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Chapter1

1. How did the recession of 2007–2009 compare with other recessions since the Great Depression in terms of length?

Ans.It was the longest. This may be close to a perfect storm situation on top of a real estate bust, and a financial bust [crime?], "Technology" is a big part of the unemployment situation, and then there's the world wide normalizing of salary levels - China, India, etc. up, US down.

2. What effect did the recession of 2007–2009 have on government regulation?

It was greatly increased.

3. What advantages does a sole proprietorship offer? What is a major drawback of this type of organization?

A sole proprietorship offers the advantage of simplicity of decision-making and low organizational and operating costs. A major drawback is that there is unlimited liability to the owner.

8. Why are institutional investors important in today's business world?

Because institutional investors such as pension funds and mutual funds own a large percentage of major U.S. companies, they are having more to say about the way publicly owned companies are managed. As a group, they have the ability to vote large blocks of shares for the election of a board of directors, which is supposed to run the company in an efficient, competitive manner. The threat of being able to replace poor performing boards of directors makes institutional investors quite influential. Since these institutions, like pension funds and mutual funds, represent individual workers and investors, they have a responsibility to see that the firm is managed in an efficient and ethical way.

9. Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maximization of shareholder wealth?

The problem with a profit maximization goal is that it fails to take account of risk, the timing of the benefits is not considered, and profit measurement is a very inexact process. The goal of shareholders wealth maximization implies that the firm will attempt to achieve the highest possible total valuation in the marketplace. It is the one overriding objective of the firm and should influence every decision.

10. When does insider trading occur? What government agency is responsible for protecting against the unethical practice of insider trading?

Insider trading occurs when anyone with non-public information buys or sells securities to take advantage of that private information. The Securities and Exchange Commission is responsible for protecting markets against insider trading. In the past people have gone to jail for trading on non-public information. This has included company officers, investment bankers, printers who have information before it is publishers and even truck drivers who deliver business magazines and read positive or negative articles about a company before the magazine is on the newsstands and then place trades or have friends place trades based on that information. The SEC has prosecuted anyone who profits from inside information. Every decision

12. What is the difference between a primary and a secondary market?

A primary market refers to the use of the financial markets to raise new funds for the corporation. After the securities are sold to the public (institutions and individuals), they trade in the secondary market between investors. It is in the secondary market that prices are continually changing as investors buy and sell securities based on the expectations of corporate prospects.

13. Assume you are looking at many companies with equal risk; which ones will have the highest stock prices?

Given companies with equal risk, those companies with expectations of high return will have higher common stock prices relative to those companies with expectations of poor returns.

Chapter 2

1. Discuss some financial variables that affect the price-earnings ratio.

The price-earnings ratio will be influenced by the earnings and sales growth of the firm, the risk or...
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