Muaja, Mita Bella Lovely Virta

Business Finance1
Assignment #01 Chapter 02
ANSWERS
No.1 Individuals as a group are considered 'net suppliers' to the financial institutions, which means that they save more money than they borrow.
The consequences will be (1) a possible increase in demand of loanable funds at financial markets because (2) financial institutions cutback
their investments and loans due to lack of funds, (3) causing inaccessibility of capital for firms that then halts businesses. For instance, if the
supply of loanable funds for financial institutions decreases, real interest rate might increase which will then affect the willingness of
borrowing of demanders of funds at financial institutions; or even a cutback of investments and loans will be done by financial institutions. If
firms don't have access to capital, their business might be impeded. As a result, demanders of fund might seek other ways to raise funds, and one
means is through issuing securities at financial market in return for funds. Thus, the demand of loanable funds at financial market increases.

No.2 I think, each company has their specific needs that are visible from its decision of issuing securities at either money market or capital market. As a matter
of fact, money markets are short-term markets and are where transactions in short-term debts instruments (or marketable securities) occur. Therefore,
companies issuing securities at money market would be in need of funds for less than a year (short-term funding). On the contrary, capital markets are
the markets for the issuances and tradings of long-term securities. Hence, companies issuing securities at capital market would be in need of long-term
funding to either grow their business without going into debt, or merely to benefit from the expertise and resources of their stockholders.

No.3 ▪ What is the type of real estate that I am offered to invest in?
▪ Does the real estate's quality worth the investment? What is it's quality?
▪ How's their credit track record? Are their ratings good?
▪ Can you make it clearer to me about the kind of mortgage backed securities?

No.4 a. When firm pays $10,000 interest No. 5 a.

earnings before interest and taxes $ 40,000 X Y
less: interest $ 10,000 Purchase cost $ 2,000 $ 30,000
earnings $ 30,000 Selling price $ 2,250 $ 35,000
times 40%tax $ 12,000 Capital Gain $ 250 $ 5,000
earnings $ 18,000
b.
b. Firm pays preference share dividends $10000 X Y
earnings $ 18,000 Capital Gain $ 250 $ 5,000
less: preference share dividends $ 10,000 Tax rate 40% 40%
earnings available for common stockholders $ 8,000 Tax $ 100 $ 2,000
 undeveloped short answers
No. 1 Being net supplier for financial institutions
means that they save money more than they borrow.

Consequences will be inadequate fund in financial

institution causing firms to lose their business.

No. 2 In money market = short-term bonds, while

in capital market = long-term bonds