Notesale: Turn your study into money

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Chapter 1 - An Introduction to

Financial Management

Objectives
 Explain the goal of the firm
...


 Compare the various legal forms of
business
...

 Value of any asset is present value of cash
flow stream to owners
...

 Stock prices change over time as conditions
change and as investors obtain new
information about a company’s prospects
...

 Owner maintains title to the firm’s assets
...


2) Partnership
 Similar to a sole proprietorship, except
that there are two or more owners
...

2b) Limited Partnership
 Consists of one or more general partners,
who have unlimited liability
...


Legal Forms of Business
2c) Limited Liability Company
(LLC)
 Cross between a partnership and a
corporation
...


Legal Forms of Business
3) Corporation
 A business entity that legally functions
separate and apart from its owners
...

 Owners hold common stock certificates,
and ownership can be transferred by
selling the certificates
...


Types of
Securities

 Treasury Bills and Treasury





Bonds
Municipal Bonds
Corporate Bonds
Preferred Stocks
Common Stocks

Which of these are RISKY?
Which promise HIGH RETURNS?
Is there a relationship between
RISK and RETURN?

Movement of Savings
 Direct Transfer of Funds

Movement of Savings
 Direct Transfer of Funds

saver

Movement of Savings
 Direct Transfer of Funds
firm
saver

Movement of Savings
 Direct Transfer of Funds
cash
firm
saver

Movement of Savings
 Direct Transfer of Funds
cash
firm
saver

securities

Movement of Savings
 Indirect Transfer using Investment
Banker

Movement of Savings
 Indirect Transfer using Investment
Banker

investment
banker

Movement of Savings
 Indirect Transfer using Investment
Banker

investment
banker

firm

Movement of Savings
 Indirect Transfer using Investment
Banker

funds

investment
banker

firm

Movement of Savings
 Indirect Transfer using Investment
Banker

funds

investment
banker

firm

securities

Movement of Savings
 Indirect Transfer using Investment
Banker

funds

saver

investment
banker

firm

securities

Movement of Savings
 Indirect Transfer using Investment
Banker
funds

funds

saver

investment
banker

firm

securities

Movement of Savings
 Indirect Transfer using Investment
Banker
funds

funds

saver

investment
banker
securities

firm

securities

Movement of Savings
 Indirect Transfer using a Financial
Intermediary

Movement of Savings
 Indirect Transfer using a Financial
Intermediary

financial
intermediary

Movement of Savings
 Indirect Transfer using a Financial
Intermediary

financial
intermediary

firm

Movement of Savings
 Indirect Transfer using a Financial
Intermediary
funds

financial
intermediary

firm

Movement of Savings
 Indirect Transfer using a Financial
Intermediary
funds

financial
intermediary
firm
securities

firm

Movement of Savings
 Indirect Transfer using a Financial
Intermediary
funds

saver

financial
intermediary
firm
securities

firm

Movement of Savings
 Indirect Transfer using a Financial
Intermediary
funds
funds

saver

financial
intermediary
firm
securities

firm

Movement of Savings
 Indirect Transfer using a Financial
Intermediary
funds
funds

saver

financial
intermediary

intermediary
securities

firm
securities

firm

Financial Market
Components
Public Offering

Financial Market
Components
Public Offering
 Firm issues securities, which
are made available to both
individual and institutional
investors
...


Private Placement

Financial Market
Components
Public Offering
 Firm issues securities, which
are made available to both
individual and institutional
investors
...


Financial Market
Components
Primary Market

Financial Market
Components
Primary Market
 Market in which new issues of a
security are sold to initial
buyers
...


Secondary Market

Financial Market
Components
Primary Market
 Market in which new issues of a
security are sold to initial
buyers
...


Financial Market
Components
Money Market

Financial Market
Components
Money Market
 Market for short-term debt
instruments (maturity periods
of one year or less)
...


Capital Market

Financial Market
Components
Money Market
 Market for short-term debt
instruments (maturity periods
of one year or less)
...


Financial Market
Components
Organized Exchanges

Financial Market
Components
Organized Exchanges
 Buyers and sellers meet in one
central location to conduct trades
...


Over-the-Counter (OTC)

Financial Market
Components
Organized Exchanges
 Buyers and sellers meet in one
central location to conduct trades
...

 Connected by Nasdaq system
(National Association of Securities

The Corporation and
Financial Markets

The Corporation and
Financial Markets
Corporation

The Corporation and
Financial Markets
Corporation

Investors

The Corporation and
Financial Markets
Corporation

Investors

Government

The Corporation and
Financial Markets
Corporation

cash

Government

Investors

The Corporation and
Financial Markets
Corporation

cash
securities

Government

Investors

The Corporation and
Financial Markets
Corporation

cash

Investors

securities
Secondary
markets

Government

The Corporation and
Financial Markets
Corporation

cash

Investors

securities
Secondary
markets

Government

The Corporation and
Financial Markets
Corporation

cash

Investors

securities
Secondary
markets

Government

The Corporation and
Financial Markets
Corporation

cash

Investors

securities
Secondary
markets

Cash flow

Government

The Corporation and
Financial Markets
Corporation

cash

Investors

securities
Secondary
markets

Cash flow
tax

Government

The Corporation and
Financial Markets
cash

Corporation

Investors

securities
reinvest
Secondary
markets

Cash flow
tax

Government

The Corporation and
Financial Markets
cash

Corporation

Investors

securities
reinvest

Cash flow

dividends,
etc
...


The Corporation and
Financial Markets

 Initial Public Offering (IPO)
 The first time the firm’s stock is
sold to the general public
...


 Seasoned New Issue
 A new stock offering by a firm
that already has stock that is
traded in the secondary market

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