The Economics and Financing of Media Companies: Second Edition

CHAPTER 10. Capital Markets and Media Firms

CHAPTER 10 Capital Markets and Media Firms Capital markets are locations in which individuals and firms seek money needed to create enterprises, to start new initiatives, to purchase new equipment and facilities, and to finance operations. Capital in the form of debt and equity are exchanged in organized and structured markets as well as placed through private sources. All companies, including media firms, must have capital and access to capital to continue operations. When individuals save money they can use that money to buy goods and services or they can invest that money or lend it to others for a fee. Money that is saved can be placed in banks, investment funds, and other capital accumulation institutions, or lent directly to those needing capital. The wealth of individuals or groups of individuals can be combined to create a firm and to obtain ownership or partial ownership of a firm. The existence of large amounts of capital through stock markets has helped create large companies that would have been impossible for individuals or a small group of individuals to create with their own capital alone and has made it possible for small firms to gain capital to introduce new products and services. Those who obtain capital through ownership shares or borrowed capital use the funds to purchase raw materials, required materials and services, and labor necessary to produce their own products and services, and to market, distribute, and sell them to purchasers. The income from the transaction is then used to repay the capital and its costs of production, distribution , and administration of the firm. 185 186 c a pi t a l m a r ke t s an d m ed i a fi r m s wants and needs of capital sources Those with capital to lend want the highest possible return for the lending of the capital and, depending upon their strategies, they typically want that return in the short term or medium term. They also pursue different strategies with regard to degrees of risk and may seek to maximize return and security across loans or investments in multiple firms. The desire for high return is tempered because the forces of supply and demand influence demand and supply of capital. If the price of capital rises, the number of borrowers and the amount of capital demand will decline. If the price declines significantly, those who have capital may use it in other ways that produce better returns and the supply may also decline. The price of capital affects the demand for capital, but monetary and fiscal policies of central banks and governments and the condition of the general economy also influence the price. In addition to return concerns, those who make capital available for use by others wish to preserve that capital and to have the value of capital increase because of the return from the rent or ownership obtained through its use. Different persons and institutions with capital have different strategies in how they approach their wants and needs, the degrees of risk they will take, and the amounts of capital that they will place in risk situations. The strategies and degrees of risk can be seen in a financial pyramid of investment options (see Figure 10-1). This pyramid also loosely represents Protected Capital placed in safe, liquid investments Low-Risk Capital placed in income and growth investments Speculative Capital placed in risk investments High-Risk Capital placed in very risky investments figure 10-1 The financial pyramid of capital risk and capital placement the amount of financial resources available in capital markets for different purposes. More capital is placed and available in lower-risk investments because most persons are not willing to risk losing any or very much of their money. The base is built upon funds placed in safe, relatively liquid investments with a reasonable rate of return. This often takes the form of investments in treasury bills, bonds, or notes issued by national governments or state and municipal bonds. The second level represents investments intended for growth of capital or income and typically includes stocks and bonds in established, financially stable and growing firms that tend to be market leaders in their industries. At the third and fourth levels the risks of no return or loss of investment increase significantly. Speculative investments are made usually in stock, bonds, or debt with a possibility for high return...