1. Chapter 2 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved Why Corporations Need Financial Markets and Institutions

2. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 2 Topics Covered  Why Finance Matters  The Flow of Savings to Corporations  Functions of Financial Markets  Functions of Financial Intermediaries  Value Maximization and Cost of Capital

3. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 3 Financial Markets Primary Markets Secondary Markets OTC Markets Money

4. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 4 Financial Markets  Financing Decision  Source of Funds “Capital”  Capital Structure  Money Markets  Euros

5. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 5 Financial Manager Firm's operations Investors (1) Investors buy shares with cash (1) (2)Cash is invested (2) (3) Timber harvest generates cash (3) (4a) Cash reinvested (4a) (4b) Cash returned to investors (4b) Financial Markets Real assets (timberland) (stockholders save and invest in closely held firm.)

6. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 6 Irwin/McGraw-Hill Financial Markets Company Issue Debt Cash Investors

7. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 7 Irwin/McGraw-Hill Financial Markets Bank of America Windsor Fund Investors $$ Sells shares Issues shares

8. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 8 Irwin/McGraw-Hill Financial Markets Funds Banks Insurance Cos. Brokerage Firms Obligations Depositors Policyholders Investors Obligations Company Intermediary Investor

9. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 9 Irwin/McGraw-Hill Financial Markets Banks Depositors $2.5 mil Cash Loan Deposits Company Intermediary Investor

10. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 10 Irwin/McGraw-Hill Financial Markets Insurance Company Policyholders $250 mil Cash Loan Sell policies Issue Stock Company Intermediary Investor

11. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 11 Total U.S. Financing % Holdings of Corporate and Foreign Bonds (Qtr 1, 2005)

12. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 12 Total U.S. Financing % Holdings of Corporate Equities (Qtr 1, 2005)

13. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 13 Function of Financial Markets  Transporting cash across time  Risk transfer and diversification  Liquidity  Payment mechanism  Provide information

14. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 14 U.S. Financing Information Provided by Financial Markets  Commodity prices  Interest rates  Company values

15. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 15 Value of Alaska Air Group Data as of April, 2005

16. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 2- 16 Value Maximization