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Lecture Fundamentals of financial management (13/e) - Chapter 19: The capital market

In chapters 17 and 18 we studied how business firms determine their mix of permanent longterm financing and how they finance “internally” by retaining earnings. We now need to find out how firms raise long-term financing “externally.” More specifically, the purpose of this chapter is to observe the ways in which bond and stock issues are initially sold in the capital market. | Chapter 19 The Capital Market © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI The Capital Market Public Issue Privileged Subscription Regulation of Security Offerings Private Placement Initial Financing Signaling Effects The Secondary Market Deja Vu All Over Again Capital Market -- The market for relatively long-term (greater than one year original maturity) financial instruments. Primary Market -- A market where new securities are bought and sold for the first time (a “new issues” market). Secondary Market -- A market for existing (used) securities rather than new issues. Deja Vu All Over Again INVESTMENT SECTOR FINANCIAL INTERMEDIARIES SAVINGS SECTOR FINANCIAL BROKERS SECONDARY MARKET Public issue Privileged subscription Private placement Indicates the possible presence of a “standby arrangement” Indicates the financial intermediaries’ own securities flow to the savings sector Public Issue Securities are sold to hundreds, and often thousands, of investors under a formal contract overseen by federal and state regulatory authorities. When a company issues securities to the general public, it is usually uses the services of an investment banker. Public Issue -- Sale of bonds or stock to the general public. Investment Banker Investment banker receives an underwriting spread when acting as a middleman in bringing together providers and consumers of investment capital. Underwriting spread -- the difference between the price the investment bankers pay for the security and the price at which the security is resold to the public. Investment Banker -- A financial institution that underwrites (purchases at a fixed price on a fixed date) new securities for resale. Investment Banker Thus, the services can be provided at a lower cost to the firm than the firm can perform the same services internally. Three primary means companies use to offer securities to the general public: . | Chapter 19 The Capital Market © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI The Capital Market Public Issue Privileged Subscription Regulation of Security Offerings Private Placement Initial Financing Signaling Effects The Secondary Market Deja Vu All Over Again Capital Market -- The market for relatively long-term (greater than one year original maturity) financial instruments. Primary Market -- A market where new securities are bought and sold for the first time (a “new issues” market). Secondary Market -- A market for existing (used) securities rather than new issues. Deja Vu All Over Again INVESTMENT SECTOR FINANCIAL INTERMEDIARIES SAVINGS SECTOR FINANCIAL BROKERS SECONDARY MARKET Public issue Privileged subscription Private placement Indicates the possible presence of a “standby arrangement” Indicates the financial intermediaries’ own securities flow to the savings sector Public Issue .