1. 2-1 Copyright © 2006 McGraw Hill Ryerson Limited prepared by: Sujata Madan McGill University Fundamentals of Corporate Finance Third Canadian Edition

2. 2-2 Copyright © 2006 McGraw Hill Ryerson Limited Chapter 2 The Financial Environment The Flow of Savings to Corporations Functions of Financial Markets and Intermediaries

3. 2-3 Copyright © 2006 McGraw Hill Ryerson Limited Flow of Savings to Corporations Financial Manager Firm's operations Investors (2) Cash invested in firm (2) (3) Cash generated by operations (3) (4a) Cash reinvested (4a) (4b) Cash returned to investors (4b) Real assets (1) Cash raised from investors (1)

4. 2-4 Copyright © 2006 McGraw Hill Ryerson Limited Flow of Savings to Corporations Definitions  Financial Market – Market where securities are issued and traded.  Primary Market – Market for the sale of new securities by corporations.  Secondary Market – Market in which already issued securities are traded among investors.

5. 2-5 Copyright © 2006 McGraw Hill Ryerson Limited Flow of Savings to Corporations Definitions  Fixed-income Market – Market for debt securities.  Capital Market – Market for long-term financing.  Money Market – Market for short-term financing.

6. 2-6 Copyright © 2006 McGraw Hill Ryerson Limited Functions of Financial Markets and Intermediaries Definitions  Financial Intermediary – An organization that raises money from investors and provides financing for individuals, corporations, or other organizations. Corporat ion Intermed iary Investors $$ Security

7. 2-7 Copyright © 2006 McGraw Hill Ryerson Limited Functions of Financial Markets and Intermediaries Funds Banks Insurance Cos. Brokerage Firms Obligations Depositors Policyholders Investors Obligations Company Intermediary Investor

8. 2-8 Copyright © 2006 McGraw Hill Ryerson Limited Functions of Financial Markets and Intermediaries Holdings of Canadian corporate equities, 2003

9. 2-9 Copyright © 2006 McGraw Hill Ryerson Limited Functions of Financial Markets and Intermediaries Transporting cash across time Offering liquidity Creating a payment mechanism Reducing risk

10. 2-10 Copyright © 2006 McGraw Hill Ryerson Limited Functions of Financial Markets and Intermediaries Information provided by Financial Markets  Commodity Prices  Interest Rates  Company Value

11. 2-11 Copyright © 2006 McGraw Hill Ryerson Limited Summary of Chapter 2  A financial market is one where securities are issued and traded.  A financial intermediary is an organization that raises money from investors and provides financing for individuals, corporations, or other organizations.  Financial markets provide information regarding commodity prices, interest rates, and company values.