Chapter 1, Problem 1Q

a)

Summary Introduction

To determine: The definition of proprietorship, partnership, corporation, charter and bylaws.

Explanation of Solution

A company owned by one individual is a proprietorship or sole proprietorship. When two or more persons are associated to conduct business, a partnership exists. A corporation, on the other hand, is a state-created legal entity. The organization is independent of its owners and managers. A charter shall contain the following information:

• Name of the proposed corporation
• Types of activities it will pursue
• Amount of capital stock
• Number of directors
• Names and addresses of directors.

The bylaws are a set of rules established by the company's founders. Included are the following points:

• How to elect directors (all elected annually or perhaps one-third each year for 3-year terms)
• Whether current stockholders will have the first right to buy any new shares in the company issues.
• Procedures for modifying the bylaws themselves will include conditions.

b)

Summary Introduction

To determine: The definition of limited partnership, limited liability partnership, professional corporation.

Explanation of Solution

In a limited partnership, the liabilities, investment returns, and control of limited partners are limited, while the liability and control of general partners are unrestricted. A limited liability partnership (LLP), also referred to as a limited liability company (LLC), blends a corporation's limited liability advantage with a partnership's tax benefits. A private company (PC), known as a professional association (PA) in some countries, has most of the incorporation privileges, but members are not exempted from professional (malpractice) liability.

c)

Summary Introduction

To determine: The definition of stockholder wealth maximization.

Explanation of Solution

Maximizing Stockholder wealth is the right goal for management decisions. In order to maximize the price of the common stock of the firm, the risk and timing associated with expected earnings per share and cash flow are considered.

d)

Summary Introduction

To determine: The definition of money market, capital market, primary market and secondary market.

Explanation of Solution

A money market is a (short-term) debt securities financial market with maturities of less than one year. The money market in country N is the biggest capital market in the world. Capital markets are the long-term debt and business equity financial markets. The example of a capital market is the NY Stock Exchange. Primary markets are the first-time trading of newly issued securities. Secondary markets are where shares are resold on the primary market after the initial issue. A secondary market is the NY Stock Exchange.

e)

Summary Introduction

To determine: The definition of private market, public market and derivatives.

Explanation of Solution

Transactions are processed directly between two parties in private markets and structured in any manner that appeals to them. Examples of private market transactions are bank loans and private debt placements with insurance companies. Standard contracts are exchanged on regulated exchanges in public markets. A significant number of individuals eventually hold shares sold on public markets, such as common stock and corporate bonds. Securities on the private market are more tailor-made but less liquid, whereas securities on the public market are more liquid but subject to more standardization. Derivatives are statements whose value is contingent on what happens to some other asset's value. Two important types of derivatives are future and options, and their values depend on what happens to other asset prices, say IBM stock, country J yen, or pork bellies. The value of derivative security is therefore derived from the value of a real asset that underlies it.

f)

Summary Introduction

To determine: The definition of investment bank, financial services corporation, financial intermediary.

Explanation of Solution

An investment banker is a business-to-saver middleman. Investment banking houses assist with corporate securities design and then sell them in primary markets to savers (investors). Corporations of financial services offer a wide range of financial services, such as brokerage, insurance, and commercial banking. A financial intermediary purchases securities through the sale of its own securities with funds it obtains. An example is a common stock mutual fund purchasing common stocks with funds obtained through the issuance of shares in the mutual fund.

g)

Summary Introduction

To determine: The definition of mutual fund, money market fund.

Explanation of Solution

A mutual fund is a company that sells the fund's shares and uses the proceeds to buy stocks, long-term bonds, or short-term debt instruments. Upon deduction of operating expenses, the resulting dividends, interest and capital gains are allocated to the owners of the fund. Various funds are designed to achieve different goals. Money market funds are mutual funds that invest in short-term debt instruments and offer privileges of inspection to their shareholders; therefore, they are essentially interest-bearing inspection accounts.

h)

Summary Introduction

To determine: The definition of physical location exchange, computer/ telephone network.

Explanation of Solution

Exchanges of physical location have face-to-face communication between securities buyers and sellers. A computer/telephone network, on the other hand, electronically links buyers and sellers, not face-to-face.

i)

Summary Introduction

To determine: The definition of open outcry auction, dealer market; automated trading platform.

Explanation of Solution

An open-outcry auction is a way for buyers and sellers to match. The buyers and sellers are face-to-face in an auction, each stating the prices and buying or selling them. A dealer in a dealer market holds a security inventory and makes a market by offering to buy or sell. Others who want to buy or sell can see the dealers ' deals and can contact the dealer of their choice to arrange a deal. An automated trading network is a computer system where buyers and sellers post orders and where trades are performed to match orders automatically.

j)

Summary Introduction

To determine: The definition of production opportunities, time preferences for consumption.

Explanation of Solution

Opportunities for production are the returns arising from investment in productive assets within an economy. The higher the chances of growth, the more producers are willing to pay for the capital required. The priorities in the consumption time apply to the desired consumption pattern. Consumer's consumption time expectations decide how much consumption they are willing to defer, and therefore save, at different interest rates.

k)

Summary Introduction

To determine: The definition of foreign trade deficit.

Explanation of Solution

When businesses and individuals in the U.S. experience a foreign trade deficit. S. Import more goods than they are exported from foreign countries. Trade deficits need to be funded, and debt is the main source of funding. Therefore, debt financing increases as the trade deficit increases, driving up interest rates.  country U Interest rates must be consistent with foreign interest rates; if the Federal Reserve tries to set interest rates below foreign rates, investors would sell U.S. bonds, leading to higher U.S. bond prices, resulting in higher country U's rates. Therefore, if the trade deficit is high relative to the size of the overall economy, the ability of the Fed to battle a recession by lowering interest rates may be hampered.