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Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firms clients is Michelle Dellatorre, a professional tennis player who has just come to the United States from Chile. Dellatorre is a highly ranked tennis player who would like to start a company to produce and market apparel that she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. Dellatorre is also very bright, and, therefore, she would like to understand, in general terms, what will happen to her money. Your boss has developed the following set of questions which you must ask and answer to explain the U.S. financial system to Dellatorre.

A-Why is corporate finance important to all managers? Corporate finance provides the skills managers need to identify and select the corporate strategies and individual projects that add value to their firm. They estimate the funding requirements of their company, and develop strategies for getting those funds.

C- How do corporations go public and continue to grow? What are agency problems? A company goes public when it sells stock to the public. In addition, an initial public as the firm grow, it might issue additional stock or debt. An agencys problem occurs when the managers of the firm act in their own self-interests and not in the interests of the shareholders.

D- What should be the primary objective of managers? The corporations primary goal is stockholder wealth maximization, which turns to maximizing the price of the firms common stock. 1. Do firms have any responsibilities to society at large? Firms have an ethical responsibility to provide a safe working environment, to avoid polluting the air or water, and to produce safe products. On the other hand, the most substantial cost-increasing actions will have to be put on a mandatory rather than a voluntary basis to make certain that the burden falls regularly on all businesses. 2. Is stock price maximization good or bad for society? The same actions that maximize stock prices also benefit society. Stock price maximization requires useful, low-cost operations that produce high-quality goods and services at the lowest possible cost. Stock price maximization requires the development of products and services that consumers want and need, so the profit intention leads to new technology, to new products, and to new jobs. Also, stock price maximization requires efficient and courteous service, enough stocks of merchandise, and well-

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located business establishments--factors that are all necessary to make sales, which are essential for profits. 3. Should firms behave ethically? Yes. Results of a recent study indicate that the executives of most major firms in the United States believe that firms do try to maintain high ethical standards in all of their business dealings. Furthermore, most executives believe that there is a positive correlation between ethics and long-run profitability. Conflicts often arise between profits and ethics. Companies must deal with these conflicts on a regular basis, and a failure to handle the situation properly can lead to huge product liability suits and even to bankruptcy. There is no room for unethical behavior in the business world (Crim, D, 2006).

H- How do free cash flows and the weighted average cost of capital interact to determine a firms value?

A firms value is the sum of all future expected free cash flows, converted into todays dollars.

(p. 12 Brimham, E).

J- What do we call the price that a borrower must pay for debt capital? What is the price of equity capital? What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy? The interest rate is the price paid for borrowed capital, while the return on equity capital comes in the form of dividends plus capital gains. The return that investors expect on capital depends on production opportunities, time preferences for spending, risk, and price increases. Production opportunities refer to the returns that are available from investment in productive assets: the more productive a manufacturer firm believes its assets will be, the more it will be willing to pay for the capital necessary to obtain those assets. Time preference for consumption refers to consumers preferences for current expenditure versus savings for future consumption. Consumers with low preference for current consumption will be willing to lend at a lower rate than consumers with a high preference for current consumption. Inflation refers to the tendency of prices to rise, and the higher the expected rate of inflation, the larger the required rate of return.

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Risk, in money and capital market context, refers to the chance that a loan will not be repaid as promised--the higher the perceived default risk, the higher the required rate of return. Risk is also linked to the maturity and liquidity of a security. As discussed, the longer the maturity, the less marketable the security, and the higher the required rate of return. The preceding discussion related to the general level of money costs, but the level of interest rates will also be influenced by such things as fed policy, fiscal and foreign trade deficits, and the level of economic activity. Also, individual securities will have higher yields than the risk-free rate because of the addition of various premiums as discussed in weekly discussion.

K- What are some economic conditions (including international aspects) that affect the cost of money? There are numerous ways that the economic conditions affect the cost money. A recession affects the cost of money because the consumer demand will be low, companies will slow down on hiring, and companies will need to resist from increasing prices. The government also takes place in affecting the cost of money. If the government happens to spend more money than it compiles from tax revenues, the government will then have to borrow money or print more money which increases the supply. The cost of money is affected by foreign trade deficits, when a trade deficits take in to place it must be financed (p. 20, Brigham).

P- Briefly explain mortgage securitization and how it contributed to the global economic crisis? Mortgage securitization is when a mortgage is sold by the originator in exchange for cash to a securitizing firm. Mortgages were sold in pools which created new securities which declared the cash flows from the pools of mortgages. The first part of the process did not change the amount of contingency within the mortgages. The process had their fair amount of risk, some were less risky and some were a high risk. Each new security that was created, the investment banks and rating agencies were accumulating fees. This contributed by allowing borrowers to obtain a mortgage due to the idea of lower rates for mortgages meaning to be more affordable. Originators and securitizers also wanted more mortgages rather than caring for the quality (p37, Brigham). Works Cited Brigham, Ehrhardt (03/2010). Financial Management: Theory & Practice [13] (VitalSource Bookshelf), Retrieved from http://online.vitalsource.com/books/1111894922/S1.1/12 Crim, D., Seijts, G., (March/April 2006). WHAT ENGAGES EMPLOYEES THE MOST OR, THE TEN CS OF EMPLOYEE ENGAGEMENT. Retrieved from http://www.iveybusinessjournal.com/topics/theworkplace/what-engages-employees-the-most-or-the-ten-cs-of-employee-engagement

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