311 ch2 - The Domestic and International Finance...

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The Domestic and International Finance Marketplace Chapter 2
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Financial Decisions Affecting Shareholder Wealth Organizational Form Sole proprietorship vs. Corporation Capital Structure Debt vs. Equity Investment projects All of these decisions rely on AFTER-TAX cash flows
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Implications of Taxes Capital Structure Interest expenses are deducted pre-tax while dividends are paid after-tax Debt is tax advantaged Dividend Policy Investors pay taxes at ordinary income tax rates on dividends and pay at the capital gains rate on increases in share price If these rates are different, investor preferences will have an impact on dividend policy
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U.S Financial System Lenders Middlemen: Brokers Dealers Investment Bankers Intermediaries Banks and Thrifts Insurance Companies Pension Funds Investment Companies Borrowers Funds Funds Funds Funds Primary Claims Primary Claims Primary Claims Secondary Claims
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Terminology Money Market Short term securities (one year or less) T-bills Commercial paper Certificates of Deposit Capital Markets Long term securities T-bonds and T-notes Corporate bonds Common and preferred stock
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Primary Market Newly issued securities Companies issuing securities receive proceeds Investment bankers (underwriters) often provide assistance Secondary Market Previously issued securities Investors trade amongst themselves Organized exchanges (NYSE, AMEX, Nasdaq)
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Real Assets Physical or intellectual property Buildings, Gold, Pork Bellies Financial Assets Financial claim on real assets Stock represents a claim on the real assets of the company Also includes bonds, preferred stock, warrants, mortgages and notes
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Example Orangeville, Inc. needs $10,000,000 to build a new plant. They decide to raise these funds by selling bonds. The new bonds will sell for $1,000 each. How many bonds will they sell?
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This note was uploaded on 04/08/2008 for the course FINANCE 311 taught by Professor Bradley during the Spring '08 term at Clemson.

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311 ch2 - The Domestic and International Finance...

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