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Unformatted text preview: prospects cause changes in the demand for
and supply of its securities and ultimately result in a new price for the securities. FIGURE 1.5
Supply and Demand
Supply and demand for a
Share Price efficient market
A market that allocates funds to
their most productive uses as a
result of competition among
wealth-maximizing investors that
determines and publicizes prices
that are believed to be close to
their true value. D1
P0 S D0 D1 Q0 Q1
Number of Shares Traded 28 PART 1 Introduction to Managerial Finance Suppose, for example, that the firm shown in Figure 1.5 announces a favorable
discovery. Investors expect rewarding results from the discovery, so they increase
their valuations of the firm’s shares. The changing evaluation results in a shift in
demand from D0 to D1. At that new level of demand, Q1 shares will be traded,
and a new, higher equilibrium price of P1 will result. The competitive market created by the major securities exchanges provides a forum in which share price is
continuously adjusted to changing demand and supply. Review Questions
1–18 Who are the key participants in the transactions of financial institutions?
Who are net suppliers and who are net demanders?
1–19 What role do financial markets play in our economy? What are primary
and secondary markets? What relationship exists between financial institutions and financial markets?
1–20 What is the money market? How does it work?
1–21 What is the Eurocurrency market? What is the London Interbank Offered
Rate (LIBOR) and how is it used in this market?
1–22 What is the capital market? What are the primary securities traded in it?
1–23 What role do securities exchanges play in the capital market? How does
the over-the-counter exchange operate? How does it differ from the organized securities exchanges?
1–24 Briefly describe the international capital markets, particularly the
Eurobond market and the international equity market.
1–25 What are efficient markets? What determines the price of an individual
security in such a market? LG6 1.5 Business Taxes
Taxes are a fact of life, and businesses, like individuals, must pay...
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This document was uploaded on 01/19/2014.
- Fall '13