Describe in your own words why financial decisions are based on incremental benefits? How does a sunk cost affect the incremental benefit from a decision?
Incremental benefits are costs and benefits that would occur if a particular course of action is taken, compared to those that would have obtained if that course of action had not been taken. It’s the opportunity cost, the value of choosing one action over another. Financial decisions are based on incremental benefits because a corporation may weigh the cost of financing a new project versus the economic cost that are not as obvious such as the cost of losing business to competitors or coming out ahead. Sunk cost is any cost that has already occurred and no decisions now or in the future will change them. An example of a sunk cost is maybe property or equipment that has been purchased for expansion. In most decision making, sunk costs can be ignored
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Suppose you are a manager in a manufacturing business. How are the capital markets relevant to the effective performance of your job?
A capital market works as an agent for demand and supply of (primarily) long-term debt and equity capital. It supplies the money provided by savers and banks, credit unions, insurance companies, etc. to borrowers and investees through securities like bonds, notes, and stocks. A capital market is a highly decentralized system made up of the stock market, bond market, and money market. It also works as an exchange for trading existing claims on capital in the form of shares. The capital market is relevant to manufacturing because the output of the goods being manufactured determines the financial health of the company. The better the manufactured goods sell, the more profitable the company becomes which makes it a strong investment in the capital market. Additionally, by observing the capital market industry...