Chap1-7 solution - Chap 1: 2. Securitization requires...

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Chap 1: 2. Securitization requires access to a large number of potential investors. To attract these investors, the capital market needs: (1) a safe system of business laws and low probability of confiscatory taxation/regulation; (2) a well-developed investment banking industry; (3) a well-developed system of brokerage and financial transactions, and; (4) well-developed media, particularly financial reporting. These characteristics are found in (indeed make for) a well-developed financial market. 4. Financial assets make it easy for large firms to raise the capital needed to finance their investments in real assets. If General Motors, for example, could not issue stocks or bonds to the general public, it would have a far more difficult time raising capital. Contraction of the supply of financial assets would make financing more difficult, thereby increasing the cost of capital. A higher cost of capital results in less investment and lower real growth. 5. Even if the firm does not need to issue stock in any particular year, the stock market is still important to the financial manager. The stock price provides important information about how the market values the firm's investment projects. For example, if the stock price rises considerably, managers might conclude that the market believes the firm's future prospects are bright. This might be a useful signal to the firm to proceed with an investment such as an expansion of the firm's business. In addition, the fact that shares can be traded in the secondary market makes the shares more attractive to investors since investors know that, when they wish to, they will be able to sell their shares. This in turn makes investors more willing to buy shares in a primary offering, and thus improves the terms on which firms can raise money in the equity market. 13. Mutual funds accept funds from small investors and invest, on behalf of these investors, in the national and international securities markets. Pension funds accept funds and then invest, on behalf of current and future retirees, thereby channeling funds from one sector of the economy to another. Venture capital firms pool the funds of private investors and invest in start-up firms. Banks accept deposits from customers and loan those funds to businesses, or use the funds to buy securities of large corporations. Chap 2 : 3/ 5/
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11. a. At t = 0, the value of the index is: (90 + 50 + 100)/3 = 80 At t = 1, the value of the index is: (95 + 45 + 110)/3 = 83.333 The rate of return is: (83.333/80) 1 = 4.17% b. In the absence of a split, Stock C would sell for 110, so the value of the index would be: 250/3 = 83.333 After the split, Stock C sells for 55. Therefore, we need to find the divisor (d) such that: 83.333 = (95 + 45 + 55)/d d = 2.340 c. The return is zero. The index remains unchanged because the return for each stock separately equals zero.
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This note was uploaded on 08/04/2011 for the course FIN 490 taught by Professor Pro.hull during the Spring '11 term at Punjab Engineering College.

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Chap1-7 solution - Chap 1: 2. Securitization requires...

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