htmhttp://www.nasdaq.com/http://www.nyse.com/

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