1. Chapter 1 Corporate Finance and the Financial Manager

2. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-2 Chapter Outline 1.1 Why Study Finance? 1.2 The Four Types of Firms 1.3 The Financial Manager 1.4 The Financial Manager’s Place in the Corporation 1.5 The Stock Market 1.6 Financial Institutions

3. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-3 Learning Objectives Grasp the importance of financial information in both your personal and business lives Understand the important features of the four main types of firms and see why the advantages of the corporate form have led it to dominate economic activity Explain the goal of the financial manager and the reasoning behind that goal, as well as understand the three main types of decisions a financial manager makes

4. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-4 Learning Objectives (cont’d) Know how a corporation is managed and controlled, the financial manager’s place in it, and some of the ethical issues financial managers face Understand the importance of financial markets, such as stock markets, to a corporation and the financial manager’s role as liaison to those markets Recognize the role that financial institutions play in the financial cycle of the economy

5. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-5 1.1 Why Study Finance? Individuals are taking charge of their personal finances with decisions such as: –When to start saving and how much to save for retirement –Whether a car loan or lease is more advantageous Example: اسمنت الشرقية (24.0200 SR) or اسمنت الشرقية الاسمنت العربية 31.8000 SR الاسمنت العربية –Whether a particular stock is a good investment –How to evaluate the terms of a home mortgage

6. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-6 1.1 Why Study Finance? In your business career, you may face such questions such as: –Should your firm launch a new product? –Which supplier should your firm choose? (which supplier can give us the best price-quality service) –Should your firm produce a part or outsource production? –Should your firm issue new stock or borrow money instead? –How can you raise money for your start-up firm? (from shareholders, financial market, monetary market??)

7. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-7 1.2 The Four Types of Firms Classification of firms can be given according: activities (commercial, industrial, services, NTIC); Capital ( small, medium and building); juridical statute,…) 1.Sole Proprietorships 2.Partnerships 3.Limited Liability Companies 4.Corporations

8. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-8 1.2 The Four Types of Firms Sole Proprietorship –Straightforward and many new businesses use this organizational form –Principal limitation is that there is no separation between the firm and the owner The firm can have only one owner

9. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-9 1.2 The Four Types of Firms Sole Proprietorship –The owner has unlimited personal liability for any of the firm’s debts (he makes all decisions and assumes all debts) –The life of a sole proprietorship is limited to the life of the owner –It is difficult to transfer ownership of a sole proprietorship

10. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-10 1.2 The Four Types of Firms Partnership –More than one owner –All partners are liable for the firm’s debt A lender can require any partner to repay all the firm’s outstanding debts –The partnership ends on the death or withdrawal of any single partner –Partners can avoid liquidation if the partnership agreement provides for alternatives such as a buyout of a deceased or withdrawn partner

11. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-11 1.2 The Four Types of Firms Partnership –A limited partnership is a partnership with two kinds of owners, general partners and limited partners General partners –Have the same rights and privileges as partners in any general partnership –Are personally liable for the firm’s debt obligations Limited partners –Have limited liability and their ownership interest is transferable –They have no management authority

12. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-12 1.2 The Four Types of Firms Limited Liability Companies (LLC) –No general partner –All the owners have limited liability, but they can also run the business

13. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-13 1.2 The Four Types of Firms Corporations –A corporation is a legally defined, artificial being, separate from its owners It has many of the legal powers that people have –It can enter into contracts, acquire assets, incur obligations, and it enjoys protection under the U.S. Constitution against the seizure of its property

14. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-14 1.2 The Four Types of Firms Corporations –A corporation is solely responsible for its own obligations –The owners of a corporation are not liable for any obligations the corporation enters into –The corporation is not liable for any personal obligations of its owners

15. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-15 1.2 The Four Types of Firms Corporations –Formation of a Corporation Must be legally formed –Must be chartered in the state in which it is incorporated –Corporate charter specifies the initial rules that govern how the corporation is run –More costly than setting up a sole proprietorship

16. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-16 1.2 The Four Types of Firms Corporations –Ownership of a Corporation No limit on the number of owners The entire ownership stake of a corporation is divided into shares known as stock The collection of all the outstanding shares of a corporation is known as the equity of the corporation

17. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-17 1.2 The Four Types of Firms Corporations –Ownership of a Corporation An owner of a share of stock in the corporation is known as a shareholder, stockholder, or equity holder Shareholders are entitled to dividend payments –Usually receive a share of the dividend payments that is proportional to the amount of stock they own No limitation on who can own its stock

18. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-18 Figure 1.1: Types of U.S. Firms

19. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-19 1.2 The Four Types of Firms Tax Implications for Corporate Entities –A corporation’s profits are subject to taxation separate from its owners’ tax obligations –Shareholders of a corporation pay taxes twice The corporation pays tax on its profits When the remaining profits are distributed to the shareholders, the shareholders pay their own personal income tax on this income

20. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-20 Example 1.1 Taxation of Corporate Earnings Problem: You are a shareholder in a corporation. The corporation earns $5 per share before taxes. After it has paid taxes, it will distribute the rest of its earnings to you as a dividend (we make this simplifying assumption, but should note that most corporations retain some of their earnings for reinvestment). The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 40% and your tax rate on dividend income is 15%. How much of the earnings remains after all taxes are paid?

21. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-21 Example 1.1 Taxation of Corporate Earnings Solution: Plan: Earnings before taxes: $5 Tax Rate: 40% Personal Dividend Tax Rate: 15% We need to first calculate the corporation’s earnings after taxes by subtracting the taxes paid from the pre-tax earnings of $5. The taxes paid will be 40% (the corporate tax rate) of $5. Since all of the after-tax earnings will be paid to you as a dividend, you will pay taxes of 15% on that amount. The amount leftover is what remains after all taxes are paid.

22. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-22 Example 1.1 Taxation of Corporate Earnings Execute: $5 per share  0.40 = $2 in taxes at the corporate level, leaving $5 - $2 = $3 in after-tax earnings per share to distribute. You will pay $3  0.15 = $0.45 in taxes on that dividend, leaving you with $2.55 from the original $5 after all taxes.

23. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-23 Example 1.1 Taxation of Corporate Earnings Evaluate: As a shareholder you keep $2.55 of the original $5 in earnings; the remaining $2 + $0.45 = $2.45 is paid as taxes. Thus, your total effective tax rate is 2.45/5 = 49%.

24. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-24 Example 1.1a Taxation of Corporate Earnings Problem: You are a shareholder in a corporation. The corporation earns $10 per share before taxes. After it has paid taxes, it will distribute the rest of its earnings to you as a dividend. The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 35% and your tax rate on dividend income is 10%. How much of the earnings remains after all taxes are paid?

25. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-25 Example 1.1a Taxation of Corporate Earnings Solution: Plan: Earnings before taxes: $10 Tax Rate: 35% Personal Dividend Tax Rate: 10% We need to first calculate the corporation’s earnings after taxes by subtracting the taxes paid from the pre-tax earnings of $10. The taxes paid will be 35% (the corporate tax rate) of $10. Since all of the after-tax earnings will be paid to you as a dividend, you will pay taxes of 10% on that amount. The amount leftover is what remains after all taxes are paid.

26. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-26 Example 1.1a Taxation of Corporate Earnings Execute: $10 per share  0.35 = $3.50 in taxes at the corporate level, leaving $10 - $3.50 = $6.50 in after-tax earnings per share to distribute. You will pay $6.50  0.10 = $0.65 in taxes on that dividend, leaving you with $5.85 from the original $10 after all taxes.

27. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-27 Example 1.1a Taxation of Corporate Earnings Evaluate: As a shareholder you keep $5.85 of the original $10 in earnings; the remaining $3.50 + $0.65 = $4.15 is paid as taxes. Thus, your total effective tax rate is $4.15/$10 = 41.5%.

28. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-28 Example 1.1b Taxation of Corporate Earnings Problem: You are a shareholder in a corporation. The corporation earns $8 per share before taxes. After it has paid taxes, it will distribute the rest of its earnings to you as a dividend (we make this simplifying assumption, but should note that most corporations retain some of their earnings for reinvestment). The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 35% and your tax rate on dividend income is 20%. How much of the earnings remains after all taxes are paid?

29. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-29 Example 1.1b Taxation of Corporate Earnings Solution: Plan: Earnings before taxes: $8 Tax Rate: 35% Personal Dividend Tax Rate: 20% We need to first calculate the corporation’s earnings after taxes by subtracting the taxes paid from the pre-tax earnings of $8. The taxes paid will be 35% (the corporate tax rate) of $8. Since all of the after-tax earnings will be paid to you as a dividend, you will pay taxes of 20% on that amount. The amount leftover is what remains after all taxes are paid.

30. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-30 Example 1.1b Taxation of Corporate Earnings Execute: $8 per share  0.35 = $2.80 in taxes at the corporate level, leaving $8.00 - $2.80 = $5.20 in after-tax earnings per share to distribute. You will pay $5.20  0.20 = $1.04 in taxes on that dividend, leaving you with $4.16 from the original $8 after all taxes.

31. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-31 Example 1.1b Taxation of Corporate Earnings Evaluate: As a shareholder you keep $4.16 of the original $8 in earnings; the remaining $2.80 + $1.04 = $3.84 is paid as taxes. Thus, your total effective tax rate is $3.84/$8.00 = 48%.

32. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-32 Example 1.1c Taxation of Corporate Earnings Problem: You are a shareholder in a corporation. The corporation earns $5 per share before taxes. After it has paid taxes, it will distribute 75% of the earnings to you as a dividend. The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 40% and your tax rate on dividend income is 28%. How much of the earnings remains after all taxes are paid?

33. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-33 Example 1.1c Taxation of Corporate Earnings Solution: Plan: Earnings before taxes: $5 Corporate Tax Rate: 40% Personal Dividend Tax Rate: 28% We need to first calculate the corporation’s earnings after taxes by subtracting the taxes paid from the pre-tax earnings of $5. The taxes paid will be 40% of $5. Since 75% of the after-tax earnings will be paid to you as a dividend, you will pay taxes of 28% on that amount.

34. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-34 Example 1.1c Taxation of Corporate Earnings Execute: $5 per share  0.40 = $2.00 in taxes at the corporate level, leaving $5.00 - $2.00 = $3.00 in after-tax earnings per share to distribute The firm will distribute 75% x $3.00 = $2.25 in dividends You will pay $3.00  0.28 = $0.84 in taxes on that dividend Total taxes paid is $2.00 + $0.84 = $2.84. This leaves you with $2.25 - $0.84 = $1.41 for you and $0.75 for the firm, for a total of $2.16 from the original $5 after all taxes are paid.

35. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-35 Example 1.1c Taxation of Corporate Earnings Evaluate: As a shareholder you keep $1.41 and the firm keeps $0.75 of the original $5 in earnings; the remaining $2.00 + $0.84 = $2.84 is paid in taxes. Thus, your total effective tax rate is $2.84/$5.00 = 56.8%.

36. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-36 1.2 The Four Types of Firms Tax Implications for Corporate Entities –S Corporations The firm’s profits/losses are not subject to corporate taxes –Instead profits/losses are allocated directly to shareholders based on their ownership share –Shareholders must include these profits as income on their individual tax returns, even if no money is distributed to them

37. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-37 1.2 The Four Types of Firms Tax Implications for Corporate Entities –C Corporations Most corporations are C corporations. Must pay corporate taxes on its profits. –Since individuals must pay personal income taxes on these dividends, shareholders in a C corporation effectively must pay taxes twice

38. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-38 Example 1.2 Taxation of S Corporation Earnings Problem: Rework Example 1.1 assuming the corporation in that example has elected subchapter S treatment and your tax rate on non-dividend income is 30%.

39. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-39 Example 1.2 Taxation of S Corporation Earnings Solution: Plan: Earnings before taxes: $5 Corporate Tax Rate: 0% Personal Tax Rate: 30% In this case, the corporation pays no taxes. It earned $5 per share. In an S corporation, all income is treated as personal income to you, whether or not the corporation chooses to distribute or retain this cash. As a result, you must pay a 30% tax rate on those earnings.

40. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-40 Example 1.2 Taxation of S Corporation Earnings Execute: Your income taxes are 0.30  $5 = $1.50, leaving you with $5 - $1.50 = $3.50 in after-tax earnings

41. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-41 Example 1.2 Taxation of S Corporation Earnings Evaluate: The $1.50 in taxes that you pay is substantially lower than the $2.45 you paid in Example 1.1. As a result, you are left with $3.50 per share after all taxes instead of $2.55. However, note that in a C corporation, you are only taxed when you receive the income as a dividend, whereas in an S corporation, you pay taxes on the income immediately regardless of whether the corporation distributes it as a dividend or reinvests it in the company.

42. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-42 Example 1.2a Taxation of S Corporation Earnings Problem: Rework Example 1.1a assuming the corporation in that example has elected subchapter S treatment and your tax rate on non-dividend income is 28%.

43. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-43 Example 1.2a Taxation of S Corporation Earnings Solution: Plan: Earnings before taxes: $10 Corporate Tax Rate: 0% Personal Tax Rate: 28% In this case, the corporation pays no taxes. It earned $10 per share. In an S corporation, all income is treated as personal income to you, whether or not the corporation chooses to distribute or retain this cash. As a result, you must pay a 28% tax rate on those earnings.

44. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-44 Example 1.2a Taxation of S Corporation Earnings Execute: Your income taxes are 0.28  $10 = $2.80, leaving you with $10 - $2.80 = $7.20 in after-tax earnings

45. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-45 Example 1.2a Taxation of S Corporation Earnings Evaluate: The $2.80 in taxes that you pay is substantially lower than the $4.15 you paid in Example 1.1a. As a result, you are left with $7.20 per share after all taxes instead of $5.85. However, note that in a C corporation, you are only taxed when you receive the income as a dividend, whereas in an S corporation, you pay taxes on the income immediately regardless of whether the corporation distributes it as a dividend or reinvests it in the company.

46. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-46 Example 1.2b Taxation of S Corporation Earnings Problem: Rework Example 1.1b assuming the corporation in that example has elected subchapter S treatment and your tax rate on non-dividend income is 39%.

47. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-47 Example 1.2b Taxation of S Corporation Earnings Solution: Plan: Earnings before taxes: $8.00 Corporate Tax Rate: 0% Personal Tax Rate: 39% In this case, the corporation pays no taxes. It earned $8 per share. In an S corporation, all income is treated as personal income to you, whether or not the corporation chooses to distribute or retain this cash. As a result, you must pay a 39% tax rate on those earnings.

48. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-48 Example 1.2b Taxation of S Corporation Earnings Execute: Your income taxes are 0.39  $8 = $3.12, leaving you with $8.00 - $3.12 = $4.88 in after-tax earnings

49. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-49 Example 1.2b Taxation of S Corporation Earnings Evaluate: The $3.12 in taxes that you pay is lower than the $3.84 you paid in Example 1.1b. As a result, you are left with $4.88 per share after all taxes instead of $4.16. However, note that in a C corporation, you are only taxed when you receive the income as a dividend, whereas in an S corporation, you pay taxes on the income immediately regardless of whether the corporation distributes it as a dividend or reinvests it in the company.

50. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-50 Example 1.2c Taxation of S Corporation Earnings Problem: Rework Example 1.1c assuming the corporation in that example has elected subchapter S treatment and your tax rate on non-dividend income is 28%.

51. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-51 Example 1.2c Taxation of S Corporation Earnings Solution: Plan: Earnings before taxes: $5 Corporate Tax Rate: 0% Personal Tax Rate: 28% In this case, the corporation pays no taxes It earned $5 per share. In an S corporation, all income is treated as personal income to you, whether or not the corporation chooses to distribute or retain this cash. As a result, you must pay a 28% tax rate on those earnings.

52. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-52 Example 1.2c Taxation of S Corporation Earnings Execute: Your income taxes are 0.28  $5 = $1.40, leaving you with $5 - $1.40 = $3.60 in after-tax earnings

53. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-53 Example 1.2c Taxation of S Corporation Earnings Evaluate: The $1.40 in taxes that you pay is substantially lower than the $2.84 you paid in Example 1.1c. As a result, you are left with $3.60 per share after all taxes instead of $2.16. However, note that in a C corporation, you are only taxed at the personal level when you receive the income as a dividend, whereas in an S corporation, you pay taxes on the income immediately regardless of whether the corporation distributes it as a dividend or reinvests it in the company

54. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-54 Table 1.1 Characteristics of the Different Types of Firms

55. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-55 1.3 The Financial Manager The financial manager has three main tasks: –Make investment decisions –Make financing decisions –Manage cash flow from operating activities

56. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-56 1.3 The Financial Manager Making Investment Decisions –The financial manager must weigh the costs and benefits of each investment or project –They must decide which investments or projects qualify as good uses of the stockholders’ money

57. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-57 1.3 The Financial Manager Making Financing Decisions –The financial manager must decide whether to raise more money from new and existing owners by selling more shares of stock or to borrow the money instead

58. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-58 1.3 The Financial Manager Managing Short-Term Cash Needs –The financial manager must ensure that the firm has enough cash on hand to meet its obligations at each point in time –This job is also known as managing working capital

59. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-59 1.3 The Financial Manager The Goal of the Financial Manager –The overriding goal of financial management is to maximize the wealth of the stockholders

60. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-60 1.4 The Financial Manager’s Place in the Corporation Stockholders own the corporation but rely on financial managers to actively manage the corporation –The board of directors and the management team headed by the CEO possess direct control of the corporation

61. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-61 1.4 The Financial Manager’s Place in the Corporation The Corporate Management Team –Board of Directors A group of people elected by shareholders who have the ultimate decision-making authority in the corporation –Chief Executive Officer (CEO) The person charged with running the corporation by instituting the rules and policies set by the board of directors

62. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-62 Figure 1.2 The Financial Functions Within a Corporation

63. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-63 1.4 The Financial Manager’s Place in the Corporation Ethics and Incentives in Corporations –Agency Problems When managers put their own self-interest ahead of the interests of those shareholders –The CEO’s Performance When the stock performs poorly: –The board of directors might react by replacing the CEO –A corporate raider may initiate a hostile takeover

64. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-64 1.5 The Stock Market Corporations can be private or public –A private corporation has a limited number of owners and there is no organized market for its shares –A public corporation has many owners and its shares trade on an organized market, called a stock market

65. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-65 Figure 1.3 Worldwide Stock Markets Ranked by Volume of Trade

66. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-66 1.5 The Stock Market Primary Versus Secondary Markets Physical Stock Markets –Auction Market NYSE –Market Makers Specialists –Bid-Ask Spread Bid price Ask price Transaction Cost

67. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-67 1.5 The Stock Market Over-the-Counter Stock Markets –Dealer Markets NASDAQ

68. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-68 1.5 The Stock Market Listing Standards –Outlines of the requirements a company must meet to be traded on the exchange The NYSE’s listing standards are more stringent than those of NASDAQ

69. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-69 1.5 The Stock Market Other Financial Markets –Bond Market –Foreign Exchange Market –Commodities Market –Derivative Securities

70. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-70 1.6 Financial Institutions Financial Institutions –Entities that provide financial services, such as taking deposits, managing investments, brokering financial transactions, or making loans

71. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-71 1.6 Financial Institutions The Financial Cycle –In the financial cycle: 1.People invest and save their money 2.Through loans and stock, that money flows to companies who use it to fund growth through new products, generating profits and wages 3.The money then flows back to the savers and investors

72. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-72 Figure 1.4 The Financial Cycle

73. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-73 1.6 Financial Institutions Types of Financial Institutions –Banks and Credit Unions –Insurance Companies –Mutual Funds –Pension Funds –Hedge Funds –Venture Capital Funds –Private Equity Funds

74. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-74 1.6 Financial Institutions Types of Financial Institutions –Financial conglomerates/financial services firms combine more than one type of institution

75. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-75 Table 1.2 Financial Institutions and Their Roles in the Financial Cycle

76. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-76 1.6 Financial Institutions Role of Financial Institutions –Financial institutions: Move funds from savers to borrowers Move funds through time Help spread out risk-bearing

77. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-77 Chapter Quiz 1.What are the advantages and disadvantages of organizing a business as a corporation? 2.What are the main types of decisions that a financial manager makes? 3.How do shareholders control a corporation? 4.What is the importance of a stock market to a financial manager?

78. Copyright ©2015 Pearson Education, Inc. All rights reserved.1-78 Chapter Quiz 5.What are the three main roles financial institutions play?