财务管理Chapter16课本答案

PEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E61THEROLEOFFINANCIALMANAGEMENTINCREASINGSHAREHOLDERVALUEOVERTIMEISTHEBOTTOMLINEOFEVERYMOVEWEMAKEROBERTGOIZUETAFORMERCEO,THECOCACOLACOMPANYPART1INTRODUCTIONTOFINANCIALMANAGEMENTCHAPTER1THEROLEOFFINANCIALMANAGEMENTPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E7_ANSWERSTOQUESTIONS_1WITHANOBJECTIVEOFMAXIMIZINGSHAREHOLDERWEALTH,CAPITALWILLTENDTOBEALLOCATEDTOTHEMOSTPRODUCTIVEINVESTMENTOPPORTUNITIESONARISKADJUSTEDRETURNBASISOTHERDECISIONSWILLALSOBEMADETOMAXIMIZEEFFICIENCYIFALLFIRMSDOTHIS,PRODUCTIVITYWILLBEHEIGHTENEDANDTHEECONOMYWILLREALIZEHIGHERREALGROWTHTHEREWILLBEAGREATERLEVELOFOVERALLECONOMICWANTSATISFACTIONPRESUMABLYPEOPLEOVERALLWILLBENEFIT,BUTTHISDEPENDSINPARTONTHEREDISTRIBUTIONOFINCOMEANDWEALTHVIATAXATIONANDSOCIALPROGRAMSINOTHERWORDS,THEECONOMICPIEWILLGROWLARGERANDEVERYBODYSHOULDBEBETTEROFFIFTHEREISNORESLICINGWITHRESLICING,ITISPOSSIBLESOMEPEOPLEWILLBEWORSEOFF,BUTTHATISTHERESULTOFAGOVERNMENTALCHANGEINREDISTRIBUTIONITISNOTDUETOTHEOBJECTIVEFUNCTIONOFCORPORATIONS2MAXIMIZINGEARNINGSISANONFUNCTIONALOBJECTIVEFORTHEFOLLOWINGREASONSAEARNINGSISATIMEVECTORUNLESSONETIMEVECTOROFEARNINGSCLEARLYDOMINATESALLOTHERTIMEVECTORS,ITISIMPOSSIBLETOSELECTTHEVECTORTHATWILLMAXIMIZEEARNINGSBEACHTIMEVECTOROFEARNINGPOSSESSESARISKCHARACTERISTICMAXIMIZINGEXPECTEDEARNINGSIGNORESTHERISKPARAMETERCHAPTER1THEROLEOFFINANCIALMANAGEMENTPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E8CEARNINGSCANBEINCREASEDBYSELLINGSTOCKANDBUYINGTREASURYBILLSEARNINGSWILLCONTINUETOINCREASESINCESTOCKDOESNOTREQUIREOUTOFPOCKETCOSTSDTHEIMPACTOFDIVIDENDPOLICIESISIGNOREDIFALLEARNINGSARERETAINED,FUTUREEARNINGSAREINCREASEDHOWEVER,STOCKPRICESMAYDECREASEASARESULTOFADVERSEREACTIONTOTHEABSENCEOFDIVIDENDSMAXIMIZINGWEALTHTAKESINTOACCOUNTEARNINGS,THETIMINGANDRISKOFTHESEEARNINGS,ANDTHEDIVIDENDPOLICYOFTHEFIRM3FINANCIALMANAGEMENTISCONCERNEDWITHTHEACQUISITION,FINANCING,ANDMANAGEMENTOFASSETSWITHSOMEOVERALLGOALINMINDTHUS,THEFUNCTIONOFFINANCIALMANAGEMENTCANBEBROKENDOWNINTOTHREEMAJORDECISIONAREASTHEINVESTMENT,FINANCING,ANDASSETMANAGEMENTDECISIONS4YES,ZEROACCOUNTINGPROFITWHILETHEFIRMESTABLISHESMARKETPOSITIONISCONSISTENTWITHTHEMAXIMIZATIONOFWEALTHOBJECTIVEOTHERINVESTMENTSWHERESHORTRUNPROFITSARESACRIFICEDFORTHELONGRUNALSOAREPOSSIBLE5THEGOALOFTHEFIRMGIVESTHEFINANCIALMANAGERANOBJECTIVEFUNCTIONTOMAXIMIZEHE/SHECANJUDGETHEVALUEEFFICIENCYOFANYFINANCIALDECISIONBYITSIMPACTONTHATGOALWITHOUTSUCHAGOAL,THEMANAGERWOULDBE“ATSEA“INTHATHE/SHEWOULDHAVENOOBJECTIVECRITERIONTOGUIDEHIS/HERACTIONSCHAPTER1THEROLEOFFINANCIALMANAGEMENTPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E96THEFINANCIALMANAGERISINVOLVEDINTHEACQUISITION,FINANCING,ANDMANAGEMENTOFASSETSTHESETHREEFUNCTIONALAREASAREALLINTERRELATEDEG,ADECISIONTOACQUIREANASSETNECESSITATESTHEFINANCINGANDMANAGEMENTOFTHATASSET,WHEREASFINANCINGANDMANAGEMENTCOSTSAFFECTTHEDECISIONTOINVEST7IFMANAGERSHAVESIZABLESTOCKPOSITIONSINTHECOMPANY,THEYWILLHAVEAGREATERUNDERSTANDINGFORTHEVALUATIONOFTHECOMPANYMOREOVER,THEYMAYHAVEAGREATERINCENTIVETOMAXIMIZESHAREHOLDERWEALTHTHANTHEYWOULDINTHEABSENCEOFSTOCKHOLDINGSHOWEVER,TOTHEEXTENTPERSONSHAVENOTONLYHUMANCAPITALBUTALSOMOSTOFTHEIRFINANCIALCAPITALTIEDUPINTHECOMPANY,THEYMAYBEMORERISKAVERSETHANISDESIRABLEIFTHECOMPANYDETERIORATESBECAUSEARISKYDECISIONPROVESBAD,THEYSTANDTOLOSENOTONLYTHEIRJOBSBUTHAVEADROPINTHEVALUEOFTHEIRASSETSEXCESSIVERISKAVERSIONCANWORKTOTHEDETRIMENTOFMAXIMIZINGSHAREHOLDERWEALTHASCANEXCESSIVERISKSEEKINGIFTHEMANAGERISPARTICULARLYRISKPRONE8REGULATIONSIMPOSEDBYTHEGOVERNMENTCONSTITUTECONSTRAINTSAGAINSTWHICHSHAREHOLDERWEALTHCANSTILLBEMAXIMIZEDITISIMPORTANTTHATWEALTHMAXIMIZATIONREMAINTHEPRINCIPALGOALOFFIRMSIFECONOMICEFFICIENCYISTOBEACHIEVEDINSOCIETYANDPEOPLEARETOHAVEINCREASINGREALSTANDARDSOFLIVINGTHEBENEFITSOFREGULATIONSTOSOCIETYMUSTBEEVALUATEDRELATIVETOTHECOSTSIMPOSEDONECONOMICEFFICIENCYWHEREBENEFITSARESMALLCHAPTER1THEROLEOFFINANCIALMANAGEMENTPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E10RELATIVETOTHECOSTS,BUSINESSESNEEDTOMAKETHISKNOWNTHROUGHTHEPOLITICALPROCESSSOTHATTHEREGULATIONSCANBEMODIFIEDPRESENTLYTHEREISCONSIDERABLEATTENTIONBEINGGIVENINWASHINGTONTODEREGULATIONSOMETHINGSHAVEBEENDONETOMAKEREGULATIONSLESSONEROUSANDTOALLOWCOMPETITIVEMARKETSTOWORK9ASINOTHERTHINGS,THEREISACOMPETITIVEMARKETFORGOODMANAGERSACOMPANYMUSTPAYTHEMTHEIROPPORTUNITYCOST,ANDINDEEDTHISISINTHEINTERESTOFSTOCKHOLDERSTOTHEEXTENTMANAGERSAREPAIDINEXCESSOFTHEIRECONOMICCONTRIBUTION,THERETURNSAVAILABLETOINVESTORSWILLBELESSHOWEVER,STOCKHOLDERSCANSELLTHEIRSTOCKANDINVESTELSEWHERETHEREFORE,THEREISABALANCINGFACTORTHATWORKSINTHEDIRECTIONOFEQUILIBRATINGMANAGERSPAYACROSSBUSINESSFIRMSFORAGIVENLEVELOFECONOMICCONTRIBUTION10INCOMPETITIVEANDEFFICIENTMARKETS,GREATERREWARDSCANBEOBTAINEDONLYWITHGREATERRISKTHEFINANCIALMANAGERISCONSTANTLYINVOLVEDINDECISIONSINVOLVINGATRADEOFFBETWEENTHETWOFORTHECOMPANY,ITISIMPORTANTTHATITDOWELLWHATITKNOWSBESTTHEREISLITTLEREASONTOBELIEVETHATIFITGETSINTOANEWAREAINWHICHITHASNOEXPERTISETHATTHEREWARDSWILLBECOMMENSURATEWITHTHERISKTHATISINVOLVEDTHERISKREWARDTRADEOFFWILLBECOMEINCREASINGLYAPPARENTTOTHESTUDENTASTHISBOOKUNFOLDSCHAPTER1THEROLEOFFINANCIALMANAGEMENTPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E1111CORPORATEGOVERNANCEREFERSTOTHESYSTEMBYWHICHCORPORATIONSAREMANAGEDANDCONTROLLEDITENCOMPASSESTHERELATIONSHIPSAMONGACOMPANYSSHAREHOLDERS,BOARDOFDIRECTORS,ANDSENIORMANAGEMENTTHESERELATIONSHIPSPROVIDETHEFRAMEWORKWITHINWHICHCORPORATEOBJECTIVESARESETANDPERFORMANCEISMONITOREDTHEBOARDOFDIRECTORSSETSCOMPANYWIDEPOLICYANDADVISESTHECEOANDOTHERSENIOREXECUTIVES,WHOMANAGETHECOMPANYSDAYTODAYACTIVITIESBOARDSREVIEWANDAPPROVESTRATEGY,SIGNIFICANTINVESTMENTS,ANDACQUISITIONSTHEBOARDALSOOVERSEESOPERATINGPLANS,CAPITALBUDGETS,ANDTHECOMPANYSFINANCIALREPORTSTOCOMMONSHAREHOLDERS12THECONTROLLERSRESPONSIBILITIESAREPRIMARILYACCOUNTINGINNATURECOSTACCOUNTING,ASWELLASBUDGETSANDFORECASTS,WOULDBEFORINTERNALCONSUMPTIONEXTERNALFINANCIALREPORTINGWOULDBEPROVIDEDTOTHEIRS,THESEC,ANDTHESTOCKHOLDERSTHETREASURERSRESPONSIBILITIESFALLINTOTHEDECISIONAREASMOSTCOMMONLYASSOCIATEDWITHFINANCIALMANAGEMENTINVESTMENTCAPITALBUDGETING,PENSIONMANAGEMENT,FINANCINGCOMMERCIALBANKINGANDINVESTMENTBANKINGRELATIONSHIPS,INVESTORRELATIONS,DIVIDENDDISBURSEMENT,ANDASSETMANAGEMENTCASHMANAGEMENT,CREDITMANAGEMENTPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E122THEBUSINESS,TAX,ANDFINANCIALENVIRONMENTSCORPORATION,NANINGENIOUSDEVICEFOROBTAININGINDIVIDUALPROFITWITHOUTINDIVIDUALRESPONSIBILITYAMBROSEBIERCETHEDEVILSDICTIONARYCHAPTER2THEBUSINESS,TAX,ANDFINANCIALENVIRONMENTSPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E13_ANSWERSTOQUESTIONS_1THEPRINCIPALADVANTAGEOFTHECORPORATEFORMOFBUSINESSORGANIZATIONISTHATTHECORPORATIONHASLIMITEDLIABILITYTHEOWNEROFASMALLFAMILYRESTAURANTMIGHTBEREQUIREDTOPERSONALLYGUARANTEECORPORATEBORROWINGSORPURCHASESANYWAY,SOMUCHOFTHISADVANTAGEMIGHTBEELIMINATEDTHEWEALTHYINDIVIDUALHASMOREATSTAKEANDUNLIMITEDLIABILITYMIGHTCAUSEONEFAILINGBUSINESSTOBRINGDOWNTHEOTHER,HEALTHYBUSINESSES2THELIABILITYISLIMITEDTOTHEAMOUNTOFTHEINVESTMENTINBOTHTHELIMITEDPARTNERSHIPANDINTHECORPORATIONHOWEVER,THELIMITEDPARTNERGENERALLYDOESNOTHAVEAROLEINSELECTINGTHEMANAGEMENTORININFLUENCINGTHEDIRECTIONOFTHEENTERPRISEONAPRORATABASIS,STOCKHOLDERSAREABLETOSELECTMANAGEMENTANDAFFECTTHEDIRECTIONOFTHEENTERPRISEALSO,PARTNERSHIPINCOMEISTAXABLETOTHELIMITEDPARTNERSASPERSONALINCOMEWHEREASCORPORATEINCOMEISNOTTAXEDUNLESSDISTRIBUTEDTOTHESTOCKHOLDERSASDIVIDENDS3WITHBOTHASOLEPROPRIETORSHIPANDPARTNERSHIP,AMAJORDRAWBACKISTHELEGALLIABILITYOFTHEOWNERSITEXTENDSBEYONDTHEFINANCIALRESOURCESOFTHEBUSINESSTOTHEOWNERSPERSONALLYFRINGEBENEFITSARENOTDEDUCTIBLEASANEXPENSEALSO,BOTHFORMSOFORGANIZATIONLACKTHECORPORATEFEATUREOF“UNLIMITEDLIFE“WITHTHEPARTNERSHIPTHEREAREPROBLEMSOFCONTROLANDMANAGEMENTTHEOWNERSHIPISNOTLIQUIDWHENITCOMESTOPLANNINGFORCHAPTER2THEBUSINESS,TAX,ANDFINANCIALENVIRONMENTSPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E14INDIVIDUALESTATESDECISIONMAKINGCANBECUMBERSOMEANLLCGENERALLYLACKSTHEFEATUREOF“UNLIMITEDLIFE,“ANDCOMPLETETRANSFEROFANOWNERSHIPINTERESTISUSUALLYSUBJECTTOTHEAPPROVALOFATLEASTAMAJORITYOFTHEOTHERLLCMEMBERS4THECHIEFBENEFICIARIESARESMALLERCOMPANIESWHERETHEFIRST75,000INTAXABLEINCOMEISALARGEPORTION,IFNOTALL,OFTHEIRTOTALTAXABLEINCOME5ACCELERATEDDEPRECIATIONISUSEDUPTOTHEPOINTITISADVANTAGEOUSTOSWITCHTOSTRAIGHTLINEDEPRECIATIONAONEHALFYEARCONVENTIONISFOLLOWEDINTHEFIRSTYEAR,WHICHREDUCESTHECOSTRECOVERYINTHATYEARFROMWHATWOULDOTHERWISEBETHECASEADDITIONALLY,AONEHALFYEARCONVENTIONISFOLLOWEDINTHEYEARFOLLOWINGTHEASSETCLASSTHISPUSHESOUTTHEDEPRECIATIONSCHEDULE,WHICHISDISADVANTAGEOUSFROMAPRESENTVALUESTANDPOINTTHEDOUBLEDECLININGBALANCEMETHODISUSEDFORTHEFIRSTFOURASSETCLASSES,3,5,7AND10YEARSTHEASSETCATEGORYDETERMINESTHEPROJECTSDEPRECIABLELIFE6THEIMMUNITYFROMEACHOTHERSTAXINGPOWERDATESBACKTOTHEEARLYPARTOFTHE19THCENTURYITUSEDTOAPPLYTOSALARIESOFGOVERNMENTEMPLOYEESASWELLTHEEXEMPTIONISHISTORICAL,ANDITISHARDTORATIONALIZEFROMTHESTANDPOINTOFECONOMIC/TAXINGEFFICIENCY7PERSONALTAXRATESAREPROGRESSIVEUPTOAPOINT,THENBECOMEREGRESSIVECHAPTER2THEBUSINESS,TAX,ANDFINANCIALENVIRONMENTSPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E158WITHTHEDIFFERENTIALTAXATIONOFORDINARYINCOMEANDCAPITALGAINS,SECURITIESWITHAHIGHERLIKELIHOODOFCAPITALGAINSARETAXADVANTAGEDTHESEINCLUDELOWDIVIDENDCOMMONSTOCKS,COMMONSTOCKSINGENERAL,DISCOUNTBONDS,REALESTATE,ANDOTHERINVESTMENTSOFTHISSORT9DEPRECIATIONCHANGESTHETIMINGOFTAXPAYMENTSTHELONGERTHESEPAYMENTSCANBEDELAYED,THEBETTEROFFTHEBUSINESSIS10ONEADVANTAGETOSUBCHAPTERSOCCURSWHENINVESTORSHAVEOUTSIDEINCOMEAGAINSTWHICHTOUSELOSSESBYTHECOMPANYEVENWITHNOOUTSIDEINCOME,STOCKHOLDERSSTILLMAYFINDSUBCHAPTERSTOBEADVANTAGEOUSIFDIVIDENDSAREPAID,THESTOCKHOLDERUNDERSUBCHAPTERSISSUBJECTONLYTOTAXATIONONTHEPROFITSEARNEDBYTHECOMPANYUNDERTHECORPORATEMETHOD,THECOMPANYPAYSTAXESONITSPROFITSANDTHENTHEOWNERSPAYPERSONALINCOMETAXESONTHEDIVIDENDSPAIDTOTHEM11TAXINCENTIVESARETHERESULTOFSPECIALINTERESTGROUPSINFLUENCINGLEGISLATORSFOREXAMPLE,EXPORTERSINFLUENCEDTHEPASSAGEOFDISCSDOCTORSANDATTORNEYSINFLUENCEDTHEPASSAGEOFTHEKEOGHPENSIONPLANSSOMEOFTHESEINCENTIVESBENEFITSOCIETYASAWHOLEOTHERSBENEFITONLYAFEWATTHEEXPENSEOFTHERESTOFSOCIETYITISHARDTOIMAGINEALLINDIVIDUALSPLACINGTHEINTERESTOFTHEWHOLEABOVETHEIROWNINTERESTSTHEREFORE,ITISDIFFICULTTOPERCEIVETHATTAXINCENTIVESWILLBEDISCONTINUEDFURTHER,SOMEINCENTIVESCANBEUSEDTOBENEFITLARGEGROUPSOFPEOPLECHAPTER2THEBUSINESS,TAX,ANDFINANCIALENVIRONMENTSPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E1612THEPURPOSEOFTHECARRYBACKANDCARRYFORWARDPROVISIONSISTOALLOWTHECYCLICALCOMPANYWITHLARGEPROFITSWINGSTOOBTAINMOSTOFTHETAXBENEFITSAVAILABLETOACOMPANYWITHMORESTEADYPROFITSALSO,THEPROVISIONPROTECTSTHECOMPANYWITHALARGELOSSINAGIVENYEARWHILEIFACOMPANYHASSTEADYLOSSESITDOESNOTBENEFITFROMTHISPROVISION,THEMARGINALCOMPANYWITHPROFITSWINGSDOES13FINANCIALMARKETSALLOWFOREFFICIENTALLOCATIONINTHEFLOWOFSAVINGSINANECONOMYTOULTIMATEUSERSINAMACROSENSE,SAVINGSORIGINATEFROMSAVINGSSURPLUSECONOMICUNITSWHOSESAVINGSEXCEEDTHEIRINVESTMENTINREALASSETSTHEULTIMATEUSERSOFTHESESAVINGSARESAVINGSDEFICITECONOMICUNITSWHOSEINVESTMENTSINREALASSETSEXCEEDTHEIRSAVINGSEFFICIENCYISINTRODUCEDINTOTHEPROCESSTHROUGHTHEUSEOFFINANCIALMARKETSSINCETHESAVINGSSURPLUSANDSAVINGSDEFICITUNITSAREUSUALLYDIFFERENTENTITIES,MARKETSSERVETOCHANNELTHESEFUNDSATTHELEASTCOSTANDINCONVENIENCETOBOTHASSPECIALIZATIONDEVELOPS,EFFICIENCYINCREASESLOANBROKERS,SECONDARYMARKETS,ANDINVESTMENTBANKERSALLSERVETOEXPEDITETHISFLOWFROMSAVERSTOUSERS14FINANCIALINTERMEDIARIESPROVIDEANINDIRECTCHANNELFORTHEFLOWOFFUNDSFROMSAVERSTOULTIMATEUSERSTHESEINSTITUTIONSINCLUDECOMMERCIALBANKS,SAVINGSANDLOANASSOCIATIONS,LIFEINSURANCECOMPANIES,PENSIONANDPROFITSHARINGFUNDSANDSAVINGSBANKSTHEIRPRIMARYFUNCTIONISTHETRANSFORMATIONOFFUNDSINTOMOREATTRACTIVEPACKAGESFORSAVERSSERVICESANDECONOMIESOFSCALECHAPTER2THEBUSINESS,TAX,ANDFINANCIALENVIRONMENTSPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E17ARESIDEBENEFITSOFTHISPROCESSPOOLINGOFFUNDS,DIVERSIFICATIONOFRISK,TRANSFORMATIONOFMATURITIESANDINVESTMENTEXPERTISEAREDESIRABLEFUNCTIONSTHATFINANCIALINTERMEDIARIESPERFORM15DIFFERENCESINMATURITY,DEFAULTRISK,MARKETABILITY,TAXABILITY,ANDOPTIONFEATURESAFFECTYIELDSONFINANCIALINSTRUMENTSINGENERAL,THELONGERTHEMATURITY,THEGREATERTHEDEFAULTRISK,THELOWERTHEMARKETABILITYANDTHEMORETHERETURNISSUBJECTTOORDINARYINCOMETAXATIONASOPPOSEDTOCAPITALGAINSTAXATIONORNOTAXATION,THEHIGHERTHEYIELDONTHEINSTRUMENTIFTHEINVESTORRECEIVESANOPTIONEG,ACONVERSIONFEATUREORWARRANT,THEYIELDSHOULDBELOWERTHANOTHERWISECONVERSELY,IFTHEFIRMISSUINGTHESECURITYRECEIVESANOPTION,SUCHASACALLFEATURE,THEINVESTORMUSTBECOMPENSATEDWITHAHIGHERYIELDANOTHERFACTORONENOTTAKENUPINTHISCHAPTERISTHECOUPONRATETHELOWERTHECOUPONRATE,THEGREATERTHEPRICEVOLATILITYOFABOND,ALLOTHERTHINGSTHESAME,ANDGENERALLYTHEHIGHERTHEYIELD16THEMARKETBECOMESMOREEFFICIENTWHENTHECOSTOFFINANCIALINTERMEDIATIONISREDUCEDTHISCOSTISREPRESENTEDBYTHEDIFFERENCEININTERESTRATEBETWEENWHATTHEULTIMATESAVERRECEIVESANDWHATTHEULTIMATEBORROWERPAYSALSO,THEINCONVENIENCETOONEORBOTHPARTIESISANINDIRECTCOSTWHENFINANCIALINTERMEDIATIONREDUCESTHESECOSTS,THEMARKETBECOMESMOREEFFICIENTTHEMARKETBECOMESMORECOMPLETEWHENSPECIALTYPESOFFINANCIALINSTRUMENTSANDFINANCIALPROCESSESAREOFFEREDCHAPTER2THEBUSINESS,TAX,ANDFINANCIALENVIRONMENTSPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E18INRESPONSETOANUNSATISFIEDDEMANDBYINVESTORSFOREXAMPLE,THENEWPRODUCTMIGHTBEAZEROCOUPONBONDANDTHENEWPROCESS,AUTOMATICTELLERMACHINES17THESEEXCHANGESSERVEASSECONDARYMARKETSWHEREINTHEBUYERANDSELLERMEETTOEXCHANGESHARESOFCOMPANIESTHATARELISTEDONTHEEXCHANGETHESEMARKETSHAVEPROVIDEDECONOMIESOFTIMEANDSCALEINTHEPASTANDHAVEFACILITATEDEXCHANGEAMONGINTERESTEDPARTIES18AALLOTHERTHINGSTHESAME,THECOSTOFFUNDSINTERESTRATESWOULDRISEIFTHEREARENODISPARITIESINSAVINGSPATTERN,THEEFFECTWOULDFALLONALLFINANCIALMARKETSBGIVENASOMEWHATSEGMENTEDMARKETFORMORTGAGES,ITWOULDRESULTINMORTGAGERATESFALLINGANDRATESONOTHERFINANCIALINSTRUMENTSRISINGSOMEWHATCITWOULDLOWERTHEDEMANDFORCOMMONSTOCK,BONDSSELLINGATADISCOUNT,REALESTATE,ANDOTHERINVESTMENTSWHERECAPITALGAINSAREANATTRACTIONFORINVESTMENTPRICESWOULDFALLFORTHESEASSETSRELATIVETOFIXEDINCOMESECURITIESUNTILEVENTUALLYTHEEXPECTEDRETURNSAFTERTAXESFORALLFINANCIALINSTRUMENTSWEREINEQUILIBRIUMDGREATUNCERTAINTYWOULDDEVELOPINTHEMONEYANDCAPITALMARKETSANDTHEEFFECTWOULDLIKELYBEQUITEDISRUPTIVEINTERESTRATESWOULDRISEDRAMATICALLYANDITWOULDBEDIFFICULTFORBORROWERSTOFINDLENDERSWILLINGTOLENDATAFIXEDINTERESTRATEDISEQUILIBRIUMWOULDLIKELYCONTINUETOOCCURUNTILTHERATEOFINFLATIONREDUCEDTOAREASONABLELEVELCHAPTER2THEBUSINESS,TAX,ANDFINANCIALENVIRONMENTSPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E19EFINANCIALMARKETSWOULDBELESSEFFICIENTINCHANNELINGFUNDSFROMSAVERSTOINVESTORSINREALESTATE19ANSWERSTOTHISQUESTIONWILLDIFFERDEPENDINGONTHEFINANCIALINTERMEDIARYTHATISCHOSENTHEECONOMICROLEOFALLISTOCHANNELSAVINGSTOINVESTMENTSATALOWERCOSTAND/ORWITHLESSINCONVENIENCETOTHEULTIMATEBORROWERANDTOTHEULTIMATESAVERTHANWOULDBETHECASEINTHEIRABSENCETHEIRPRESENCEIMPROVESTHEEFFICIENCYOFFINANCIALMARKETSINALLOCATINGSAVINGSTOTHEMOSTPRODUCTIVEINVESTMENTOPPORTUNITIES20MONEYMARKETSSERVETHESHORTTERMLIQUIDITYNEEDSOFINVESTORSTHEUSUALLINEOFDEMARKATIONISONEYEARMONEYMARKETSINCLUDEINSTRUMENTSWITHMATURITIESOFLESSTHANAYEARWHILECAPITALMARKETSINVOLVESECURITIESWITHMATURITIESOFMORETHANONEYEARHOWEVER,BOTHMARKETSAREFINANCIALMARKETSWITHTHESAMEECONOMICPURPOSESOTHEDISTINCTIONOFMATURITYISSOMEWHATARBITRARYMONEYMARKETSINVOLVEINSTRUMENTSTHATAREIMPERSONALFUNDSFLOWONTHEBASISOFRISKANDRETURNABANKLOAN,FOREXAMPLE,ISNOTAMONEYMARKETINSTRUMENTEVENTHOUGHITMIGHTBESHORTTERM21TRANSACTIONCOSTSIMPEDETHEEFFICIENCYOFFINANCIALMARKETSTHELARGERTHEYARE,THELESSEFFICIENTAREFINANCIALMARKETSFINANCIALINSTITUTIONSANDBROKERSPERFORMANECONOMICSERVICEFORWHICHTHEYMUSTBECOMPENSATEDTHEMEANSOFCOMPENSATIONISTRANSACTIONCOSTSIFTHEREISCOMPETITIONAMONGTHEM,TRANSACTIONCOSTSWILLBEREDUCEDTOJUSTIFIABLELEVELSCHAPTER2THEBUSINESS,TAX,ANDFINANCIALENVIRONMENTSPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E2022THEMAJORSOURCESAREBANKLOANS,BONDISSUES,MORTGAGEDEBT,ANDSTOCKISSUES23FINANCIALBROKERS,SUCHASINVESTMENTBANKERSINPARTICULARASWELLASMORTGAGEBANKERS,FACILITATETHEMATCHINGOFBORROWERSINNEEDOFFUNDSWITHSAVERSHAVINGFUNDSTOLENDFORTHISMATCHINGANDSERVICING,THEBROKEREARNSAFEETHATISDETERMINEDBYCOMPETITIVEFORCESINADDITION,SECURITYEXCHANGESANDTHEOVERTHECOUNTERMARKETIMPROVETHESECONDARYMARKETANDHENCETHEEFFICIENCYOFTHEPRIMARYMARKETWHERESECURITIESARESOLDORIGINALLY_SOLUTIONSTOPROBLEMS_1AUNDERTHEPARTNERSHIP,418,000INACTUALLIABILITIESIFSUED,THEYCOULDLOSEUPTOTHEIRFULLCOMBINEDNETWORTHSASACORPORATION,THEIREXPOSUREISLIMITEDTOTHE280,000INEQUITYTHATTHEYHAVEINTHEBUSINESSBCREDITORSSHOULDBELESSWILLINGTOEXTENDCREDIT,BECAUSETHEPERSONALNETWORTHSOFTHEOWNERSNOLONGERBACKTHECLAIMS2EQUIPMENTMACHINECOST28,0000053,00000DEPRECIATIONINYEAR19,3324010,60000212,4460016,9600034,1468010,1760042,074806,1056056,1056063,0528028,0000053,00000CHAPTER2THEBUSINESS,TAX,ANDFINANCIALENVIRONMENTSPEARSONEDUCATIONLIMITED2005VANHORNEANDWACHOWICZFUNDAMENTALSOFFINANCIALMANAGEMENT,12E213AMOUNTPERCENTSUBJEC