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The Domestic and International Financial Marketplace
2 The Domestic and International Financial Marketplace ©2009 South-Western/Cengage
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Introduction This chapter looks at the domestic and international financial marketplaces that allocate scarce resources.
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Finance Decisions Affecting SWM
Form of business organization Types of financing Investment projects All based on after-tax cash flow
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Implication Of Income Taxes For Financial Managers
Capital structure policy Dividend policy Capital budgeting Leasing
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Flow of Funds
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Primary Market Where newly created securities are sold
Investment banks help corporations sell new security issues Investment banks can Underwrite Sell on best efforts basis
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Secondary Market For sales of existing securities Listed exchanges
Over-the-counter (OTC) markets Stock market indexes DJIA, S&P 500, NASDAQ, Russell, Wilshire
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Regulations Purpose: adequate disclosure to potential investors
State blue sky laws Federal Securities Act of 1933 Securities Exchange Act of 1934 Securities Exchange Commission (SEC) Ethical issues Insider trading
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International Finance
Import Export Foreign Branch Licensing Arrangements Joint Ventures Multinational Corporations Global Financial Transactions Manufacturing Distribution
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Global Risks Fluctuating exchange rates Government regulations
Tax laws Business practices Political environment
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Eurocurrency Market Eurocurrency Eurodollars LIBOR Euro
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Currency Exchange Terminology
Exchange rate Direct quote Indirect quote Spot rate Forward exchange rate
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Forward Exchange Rates
Exchange rates for currencies delivered at some future date, i.e., 30, 90, or 180 days Premium Discount
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Annualized Forward Premium Or Discount
100% # of months forward 12 months Spot rate Forward rate – Spot rate
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Foreign Currency Futures
Standard amount of currency Foreign currency futures contract Standard future time At a price set at the present time Contracts traded on Chicago Mercantile Exchange (CME)
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Foreign Currency Options
Call Put European Option American Option
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Market Efficiency “Glue” that bonds the PV of a firm’s net cash flow to shareholders’ wealth Capital markets are efficient if prices instantaneously and fully reflect all the risk and economically relevant information about a security’s prospective returns.
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Stock Price Changes
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Three Degrees Of Market Efficiency
Weak form Semi-strong form Strong form
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Implications of Market Efficiency
Timing or gambling An expected NPV of zero Corporate diversification expensive and unnecessary Security price adjustment Behavioral finance perspective
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The percentage return from holding an investment for one period
Holding Period Return HPR The percentage return from holding an investment for one period
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Equation
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Returns Ex post = realized (after the fact)
Ex ante = expected (before the fact)
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Appendix: Corporate Income Taxes
Progressive Marginal Marginal tax rate used in text: % = State + Fed
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Appendix: Corporate Tax Rates
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Appendix: Corporate Tax Rates
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