Q1-1 If you bought a share of stock, what would you expect to receive, when would you expect to receive it, and would you be certain that your expectations would be met? If managers make good decisions, its stock price will increase; however, if its managers make bad decisions, the stock price will decrease. Management’s goal should be to make decisions designed to maximize the stock’s price. Shareholder Wealth Maximization: The primary goal for managers of publicly owned companies implies that decisions should be made to maximize the long-run value of the firm’s common stock.
Q1-5 Suppose three honest individuals gave you their estimates of Stock X’s intrinsic value, One person is your current roommate, the second person is a professional security analyst with an excellent reputation on Wall Street , and the third person is a Company X’s CFO. If the three estimates differed, in which one would you have the most confidence? Why? 3rd person who is a Company X’s CFO: A firm’s managers have the best information about the firm’s future prospects, so managers’ estimates of intrinsic values are generally better than those of outside investors. Q1-8 What are the four forms of business organization?
What are the disadvantages and disadvantages of each? Proprietorship: An unincorporated business owned by one individual. Partnership: An unincorporated business owned by two or more individuals. Corporation: A legal entity created by a state, separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership and limited liability. Limited Liability Company (LLC): A relatively new type of organization that is a hybrid between a partnership and a corporation. Limited Liability Partnership (LLP): Similar to an LLC but used for professional firms in the fields of accounting, law, and architecture.
It has limited liability like corporations but is taxed like partnerships. Limited liability reduces the risks borne by investors. Corporations can attract capital more easily than other types of business and they are better to take advantages of growth opportunities. The stock of a corporation is easier to transfer. Q2-3 Is an initial public offering an example of a primary or a secondary market transaction? Initial Public Offering (IPO) Market: The market for stocks of companies that are in the process of going public. Primary Markets: Markets in which corporations raise capital by issuing new securities.
Q2-5 What would happen to the U. S. standard of living if people lost faith in the safety of the financial institutions? Explain. A healthy economy is dependent on efficient funds transfer from people who are net savers to firms and individuals who need capital. Without efficient transfers, the economy could not function. Q2-12 Explain whether the following statements are true or false. a. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high returns. True) Speculation is done in the hope of high returns; but it raises risk exposure. Derivative: Any financial asset whose value is derived from the value of some other “underlying” assets. (Derivatives can be used to reduce risks or to speculate) b. Hedge funds typically have large minimum investments and are marketed to institutions and individuals with high net worth’s. (True) Hedge funds typically have large minimum investments (often exceeding $1 million) and are marketed primarily to institutions and individuals with high net worth’s. c. Hedge funds have traditionally been highly regulated. False) Hedge funds are largely unregulated. d. The New York Stock Exchange is an example of a stock exchange that has a physical location. (True) Physical Location Exchanges: Formal organizations having tangible physical locations that conduct auction markets in designated (“listed”) securities. e. A larger bid-ask spread means that the dealer will realize a lower profit. (False) Bid-Ask Spread: Which is the difference between bid and ask prices, represents the dealer’s markup, or profit. f. The efficient markets hypotheses assumes that all investors are rational. (True)