Introduction To Finance – Assignment Example

Section 1. What are some of the problems in implementing the goal of maximization of shareholder wealth? Some of the problems associated with maximizing shareholders wealth include the creation of pollution derived from production. Another problem is inequity in the distribution of corporate wealth. Sometimes the top managerial positions earn vast amounts of money, while the shareholders earn a modest earning.
2. What is the agency problem and how might it impact the goal of maximizing shareholder’s wealth?
The agency problem refers to the conflict of interest that exists between the creditors, shareholders, and managers due to differing goals (Investopedia, 2010). It affects the goal of maximizing shareholders wealth because each party is looking for their best interest. For example the bank only cares about getting paid their money on time, the manager cares about making more money for himself, while the company wants to increase its earnings.
Investopedia.com. 2010. “Agency Problem.” 20 September 2010
3. Define: a) sole proprietorship b) partnership c) corporation
a) Refers to a business owned by a single person in which there is no distinction between the business and the owners
b) A type of business arrangement in which two or more individuals share the ownership of a business
c) It is the most common type of business arrangement. A corporation has legal rights separate to its ownership. If the corporation is public its shares are sold in the open marketplace.
Section 2
1.Distinguish between money and capital markets.
The money markets deal with short term lending and borrowing of money. Some of the instruments included in the money markets are treasury bills, commercial paper, and certificate of deposits. The capital markets deals with trafficking of long term securities such as stock of corporations and corporate bonds.
2. What is an investment bankers and what sort of functions does he or she perform?
An investment banker is a person dedicated to raising capital. This person raises money for corporations through mechanism such as initial public offerings (IPO) and it uses bonds to raise money for municipalities.
3. Explain the term opportunity costs with respect to the cost of to the cost of funds to a firm?
Opportunity cost refers to the alternative use that is passed up when making a monetary decision. For example a company has $1000. It decides to use the money to give the employees a bonus. An opportunity cost of this decision is that the money could have been use to buy more inventory.
Section 3
1. 6.8% - 4% - 0.4% = 2.4%
2. 4.34% -2.78% = 1.56% ; 7.33% - 2.78% = 4.55%
The interest paid by short term issues is typically less than those of 30 year securities. Once a long term security is issued its interest rate is frozen. A situation that could make a short term issue yield higher than long term issue is inflation. High inflationary forces could make short term issues pay more than older long term issues.