1. Describe the cycle of money, the participants in the cycle, and the common ob

Question

1. Describe the cycle of money, the participants in the cycle, and the common objective
of borrowing and lending.

2. Distinguish the four main areas of finance and briefly explain the financial activities that
each encompasses.

3. Explain the different ways of classifying financial markets.

4. Discuss the three main categories of financial management.

5. Identify the main objective of the finance manager and how that objective might be
achieved.

6. Explain how the finance manager interacts with both internal and external players.

7. Delineate the three main types of business organizations and their respective advantages
and disadvantages.

8. Illustrate agency theory and the principal-agent problem.

9. Review issues in corporate governance and business ethics.

1. Explain the foundations of the balance sheet and income statement

2. Use the cash flow identity to explain cash flow.

3. Provide some context for financial reporting.

4. Recognize and view Internet sites that provide financial information.

1. Debits always equal credits. What type of accounting system uses this requirement? What is the accounting identity? What is the connection between “debits always equal credits†and the accounting identity?

2. From the income statement accounts below,

a. produce the income statement for the year.

b. produce the operating cash flow for the year.

Income Statement Accounts for the Year Ending 2007

Cost of Goods Sold

$1,420,000

Interest Expense

$ 218,000

Taxes

$ 318,000

Revenue

$2,984,000

SG&A Expenses

$ 450,000

Depreciation

$ 250,000

3. Since 1950, the interest rates for long-term government bonds have averaged a higher interest rate than short-term government bonds. Why?

4. During what decade from 1950 to 1999 did we see the highest interest rates in the United States?

5. What is a bond? What determines the price of this financial asset?

6. What is the primary difference between an annual bond and a semiannual bond? What changes do you need to make in finding the price of a semiannual bond versus an annual bond?

7. When we talk about the yield of a bond, we usually mean the yield to maturity of the bond. Why?

8. What are three key features of common stock?

9. What are the differences between authorized, issued, and outstanding shares?

10. What is the role of the investment banker in the primary sale of common stock?

11. What are the potential repercussions if the investment banker does not perform the due diligence task?

12. What is the function of a specialist in the secondary market?

13. What is a bid price and what is an ask price?

14. What is the difference between preferred stock and common stock?

Income Statement Accounts for the Year Ending 2007

Cost of Goods Sold

$1,420,000

Interest Expense

$ 218,000

Taxes

$ 318,000

Revenue

$2,984,000

SG&A Expenses

$ 450,000

Depreciation

$ 250,000

Explanation / Answer

1.The four main areas of finance are corporate finance, investments, financial institutions and markets, and international finance. Corporate finance supports the operations of a company. Investments are the activities centered on buying and selling stocks and bonds. Financial institutions and markets are the organizations that promote the cycle of money and the buying and selling of financial assets. International finance is concerned with the multinational element of finance activities.

2.Also known as the Four P's, the marketing mix elements are price, place, product, andpromotion.

1. Product. The Product area is concerned with developing the right "product" for the target market. This offering may involve a physical good, a service, or a blend of both. Keep in mind that Product is not limited to "physical good".

2. Place.Place is concerned with all the decisions involved in getting the "right" product to the target market's Place. A product isn't much good to a customer if it isn't available when and where it's wanted. A product reaches customers through a channel of distribution. (A channel of distribution is any series of firms - or individuals - from producer to final user or consumer.)

3. Promotion.The third P - is concerned with telling the target market about the "right" product. Promotion includes personal selling, mass selling, and sales promotion. It is the marketing manager's job to blend these methods.

4. Price. In addition to developing the right Product, Place, and Promotion, marketing managers must also decide the right Price. In setting a price, they must consider the kind of competition in the target market - and the cost of the whole marketing mix. They must also try to estimate customer reaction to possible prices

3.Financial Market is the market where financial securities like stocks and bonds and commodities like valuable metals are exchanged at efficient market prices. Here, by efficient market prices we mean the unbiased price that reflects belief at collective speculation of all investors about the future prospect. The trading of stocks and bonds in the Financial Market can take place directly between buyers and sellers or by the medium of Stock Exchange. Financial Markets can be domestic or international.

Different Types of Financial Markets

• Capital Market

Capital Market consists of primary market and secondary market. In primary market newly issued bonds and stocks are exchanged and in secondary market buying and selling of already existing bonds and stocks take place. So, the Capital Market can be divided into Bond Market and Stock Market. Bond Marketprovides financing by bond issuance and bond trading. Stock Market provides financing by shares or stock issuance and by share trading. As a whole, Capital Market facilitates raising of capital.

• Money Market

Money Market facilitates short term debt financing and capital.

• Derivatives market

Derivatives Market provides instruments which help in controlling financial risk.

• Foreign Exchange market

Foreign Exchange Market facilitates the foreign exchange trading.

• Insurance Market

Insurance Market helps in relocation of various risks.

• Commodity Market

Commodity Market organizes trading of commodities.

Contribution of Financial Markets

Financial Markets are essential for fund raising. Through Financial Market borrowers can find suitable lenders. Banks also help in the process of financing by working as intermediaries. They use the money, which is saved and deposited by a group of people; for giving loans to another group of people who need it. Generally, banks provide financing in the form of loans and mortgages. Except banks other intermediaries in the Financial Market can be Insurance Companies and Mutual Funds. But more complicated transactions of Financial Market take place in stock exchange. In stock exchange, a company can buy others' company's shares or can sell own shares to raise funds or they can buy their own shares existing in the market.

Basis of Financial Market

Basis of Financial Markets are the Borrowers and Lenders.

Borrowers of the Financial Market can be individual persons, private companies, public corporations, government and other local authorities like municipalities. Individual persons generally take short term or long term mortgage loans from banks to buy any property. Private Companies take short term or long term loans for expansion of business or for improvement of the business infrastructure. Public Corporations like railway companies and postal services also borrow from Financial Market to collect required money. Government also borrows from Financial Market to bridge the gap between govt. revenue and govt. spending. Local authorities like municipalities sometimes borrow in their own name and sometimes govt. borrows in behalf of them from the Financial Market.

Lenders in the Financial Market are actually the investors. Their invested money is used to finance the requirements of borrowers. So, there are various types of investments which generate lending activities. Some of these types of investments are depositing money in savings bank account, paying premiums to Insurance Companies, investing in shares of different companies, investing in govt. bonds and investing in pension funds and mutual funds.

Financial Market is nothing but a tool which is used to raise capital. Just like any other tool, it can be beneficial and can be harmful too. So, the ultimate outcome solely lies in the hands of the people who use it to serve their purpose.

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