The Domestic and International Financial Marketplace 2 The Domestic and International Financial Marketplace ©2009 South-Western/Cengage

Introduction This chapter looks at the domestic and international financial marketplaces that allocate scarce resources.

Finance Decisions Affecting SWM Form of business organization Types of financing Investment projects All based on after-tax cash flow

Implication Of Income Taxes For Financial Managers Capital structure policy Dividend policy Capital budgeting Leasing

Flow of Funds

Primary Market Where newly created securities are sold Investment banks help corporations sell new security issues Investment banks can Underwrite Sell on best efforts basis

Secondary Market For sales of existing securities Listed exchanges Over-the-counter (OTC) markets Stock market indexes DJIA, S&P 500, NASDAQ, Russell, Wilshire

Regulations Purpose: adequate disclosure to potential investors State blue sky laws Federal Securities Act of 1933 Securities Exchange Act of 1934 Securities Exchange Commission (SEC) Ethical issues Insider trading

International Finance Import Export Foreign Branch Licensing Arrangements Joint Ventures Multinational Corporations Global Financial Transactions Manufacturing Distribution

Global Risks Fluctuating exchange rates Government regulations Tax laws Business practices Political environment

Eurocurrency Market Eurocurrency Eurodollars LIBOR Euro

Currency Exchange Terminology Exchange rate Direct quote Indirect quote Spot rate Forward exchange rate

Forward Exchange Rates Exchange rates for currencies delivered at some future date, i.e., 30, 90, or 180 days Premium Discount

Annualized Forward Premium Or Discount 100% # of months forward 12 months Spot rate Forward rate – Spot rate 

Foreign Currency Futures Standard amount of currency Foreign currency futures contract Standard future time At a price set at the present time Contracts traded on Chicago Mercantile Exchange (CME)

Foreign Currency Options Call Put European Option American Option

Market Efficiency “Glue” that bonds the PV of a firm’s net cash flow to shareholders’ wealth Capital markets are efficient if prices instantaneously and fully reflect all the risk and economically relevant information about a security’s prospective returns.

Stock Price Changes

Three Degrees Of Market Efficiency Weak form Semi-strong form Strong form

Implications of Market Efficiency Timing or gambling An expected NPV of zero Corporate diversification expensive and unnecessary Security price adjustment Behavioral finance perspective

The percentage return from holding an investment for one period Holding Period Return HPR The percentage return from holding an investment for one period

Equation

Returns Ex post = realized (after the fact) Ex ante = expected (before the fact)

Appendix: Corporate Income Taxes Progressive Marginal Marginal tax rate used in text: 40% = State + Fed

Appendix: Corporate Tax Rates

Appendix: Corporate Tax Rates 26