1. The Domestic and International Financial Marketplace2
The Domestic and International Financial Marketplace
©2009 South-Western/Cengage

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

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

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

5. Flow of Funds

6. 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

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

8. 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

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

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

11. Eurocurrency Market
Eurocurrency
Eurodollars
LIBOR
Euro

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

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

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

15. 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)

16. Foreign Currency Options
Call
Put
European Option
American Option

17. 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.

18. Stock Price Changes

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

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

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

22. Equation

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

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

25. Appendix: Corporate Tax Rates

26. Appendix: Corporate Tax Rates26