(BBA)CH8 Financial Structure

(BBA)CH8 Financial Structure - Chapter Eight An Economic...

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    Chapter Eight An Economic Analysis of Financial Structure
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    Sources of External Funds for Non-financial Businesses (p.170)   1 8 % 7 6 % 7 8 % 5 6 % 3 8 % 1 0 % 8 % 1 8 % 3 2 % 7 % 9 % 1 5 % 1 1 % 8 % 5 % 1 2 % 0 % 2 0 % 4 0 % 6 0 % 8 0 % B an k L o an d N o n b an k L o an s B o n d s S to ck U .S .A . G erm an y Jap an C an ad a
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    Sources of External Funds for Non-financial Businesses (p.170) 18% 38% 32% 11% 76% 10% 7% 8% 78% 8% 9% 5% 56% 15% 12% 0% 20% 30% 40% 50% 60% 70% 80% U .S.A . G erm any Japan Canada B ank L oand N onbank L oans B onds Stock
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    Basic Facts about Financial Structure through the World (p.169) How US firms finance their activities using external funds in period 1970-2000 compared to that of other countries: 1. Bank loans category is made up primarily of loans from depository institutions. 2. Non-bank loans category is composed primarily of loans by other financial intermediaries. 3. Bonds category includes marketable debt securities such as corporate bonds and commercial paper. 4. Stocks category consisted of new issues of new equity.
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    Basic Facts about Financial Structure through the World (p.169-172) According to Figure 1 at page 170, we explore eight facts. 1. Stocks are not important source of external financing for businesses. 2. Issuing marketable debt and equity securities is not primary way in which businesses finance their operations. 3. Indirect finance is more important than direct finance, in which businesses raise funds directly from lenders in financial markets.
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    Basic Facts about Financial Structure through the World (p.169-172) 4. Financial intermediaries are the most important source of external funds used to finance businesses. 5. The financial system is among heavily regulated sectors of the economy. Governments regulate financial market to promote provision of information and to ensure soundness of financial system. 6. Only large, well-established companies have easy access to securities market to finance their activities.
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    Basic Facts about Financial Structure through the World (p.169-172) 7. Collateral is prevalent feature of debt contracts for both households and businesses. 8. Debt contracts are extremely complicated legal documents that place substantially restriction on behavior of borrowers.
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    Transaction Costs: How Transaction Costs Influence Financial Structure (p.172) If you have $5,000 only, what securities you can invest ? 1. To purchase a small number of stock . Brokerage commission will be a large percentage of your purchase price. 2. To purchase a bond The smallest amount of a bond is $10,000 and you may not have enough money to buy it.
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    Transaction Costs: How Transaction Costs Influence Financial Structure (p.172) 3. Diversification You have inability to diversify will subject you to more risk.
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    Transaction Costs: How Financial Intermediaries Reduce Transaction Costs (p.173) 1. Economies of Scales To bundle funds of many investors so that they can take advantage of economies of scales. (ex. Mutual funds) 2. Expertise
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This note was uploaded on 11/07/2010 for the course BBA 4565 taught by Professor Chushunhe during the Spring '10 term at University of Macau.

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(BBA)CH8 Financial Structure - Chapter Eight An Economic...

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