Chapter 2 Quiz

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HW # 2- Quiz Chapter 2

1.Corporate Financing. How can a small, private firm finance its capital investments. Give two or three examples of financing sources. A small, private firm can finance its capital investments in financial markets and intermediaries. The intermediaries include hedge funds, mutual funds, pension funds, and financial institutions such as banks and insurance companies.

2.Corporate Financing. Is it possible for an individual to save and invest in a corporations without lending money to or purchasing additional shares? Explain. Yes. When the corporation retains cash and reinvests in the firm’s operations, that cash is saved and invested on behalf of the firm’s shareholders. The reinvested cash could have been paid out to the shareholders. By not taking the cash, these investors have reinvested their savings in the corporation.

3.Corporations. What is meant by the separation of ownership and control for public corporations? What potential problem does this separation create? Is a situation in which owners/shareholders of the business have little or no direct control over management decisions. This separation has to do with collective action problems associated with dispersed share ownership. The separation of ownership and control permits hierarchical decision making which, for some types of decisions, is superior to the market. It applies particularly to large publicly-owned companies where there are many shareholders, none of whom has a controlling interest.It can also apply to smaller family-owned companies where the business is run by managers. However, in the case of large companies important shareholders like investment trusts and pension funds can exert pressure on the management to run the company in a certain way.

4.Financial Markets. The stock and bond markets are not the only financial markets. Give two or three additional examples. -Commodity markets: which facilitate the trading of commodities -Money Markets: provide...
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