Financial Markets

Financial Markets - Financial Markets This lecture provides...

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Financial Markets This lecture provides a look at the domestic and international marketplaces in which firms operate. The role of the financial marketplace is to allocate scarce resources from savers to investors. This lecture provides an overview of the U.S. financial system and how funds are transferred between savers and investors. The major financial intermediaries and the operation and structure of secondary security markets are discussed as well efficient markets concepts and the role of taxes. I. Corporate and personal income taxes have important implications for financial managers. Because so many financial decisions are based on after-tax cash flows , finance and business professionals must have a basic understanding of tax matters. A. Several financial decisions that are affected by income taxes are discussed in this lecture. 1. Capital structure policy . Because interest payments on debt financing are deductible expenses when computing the income tax liability and because dividends paid on common or preferred stock are not deductible, there is a tax advantage to debt financing over equity financing. 2. Dividend policy. When dividend are paid to common stockholders, these dividends are taxed immediately as income to the stockholders. If, instead, the firm retains and reinvests the earnings, the price of the common stock should increase. Personal taxes on the stock price appreciation are deferred until the stock is sold. Thus, some stockholders prefer capital gains to dividend income, which would affect dividend policy. 3. Capital budgeting. Capital expenditure decisions (long term projects or investments made by the firm) are based on after-tax cash flows. Changes in depreciation schedules will affect the cash flows and net present value of capital investments. 4. Leasing . Tax effects can motivate leasing (rather than buying) if the tax rates of the lessee (asset user) and the lessor (asset owner) are different. B. Corporate tax rates are progressive - the larger the income, the higher the tax rate. The top marginal tax bracket for federal taxes is 35%. Many of the problems in later lectures will use 35% for the tax rate. 1
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C. The U.S. financial system serves an important function by channeling funds from saving units to investing units. II. A. The funds flow through financial middlemen and financial intermediaries. 1. Financial middlemen include brokers (who buy securities for investors), dealers (who sell securities to investors from their own inventory of securities), and investment bankers (who help corporations sell their securities). 2.
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This note was uploaded on 04/20/2011 for the course FIN 4181 taught by Professor Spencer during the Spring '11 term at Dowling.

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Financial Markets - Financial Markets This lecture provides...

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