a 14.1) financial market is a place where buyers and sellers meet and participate in trade of
equities, bonds, currencies and derivatives. In these financial markets, market forces determine
prices of securities and they have regulations for trading and there are also costs and fees
attached in trading.
Financial markets perform six functions which are:
They allow borrowing and lending by allowing transfer of funds from one agent to
another for investment or consumption purpose.
They provide ways to determine prices of newly issued financial assets or of existing
securities
They collect information about financial assets about their values and they coordinate
activities to facilitate flow of funds from lenders to borrowers
They try to share risk from those who undertake investments to those who provide funds
for investment.
They allow holders of securities to resell or easily liquidate them.
They are efficient and they try to reduce transactions costs and information costs
They are very important for an economy and an economy would be worse off without its
existence as it helps to regulate and stimulate the economy at times and without its existence
there will be less stringent government regulation as central bank of a country controls the
economy and achieve its objectives by either increasing or decreasing money supply or interest
rates or bond holdings, which are then translated into activities in financial markets. Without
these financial markets there may be unfair lending practices or monopolies hindering interest of
investors and less confident people. Also, if the financial markets did not exist, the wealth of the
economy would decrease as a whole and the rate of capital formation will not be high.
14.3) major difference between money and capital markets is the maturity period of securities
traded in each market. The money market in deals transactions with short term instruments that is
less than one year whereas capital markets deals in transactions of long term financial
instruments that is more than one year.
14.4) corporations and investors enjoy three main advantages from organized security exchanges.
These are:
A continuous and stable market which results in continuous security prices.
It develops fair security prices based on market forces which is supply and demand and
not on bargaining
They help business to raise new capital as the secondary market makes it easier for firms
to float new securities offerings successfully.
15-12A
DOL = (Sales-Variable Costs) / (Sales-Variable Costs-Fixed Costs)
Break-even point in Units = Fixed Costs / Contribution margin per unit
Contribution margin per unit = (Revenues - Variable Costs) / Units sold =
= Price per unit - Variable cost per unit
Return on operating assets= operating income/operating assets
Net come=25%*20 million=5 million
Operating assets turnover= sales/operating assets
5=sales/20 million
Sales= 5 *20 million
= 100 million
DOL=4=100million-vc/(5million)
VC=80 million
Sales- vc-fc=income
100-80-fc=5
Fc=15 million
Contribution margin per unit= (100-80)/10= $2
Break even point in units=fixed costs/contribution margin per unit
=15/2
=7.5 million
15.13A
a. break-even point in units= FC/ CM per unit
CM per unit= price per unit VC per unit
= 180-126=$54
Break-even points is unit=540000/54
= 10000
b. sales volume in dollars= 10000*180=$1800000
c. profit/loss for 12000 units
profit/loss= CM per unit*12000-FC
= (54*12000)-540000
=$108000
Profit/loss for 15000 units= (54*15000)-540000
= $270000
Profit/loss for 20000 units= (54*20000)-540000
=540000
d. DOL= (CM*units)/income
for 12000 units
DOL=(54*12000)/108000
=6 times
For 15000 units
DOL= (54*15000)/270000
=3 times
For 20000 units
DOL= (54*20000)/540000
= 2 times