Finance 370 Week 2 Essay

1077 words - 5 pages

Fin 370
Week 2
Individual Assignment
Chap. 14 Questions 14-1, 14-3, 14-4
Chap. 15 Questions 15-12A, 15-13A

Question 14-1

What are financial markets? What function do they perform? How would an economy be worse off without them?

Financial markets report price for each good; they are institutions and procedures that facilitate transactions in all types of financial claims (securities).
Each financial market performs a different function. Such as the stock markets primary function is to provide a platform for investors to buy shares of ownership of a public corporation which are sold to investors to allow the companies to raise a lot of cash at once. The investors profit when the ...view middle of the document...

Normal business activities would be funded slowly or not at all. Business firms in the aggregate usually spend more during a specific period than they earn. Households in the aggregate spend less on current consumption than they earn. As a result, some mechanism is needed to facilitate the transfer of savings from those economic units with a surplus to those with a deficit. That is precisely the function of financial markets. Financial markets exist in order to allocate the supply of savings in the economy to the demanders of those savings. The central characteristic of a financial market is that it acts as the vehicle through which the forces of demand and supply for a specific type of financial claim are brought together. If, specifically, the United States did not have a financial market then there would not be a way for the economy to move money around to facilitate progress and profit.

Question 14-3

Distinguish between the money and capital markets.

Money Markets facilitates transactions using short-term financial instruments; whereas, Capital Markets facilitates transactions using long-term financial instruments.

Question 14-4

What major benefits do corporations and investors enjoy because of the existence of organized security exchanges?

Continuous market – price volatility reduced
Establishing & publicizing fair security prices – objective auction-type determination of price
Helping business raise new capital – new firms have a place to publicize security offerings whose price will be subjected to a competitive determinant rather than having to assign prices

Question 15-12 A
You are a hard-working analyst in the office of financial operations for a manufacturing firm that produces a single product. You have developed the following cost structure information for this company. All of it pertains to an output level of 10 million units. Using this information, find the break-even point in units of output for the firm.
Return on operating assets | = 25% |
Operating asset turnover | = 5 times |
Operating assets | = $20 million |
Degree of operating leverage | = 4 times |

1) Compute the operating profit margin:

(Margin) x (Turnover) = Return on operating assets
(M) x (5) = 0.25
M = .05

2) Compute the sales level associated...

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