Financial Policy Definition.
Amartuul Turbat Professor Fillenwarth Financial Policy 11 March 2011 The Definitions Question 1-2; (1-1. a. b. ) Proprietorship: is the entity owned by an individual who is only founder and manager of the company. Even though it does not pay tax for located states, proprietorship’s profits or loses reports on its owners’ annual tax reports. Despite the fact that proprietorship is easy to form and has seldom government regulations, its term of operation is directly depending on its founder life time (Ehrhardt and Brigham 5).
In addition on proprietorship, a partnership is more flexible type which is a business relationship between several individuals who are similar desires to obtain the profits from the partnership’s operation. Typically, partnership classified general and limited based on its contract regulation. Despite the fact that in general partnership-general members responsible to pay company’s loss by their own assets, in limited partnership members-limited members can lose the amount of money which they invested in the partnership.
Furthermore, likewise limited members responsible for limited part of the partnership, they have limited right to participate or control the company’s management. Even though at least one person should be a general member of the partnership, all members can be partner whose potential losses are limited by their amount of investment. This type of company is called Limited Liability Company (Ehrhardt and Brigham 6). Finally, company organized as a corporation when business enlarged and it is difficult to manage it by structure of partnership or proprietorship.
Corporation works under the located state law and operates independently from managers. Due to this separation, corporation has “unlimited life of existence, easy transferability of ownership interest, and limited liability losses” (Ehrhardt and Brigham 24). Question 1-1 (C) Stock holder Wealth Maximization: is the main goal of the corporation since it is the best way of successful operation in long-term business. Derivatives: is the special type of securities because its value and right are depending on prices of another assets or operation. D; E) – Corporations can sell its stock in the private markets or the public markets. Unlike the private market in which trade is made in between two sides, in the public market, numerous people participate in the trades. In order to be an owner of the corporations, investors can buy the company’s stock from the “primary markets” in which companies sell their IPO (Initial Public offering) or from the “secondary market” in which IPO owners sell their stocks for other investors.
Also, there are some other financial markets exist such as money markets and capital markets. Main difference between those two markets is “liquidation” of the securities (Ehrhardt and Brigham 23). For example, in spite the fact that short-term highly liquid debts trade in the money market and long-term stocks and debt maturing trade in the capital markets. (F) Investment Bank: is a financial institution which encourages the company to create stocks into the markets, and it is the assistant of the companies when they merging with each other (Ehrhardt and Brigham 23).
Financial Service Corporations: are the organizations which involved with money management such as banks, credit card companies, and insurance companies (Ehrhardt and Brigham 24). Financial Intermediaries: are the unions which involved finding the surplus money from one side and then allocating it to deficit sides (Ehrhardt and Brigham 30). (G) Mutual Funds: are the organizations that collect money from numerous investors and then put it to buy financial instruments such as stocks, bonds, short and long-term money instruments.
Money Market Fund: is the one type of mutual fund which invests in securities with short-term, low risk, and more safety conditions (Ehrhardt and Brigham 29). (H) Physical Location exchanges: is a physical financial market in which brokers and dealer participate in trade of stock, bonds, notes and mortgages. Computer/ Telephone Network: Invertors can participate in trades by computer/ telephone network without requiring members to be in the same building. (I) Open Outcry Auction: is a trading process of selling and buying stocks by offering bids and then sell it higher prices.
In other words it is the mechanism of the trades. Dealer markets: is different from the auction since in which brokers acting a main role of the trading process, and they ask and quote the prices in order to match the seller or buyer with their prices (Ehrhardt and Brigham 30). Electronic communication network: is the automatic system which helps for members to match their bid to another buyer or seller. It provides people in any every counties opportunity to participate in trading by using internet (Ehrhardt and Brigham 30). J) Production opportunities: is the possibility to convert a capital into profits. Because production opportunities affect the returned earnings of the investment, financiers consider it when they determining the cost of money (Ehrhardt and Brigham 21). Time references for consumption: is the tendency of the use of money in present and future. In spite the fact that in China people tend to save their money for future, Mongolian people prefer to use their money presents (Ehrhardt and Brigham 20). (K) Foreign trade deficit: is the one of the economic condition which affects the cost of money.
For example, if American foreign trade getting slows, its reserve of the money become decreasing, so it can be influence cost of the investment. It means American buy more than they sell (Ehrhardt and Brigham 19). Question 1-3 Intrinsic value is the true value of the organizations which based on real position of market share, company’s assets, and perception of the future. This value can be same as market value if factors are same in the estimation process. On the other hand, intrinsic value may be different from market value depending on information used in evaluation.
For example, if management hides negative information, market value might be higher than intrinsic values (Ehrhardt and Brigham 9). Question 1-4 Edmund Enterprises recently made a large investment to upgrade its technology. Even though this investment cannot improve the income in short-term, it can reduce the production cost. Therefore, in short-term investment cost will increase in the “Income Statement” because of the new investment; as a result profits will decrease and company’s earnings per share will decrease.
However, in the financial markets, this news affects positively on stock’s market price. Also, this investment can raise the company’s intrinsic value since it can reduce the production costs (Ehrhardt and Brigham 30). Question 1-5 Capital can be transferred by the direct and indirect ways. In direct ways only two sides participate. Savers can make investment direct into business, and business sells their securities to savers without other parties. On the other hand, investment bank or financial intermediaries can participate effectively in transfers of capital.
For example, person who has surplus money invest in business by using investment bank or financial intermediaries, and companies can get investment by collaborating with those third parties (Ehrhardt and Brigham 14). Question 1-6 Financial intermediaries such as commercial banks, financial service companies play a crucial role of the economic system. Banks allocate efficiently financial fund, and they offer financial services that can make easy to obtaining information for both savers and borrowers (Levine 690).
Question 1-7 An initial public offering (IPO) is a primary market transaction. Typically, the company sells the IPO to other institutional investors, so the general public has no access to the IPO initially. After certain institutions get the stocks, they may sell them into the secondary market where all investors can buy them (Ehrhardt and Brigham 28). Question 1-8 Stock market is a securities market where bond, stock and other securities trading in guided by the professional stockbrokers.
On the other hand, in dealer markets, transactions makes based on person who acting as dealers for his own accounts rather than brokers acting as dealer for his buying and selling processes (Buiter). Question 1-9 Two leading stock markets are “New York Stock Exchange” (NYSE) and “Nasdaq Stock Exchange” (NASDAQ). NYSE is considered largest stock market in the world and companies’ market capitalization which are listed at NYSE are US$13. 39 trillion in end of 2010. Also, NASDAQ is the largest electronic screen trading in the United States, and second largest stock market by market capitalization of listed companies (Buiter para. ). Works Cited Brigham, Eugene F. , and Michael C. Ehrhardt. Financial Management Theory and Practice. Mason, Ohio: South-Western Cengage Learning, 2010. Print. Buiter, Willem H. “Time Preference and International Lending and Borrowing in an Overlapping-Generations Model. ” The Journal of Political Economy 89. 4 (1989): 769+. Google Scholars. Web. 2 Mar. 2011. Levine, Ross. “Financial Development and Economic Growth. ” Journal of Economic Literature(1999): 688-729. Web. 02 Mar. 2011.
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