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D1 s p1 p0 s d0 d1 q0 q1 number of shares traded 28

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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 security D0 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 S P1 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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