In one way or another, business activity must be financed. Without finance to support
their fixed assets and working capital requirements, businesses could not exist. There are
three primary sources of finance for companies:
● a cash surplus from operating activities
● new equity funding
● borrowing from bank and non-bank sources. Non-bank sources are mainly investors in
the capital markets who subscribe for bonds and other securities issued by companies.
Stocks are not the most important sources of external financing for businesses (figure 1) == Why?
Issuing marketable debt and equity securities is not the primary way in which businesses finance their operations (figure 1) == Why?
Indirect finance is many times more important than direct finance ((figure 1) == Why?
Financial intermediaries are the most important source of external funds (figure 1) == Why?
Chapter 13 - Leverage and capital structure. In this chapter you will understand the effect of financial leverage on cash flows and cost of equity, understand the impact of taxes and bankruptcy on capital structure choice, understand the basic components of bankruptcy.
Learning outcome of chapter 10: List alternative sources of government revenue; define a tax and describe the structure of tax rates; distinguish between general and selective taxes, specific and ad valorem taxes, as well as direct and indirect taxes; list the properties of a good tax; explain what is meant by an equitable tax;...
Chapter 1 - Market organization and structure. This chapter introduces how the financial system operates and explains how well-functioning financial systems lead to wealthy economies. Financial analysts need to understand how the financial system works because their analyses often lead to trading decisions.
The teaching and the practicing of corporate finance are more challenging and exciting
than ever before. The last decade has seen fundamental changes in financial markets and
financial instruments. In the early years of the 21st century, we still see announcements in
the financial press about such matters as takeovers, junk bonds, financial restructuring, initial
public offerings, bankruptcy, and derivatives. In addition, there is the new recognition
of “real” options (Chapters 21 and 22), private equity and venture capital (Chapter 19), and
the disappearing dividend (Chapter 18).
One of the basic building blocks for managing a successful treasury department
is the establishment of a comprehensive set of treasury policies. Such
policies define the principal financial risks a company is facing and how these
risks will be managed by the treasury department. Chapter 1 covers the process
of identifying and measuring these risks.
This paper studies the responses of residential property and equity prices,
inflation and economic activity to monetary policy shocks in 17 countries,
using data spanning 1986-2006. We estimate VARs for individual economies
and panel VARs in which we distinguish between groups of countries on the
basis of the characteristics of their financial systems. The results suggest that
using monetary policy to offset asset price movements in order to guard
against financial instability may have large effects on economic activity.
The study aims at indicating determinants for Thai mutual fund growth based on two disciplines. The
first discipline is the exploratory of Thai mutual funds via descriptive study or fact finding which
indicates Thai mutual funds structure in terms of product concentration and the competitive situation as
discussed in the last section. The second discipline is econometric model namely fixed effect model
testing whether management fees, administrative fees, and other determinants affect the mutual fund
Investment funds worldwide experienced an increase in net flows in the first quarter of 2012 to register
net inflows of €193 billion, up from €83 billion in the previous quarter. Long-term funds recorded net
inflows of €248 billion, a considerable increase compared to the net inflows of €11 billion recorded in
the previous quarter.
Flows out of equity funds worldwide were €6 billion in the first quarter, after experiencing €52 billion
of net outflows in the fourth quarter of 2011.
The value of the share
depends on how well its property rights are enforced. The enforcement of property rights
is usually undertaken by both individual owners and the state. In economies where the
state does not effectively enforce property rights, the enforcement by individual owners
plays a relatively more important role. The structure of share ownership affects the
degree to which corporate contracts are enforced, because it affects the owners’ abilities
and incentives to enforce the property rights delineated by the contracts.
Since the ﬁnancial crisis, there has been renewed interest in documenting the balance-
sheet positions of ﬁnancial institutions. We share the important goal of this literature:
to come up with data on positions that will inform the theoretical modeling of these insti-
tutions, as called for by Franklin Allen in his 2001 AFA presidential address. Adrian and
Shin (2011) investigate the behavior of Value-at-Risk measures reported by investment
The analysis in this paper suggests that hedge funds play a
very positive role in financial markets by providing liquidity to
thin markets where mis-priced financial instruments are to be
found. This type of activity reduces volatility rather than
Indeed with the rapid growth of structured products in
recent years, particularly in Europe and Asia, hedge funds
have been quite critical in containing the volatility that might
otherwise have arisen.
The papers of Long and Merton suggested interest rates and inﬂa-
tion as risk factors, but their models did not fully specify what all the
hedge portfolios should be, or how many there should be. The APT
speciﬁes the factors only in a loose statistical sense. This leaves it up to
empirical research to identify the risk factors or hedge portfolios. Chen
et al. (1986) empirically evaluated several likely economic factors, and
Chen et al. (1987) used these in an evaluation of equity mutual funds.
The past ten years are witness to many changes in line with this objective. Trading
and settlement procedures have been improved. New instruments have been
introduced. Disclosure levels have been enhanced. Measures to protect investors’
interest and educate them have been initiated at least on paper. A code of corporate
governance has been put in place. Steps were initiated to change the organisational
structure of the stock exchanges.
Contracts tend to use a single earnings number that is either the reported earnings or a transformation of reported earnings. For example, private debt contracts use reported earnings with some GAAP measurement rules "undone" (e.g., equity accounting for subsidiaries -see Leftwich, 1983, p. 25). And, CEO bonus plans use earnings (or transformations of earnings such as returns on invested capital) to determine 80% of CEO bonuses (Hay, 1991; Holthausen, Larcker and Sloan, 1995).
It has often proven valuable to have the proposed audit task plan reviewed by an experienced
auditor who is outside the audit team. Such reviews may raise issues that were not
considered by the originator of the plan and that suggest the need to modify the plan in
material ways. In an “audit office” with a hierarchical structure, such a review is typically
required by office policy and is usually carried out in two stages by supervisory levels above
that of audit team leader. In a more decentralised SAI, such as some “courts...
After studying this chapter in the lecture, you should be able to: Explain how financial leverage affects earnings per share (EPS) and return on equity (ROE), compute the degree of financial leverage, define and compute the indifference earnings before interest and taxes (EBIT) and explain its importance in selecting between alternative financing opportunities, define and explain the term homemade leverage, explain why determining the optimal capital structure is important,...
Banks thus planned to meet their shortfalls predominantly through capital
measures, and some made progress in spite of unfavourable market
conditions. Low share prices, as at present, cause a strong dilution effect,
drawing resistance from incumbent shareholders and management.
experience of UniCredit, whose deeply discounted €7.5 billion rights issue led
to a 45% (albeit transient) plunge in its share price, deterred other banks from
following suit. Capital can also be built through retained earnings, debt-to-
equity conversion or redemption below par.
Chapter 11 - Reporting and interpreting owners’ equity. After studying this chapter, you should be able to: Explain the role of stock in the capital structure of a corporation, analyze the earnings per share ratio, describe the characteristics of common stock and analyze transactions affecting common stock, discuss dividends and analyze transactions,...