Ch 9 & 10 Finance PDF

**Chapter 9:** **Introduction to Finance** **Finance:** The study of how and under what terms savings (money) are allocated between lenders and borrowers - - - **Real Assets:** Tangible things that compose personal and business assets - - **Financial Assets:** a claim that one indi...

**Chapter 9:** **Introduction to Finance** **Finance:** The study of how and under what terms savings (money) are allocated between lenders and borrowers - - - **Real Assets:** Tangible things that compose personal and business assets - - **Financial Assets:** a claim that one individual or institution has on another **What is money?** - - - - - - - **The Financial System** Tangible items owned by individuals and businesses - - - - Claim that one individual has on another - - - **Intermediation:** The transfer of funds from lenders to borrowers - - - - - - -  **Market Intermediaries (brokers):** entities that facilitate the working of markets and help provide direct intermediation but **do not change the nature of the transaction**; also called brokers - - **Financial Intermediaries:** Entities that invest funds on behalf of others and **change the nature of the transactions** → raises money by borrowing directly from other individuals → ultimate lenders only have an indirect claim on the ultimate borrowers (direct claim is on the financial institution) - - - - - **Credit crunch:** A situation in which financial intermediaries have to raise the cost of their loans by a significant amount due to their own inability to raise financing on reasonable terms **Crown corporations:** government-owned companies that provide goods and services needed by Canadians - **What is Finance?** - - - - - - - **Financial Instruments and Markets** **Financial Assets:** formal legal documents that set out the rights and obligations of all the parties involved **Stock vs. Bond Market:** **Stock Market:** Where investors go to trade **equity** securities - - - **Bond Market:** Where investors go to trade **debt** securities - - - - **Non-marketable financial assets:** invested funds that are available on demand in instruments that are not tradable - **Marketable financial assets:** those assets that can be traded among market participants - - **Money market securities:** short-term debt instruments - **Capital market securities:** debt securities with maturities greater than one year, and equity securities - **Financial Markets:** - - - - - - - - -  **Types of secondary markets:** 1. 2. **Where does trading occur?** **Exchanges/auction markets:** secondary markets that involve a bidding process that takes place in a specific location - - - - - - - - - - - - **Over-the-Counter (OTC)/Dealer:** secondary markets that do not have a physical location and consist of a network of dealers who trade directly with one another → do not have a physical location - - - **Brokers:** market intermediaries who facilitate the sale of financial securities and help to make the market work **Market Capitalization:** The total market value of the common equity of an entity - - - **Financial Instruments and Financial Markets:** - - - - - - **Chapter 10:** **How Firms Raise Capital** **Investors:** Always looking for an exit! - - - **Entrepreneur:** It all starts with an idea...and a little bit of money - - - **Seed money:** where does the initial money come from? - - **Bootstrapping:** process by which entrepreneurs raise seesd money and obtain other resources necessary to start their businesses → accomplish something on your own - - **Venture Capital:** **Venture capitalist:** individuals or firms that help new businesses get started and provide much of their early-stage financing - - - **Venture Capital Funding:** Important because entrepreneurs have only limited access to traditional sources of funding. Usually, there are three reasons why traditional sources of funding do not work for new or emerging businesses 1. 2. 3. For these reasons, investors find it difficult to participate **directly** in the venture capital market **Venture capital funding cycle:** VC Investors will provide funding in **stages** and require additional **personal investment** (ex. Company needs \$5M in total) - - **Staged Funding:** each stage gives the venture capitalist an opportunity to reassess the management team and the firm's financial performance. - - - - - **Personal Investment:** require the entrepreneur to make a substantial personal investment in the business - - **Syndication:** originating venture capitalist sells a % of a deal to other VCs. - - - **In-depth knowledge:** reduces the risk → specialization gives the VC a comparative advantage over other investors or lenders who are generalists **Venture Capital: Exit Strategy:** - - - - - - - - - **Venture Capital: Risk Management:** - - - - - - - - **Initial Public Offering (IPO)** - - **Should a company IPO?** **Advantages:** - - - - - - **Disadvantages:** - - - - **IPO Process:** - - - - - - - - - - - - - - - - - **IPO Pricing and Cost:** **Underpricing:** offering new securities for sale at a price below their true value. - - **Cost of an IPO** 1. 2. 3. **General cash offer:** lowest-cost source of external funds - - - - - - **How firms raise capital:** - - - - - -