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The Role of Financial Managers

 


             When a business sells securities to investors in exchange for cash, it raises capital in a primary market transaction. In such a transaction, money flows from investors to firms, and the firms invest the money they receive to exploit investment opportunities. On the other side of the transaction, investors holding the firms securities can trade them with other investors. Trades between investors generate no new cash flows for the firm and are called secondary market transactions. Most stock market transactions involve secondary market trades; while a much larger fraction of all bonds market transactions involve capital-raising primary offerings.
             Corporations can obtain debt financing either by selling bonds (or other debt securities) directly to investors or by borrowing money from a commercial bank or other financial intermediary. The largest and most creditworthy firms raise large amounts of short-term funding by issuing commercial paper directly to investors in the money market, the market for debt instruments maturing in one year or less. Longer term debt instruments include notes (debt with original maturities of less than seven years) and various types of corporate bonds (debt with original maturities of more than seven years).
             For two reasons, the capitol budgeting function is arguably the single most important activity of the firm's financial managers. First, the scale that managers evaluate in the capital budgeting process is usually quite large. Second, companies can prosper in competitive economy only by seeking out the most promising new products, processes, and services to deliver to customers. Companies such as Intel, General Electric, Deutsche Telekom, and Toyota regularly make huge capital investments, the outcomes of which drive the value of their firms and the wealth of their owners. For these and other companies, the annual capital investment budget can run to several billion dollars, so the consequences of a flawed capital budgeting process are series indeed.


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