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1、16chapterBusiness Essentials, 7th EditionEbert/Griffin 2009 Pearson Education, Inc.Managing FinancesInstructor Lecture PowerPointsPowerPoint Presentation prepared by Carol Vollmer Pope Alverno CollegeAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
2、 transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 2009 Pearson Education, Inc.2After reading this chapter, you should be able to:1.Explain the conce
3、pt of the time value of money and the principle of compound growth.2.Identify the opportunities offered by mutual funds and exchange-traded funds.3.Describe the role of securities markets, and identify the major stock exchanges and stock markets 4.Explain how securities markets are regulated and tra
4、cked.L E A R N I N G O B J E C T I V E S 2009 Pearson Education, Inc.After reading this chapter, you should be able to:5.Describe the risk-return relationship, and discuss the use of diversification and asset allocation for investments.6.Describe the various ways firms raise capital and identify the
5、 pros and cons of each method.7.Identify the reasons a company might make an initial public offering of its stock, and explain how stock value is determined. L E A R N I N G O B J E C T I V E S (contd) 2009 Pearson Education, Inc.Whats in It for Me?By understanding the material in this chapter, you
6、will understand the various ways individuals gather, either in person or, increasingly, online looking for ways to make their money work for them.This chapter will help you learn ways to make your money work for youWhether your goals are long- or short-termWhether you are motivated by profit or secu
7、rityOr simply because you enjoy the challenges inherent in investing 2009 Pearson Education, Inc.The Time Value of MoneyThe time value of money is the most important concept in business financeWhile money is invested, it grows, earning interest or yielding some form of returnThis stems from the conc
8、ept of compound growthThe time value of money paid to investors over given time periods 2009 Pearson Education, Inc.FIGURE 16.1 The Amount to Which an Initial $10,000 Investment Grows 2009 Pearson Education, Inc.The Rule of 72The rule of 72 is an interesting concept.If we want to double our money, h
9、ow many years will it take?Divide 72 by the interest rate you will receive.Also, if you want to know how long it will take to double your money, divide 72 by the number of years in which you want this to occur. 2009 Pearson Education, Inc.Common StockA stock is a portion of ownership in a companyThe
10、 ownership of the company is divided into small parts called sharesThese shares can be bought or soldThis determines who owns what percent of the companyThe most common form of shares is called common stockShares are purchased in the hope that they will increase in valueCommon stock is normally valu
11、ed in two ways:Market valueBook value 2009 Pearson Education, Inc.Common Stocks (contd)Investment traits of common stockMost risky form of investmentOffer high growth potentialAlso vary the most with changes in the stock marketDividendsA payment made to shareholders on a per share basis from the com
12、panys earnings. 2009 Pearson Education, Inc.Mutual and Exchange Traded FundsMutual Funds and Exchange Traded FundsAlternatives to stockEasy to purchase with small sums of moneyMutual fundsCreated by investment firmsPool cash investments into various investments to create a portfolioGrow in value acr
13、oss time and produce income 2009 Pearson Education, Inc.Reasons for InvestingWhy should a person or business invest in the market?Stability and safetyMoney market mutual funds preserve capital and provide more current incomeConservative capital growthBalanced funds stress preservation of capital and
14、 current income, as well as some growth Aggressive growthAggressive growth funds seek maximum long-term growth 2009 Pearson Education, Inc.Exchange Traded FundsExchange traded funds are a bundle of stocks and bonds that are in an index that tracks the overall movement of a market Unlike mutual funds
15、, they can be traded like stocksAdvantages of ETFs:Can be traded throughout the day like stocksHave lower operating costs than mutual fundsDont require large amounts of investment 2009 Pearson Education, Inc.Securities MarketsSecuritiesRepresent secured, or financially valuable, claims on the part o
16、f investorsSecurities MarketsMarkets in which stocks and bonds are soldStockRepresents an ownership claim on the assets of a corporationBondRepresents a financial claim of money owed by a company to the bondholder 2009 Pearson Education, Inc.Primary and Secondary Securities MarketsPrimary Securities
17、 MarketsThe market in which new stocks and bonds (but not mutual funds) are bought and sold by firms and governmentsSecondary Securities MarketsWhere existing stocks and bonds are tradedSecurities and Exchange Commission (SEC)The government agency that regulates U.S. securities marketsNew securities
18、 must be approved by the SEC 2009 Pearson Education, Inc.Primary and Secondary Securities Markets (contd)Investment banks help bring new securities to the market by:Advising companies on the timing and financial terms of new issuesUnderwritingor buyingnew securities, bearing some of the risks of iss
19、uing themDistributing new securities through banks and brokers to individual investors 2009 Pearson Education, Inc.New York Stock New York Stock ExchangeExchangeGlobal Stock Global Stock ExchangesExchangesAmerican American Stock Stock ExchangeExchangeRegional Stock Regional Stock ExchangesExchanges
20、NASDAQ NASDAQThe Major Exchanges and Markets 2009 Pearson Education, Inc.The Major Exchanges and Markets (contd)The New York Stock ExchangeFor many people, “the stock market” means the New York Stock Exchange (NYSE)The American Stock Exchange (AMEX) The second-largest floor-based U.S. exchange is al
21、so located in New York CityRegional Stock ExchangesSeven regional stock exchanges were organized to serve investors in places other than New YorkGlobal Stock ExchangesThe value of shares listed on foreign exchanges continues to grow 2009 Pearson Education, Inc.TABLE 16.1 Selected Global Stock Exchan
22、ges and Markets 2009 Pearson Education, Inc.The Major Exchanges and Markets (contd)National Association of Securities Dealers Automated Quotation (NASDAQ) systemThe worlds oldest electronic stock marketOrders are gathered and executed on a computer networkElectronic communication networks have allow
23、ed for:Cross-border ownershipInternational consolidation of markets 2009 Pearson Education, Inc.Individual Investor TradingStock BrokersEarn commissions by executing buy-and-sell orders from nonexchange membersDiscount BrokersOffer lower fees to investors than do full-service stock brokersFull-Servi
24、ce BrokersOffer full services to investors who do not have the time to manage their own portfoliosOnline TradingConditions favoring online tradingConvenient access to the InternetFast, no-nonsense transactionsOpportunity for self-directed investors to manage their own investments while paying low fe
25、es for tradingOwnership records have been helped by book-entry ownership 2009 Pearson Education, Inc.The S&P500The NASDAQ CompositeDow Jones Industrial AverageMarket Indexes 2009 Pearson Education, Inc.The Russell 2000Index-matching FTFsMarket IndexesThe Dow Jones Industrial Average (DJIA)The most w
26、idely cited U.S. market indexMeasures the performance of financial markets by focusing on 30 blue-chip companies as reflectors of economic healthThe S&P 500 Composite Index Consists of 500 stocks, including 400 industrial firms, 40 utilities, 40 financial institutions, and 20 transportation companie
27、s 2009 Pearson Education, Inc.Market Indexes (contd)NASDAQ Composite IndexAll NASDAQ-listed companies are included in the index, for a total of more than 3,300 firms (both domestic and foreign)The Russell 2000A specialty index that measures the smallest companies based on market capitalizationIndex
28、matching ETFsIncludes countless other specialty indexes 2009 Pearson Education, Inc.FIGURE 16.2 Bull and Bear Markets 2009 Pearson Education, Inc.The Risk Return RelationshipEach type of investment has a risk return relationshipThere are three main types of returns:DividendsPrice appreciationTotal r
29、eturn 2009 Pearson Education, Inc.FIGURE 16.3 Uncertainty About Financial Returns on Investments 2009 Pearson Education, Inc.Reducing Risk With Diversification and Asset AllocationDiversificationBuying several different kinds of investments, rather than just one, so that the risk of loss is reduced
30、by spreading the total investment across more stocksAsset AllocationThe proportionthe relative amountsof funds invested in (or allocated to) each of the investment alternativesPerformance Differences for Different PortfoliosA portfolio is the combination of all the investmentsstocks, bonds, real est
31、ate, and mutual fundsPortfolios have different investment objectives, and can be managed through asset allocation 2009 Pearson Education, Inc.Financing the BusinessSecured loans for equipmentBusinesses usually need some financing to start operations Secured loans provide capital for such loansWith a
32、 secured loan, the borrower needs to guarantee repaymentThe loan needs to be secured by pledging the asset as collateral to the lenderIf the borrower defaults and doesnt pay the loan, the lender can claim the equipment in lieu of payment 2009 Pearson Education, Inc.Financing the Business (contd)Prin
33、cipal and Interest RatesLoan Principal is the amount of money that is owed on a loanInterest is also paid at an annual percentage rate (APR) agreed to by the commercial lender and the borrowerInterest is a fee paid by the borrower to the lender for the use of the loan principal 2009 Pearson Educatio
34、n, Inc.Working Capital and Unsecured Loans from BanksFirms need cash to operate their businessesWorking capital = Current assets current liabilitiesIf the result of this equation is positive, the working capital is positive for the firm and they are able to cover operating expensesIf the result of t
35、his equation is negative, the firm may need to borrow funds in the short term to pay operating expensesUnsecured loans from banks can be obtained without pledging collateralFirms need a good credit rating to obtain this type of loanThey may be required to keep a portion of the loan balancecalled a c
36、ompensating balancein a separate, non-interest-bearing account with the bank 2009 Pearson Education, Inc.Angel Investors and Venture CapitalOnce a business is started, it may need additional capitalAngel investors are a source for this type of investmentAngel investors are usually wealthy individual
37、s or corporations that seek to invest in a new businessAngel investors require a sizeable return, perhaps up to 50% ownership of the company, in exchange for their investmentAngel investors provide what is called venture capitalIn general, firms turn toward angel investors and venture capital when t
38、hey are too new to have established credit with a commercial bank 2009 Pearson Education, Inc.Sale of Corporate BondsCorporations can raise capital by selling corporate bondsA corporate bond is a formal pledge (IOU) obligating the issuer to pay interest periodically and repay the principal at maturi
39、ty (a preset future date) to the lenderThe government also offers municipal bonds 2009 Pearson Education, Inc.Characteristics of Corporate BondsA bondholder has no claim to corporate ownershipEach new bond has a bond indentureThis sets forth the borrowers obligationsAs well as the financial returns
40、for lendersAn important point for a bond is its maturity dateThis is the date by which the company must repay the face value (or par value) of the bond to the lenderBond defaultA bond is in default when it fails to make payment to the lenderIf this occurs, the bondholders can file a bondholders clai
41、mIf the company cannot pay back its debt, it may declare bankruptcy, which gives the company relief from repaying some or all of its debts 2009 Pearson Education, Inc.TABLE 16.2 Bond Ratings Systems 2009 Pearson Education, Inc.Becoming a Public CorporationInitial Public Offerings (IPOs) are a signif
42、icant form of funding for corporationsIPOs are the first sale of a companys stock to the general publicGoing public means selling off part of the companyMeans giving up control of some of the companyLarge investors can become corporate raiders 2009 Pearson Education, Inc.Stock ValuationStock valuati
43、onPrices of stocks vary in value due to many factorsWhy do prices of stocks vary?The price of a stock depends on the demand for and supply of a specific companys stockThe corporation may want the stock to be valued in a specific price rangeStock split: If the price of a companys stock gets too high,
44、 it can restore it to its original range by paying a special dividend in shares of stock to its shareholders 2009 Pearson Education, Inc.TABLE 16.3 Financial Comparison of Coca-Cola and PepsiCo 2009 Pearson Education, Inc.TABLE 16.4 Corporation Sizes Basedon Capitalization 2009 Pearson Education, In
45、c.Pros and Cons of Debt FinancingDebt financingLong-term borrowing from sources outside the company Major source of fundingLong-term loans are attractive:Speed of availability due to limited parties involvedNo public disclosure required 2009 Pearson Education, Inc.Pros and Cons of Equity FinancingEq
46、uity financing Looking inside the company for funding sourcesThe expense of common stockPaying dividends to shareholders is more expensive than paying interest on corporate bondsRetained earnings as a source of capitalMeans smaller dividends to shareholdersMeans no interest paid on debt 2009 Pearson
47、 Education, Inc.Key Termsaggressive growth fundsAmexangel investorsasset allocationbalanced fundsbear marketbond indenturebondholders claimbond rating systemsbondsbook entry ownershipbook valuebull marketcollateralcommon stock compound growthcorporate bondcorporate raidersdebt financingdefaultdiscou
48、nt brokersdiversificationdividendselectronic communication networksequity financingexchange traded fundsface valuefull-service brokersinitial public offeringinterestinvestment banksloan principal 2009 Pearson Education, Inc.Key Terms (contd) 2009 Pearson Education, Inc.sharesstockstock brokersstock
49、splittime value of moneyunsecured loanventure capitalworking capitalsharesstockstock brokersstock splittime value of moneyunsecured loanventure capitalworking capitalmarket capitalizationmarket value maturity datemoney market mutual fundsmutual fundsNASDAQNYSEonline tradingpar valueportfoliorisk return relationshiprule of 72secured loansecuritiessecurities market (primary and secondary)
