brealey_ch02 - PART 1 Third Pass CHAPTER Introduction 1...

This preview shows page 1 - 3 out of 26 pages.

We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
Exploring Economics
The document you are viewing contains questions related to this textbook.
Chapter 25 / Exercise 014
Exploring Economics
Sexton
Expert Verified
LEARNING OBJECTIVES After studying this chapter, you should be able to: LO1 Describe how financial markets and institutions channel savings to corporate investment. LO2 Describe the basic structure of mutual funds, pension funds, banks, and insurance companies. LO3 Enumerate the functions of financial markets and institutions. LO4 Explain why the cost of capital for corporate investment is deter- mined by investment opportunities in financial markets. PART 1 Introduction 2 1 Goals and Governance of the Firm 2 Financial Markets and Institutions 2.1 The Importance of Financial Markets and Institutions 2.2 The Flow of Savings to Corporations 2.3 Functions of Financial Markets and Intermediaries 2.4 Value Maximization and the Cost of Capital 2.5 The Crisis of 2007–2009 2.6 Summary 3 Accounting and Finance 4 Measuring Corporate Performance CHAPTER Financial Markets and Institutions
We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
Exploring Economics
The document you are viewing contains questions related to this textbook.
Chapter 25 / Exercise 014
Exploring Economics
Sexton
Expert Verified
If a corporation needs to issue more shares of stock, its financial manager must understand how the stock market works. If the corporation wants to take out a bank loan, the financial manager must understand how banks and other financial institu- tions work. That much is obvious. But the capital investment decision also requires a broader under- standing of financial markets. We have said that a successful investment is one that increases the market value of the firm. How do investors value the firm? What level of profitability do investors require from the firm’s capital investments? To answer these questions, we will need to think clearly about the cost of the capital that the firm raises from out- side investors. Financial markets and institutions are the firm’s financial environment. You don’t have to under- stand everything about that environment to begin the study of financial management, but a general understanding provides useful context for the work ahead. For example, that context will help you to understand why you are calculating the yield to maturity of a bond in Chapter 6, the net present value of a capital investment in Chapter 8, or the weighted-average cost of capital for a company in Chapter 13. This chapter does three things. First, it surveys financial markets and institutions. We will cover the stock and bond markets, mutual and pension funds, and banks and insurance companies. Second, we will set out the functions of financial markets and institutions: What do they do for corporations and for the economy? Third, it offers another look at why maximizing value is the natural financial objective of the corporation, and it defines the cost of capital for corporate investment. The Toronto Stock Exchange is an important Canadian financial market. Courtesy of the Toronto Stock Exchange. THE IMPORTANCE OF FINANCIAL MARKETS AND INSTITUTIONS We saw in the last chapter why a corporation’s financing and investment decisions are important to its profitability and growth. Here we shift attention to the corporation’s financial environment,

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture