Question

1. What is the primary factory that determines the price of securities? Cn you think of another factor that might significantly affect how investors value the first factor?
2. Discuss the differences, similarities, and ties between finance and accounting.
3. Discuss the relationship between finance and economics
4. How does the activity of investors in financial market affects the decisions of executives within the firm?
5. What are the significant financial advantages and disadvantages of the sole proprietorship/partnership form in comparison with the corporate form?
6. Is limited liability a meaningful concept? Why or why not? And if so, for whom?
7. What conflict(s) of interest can you imagine arising between members of the community which a company operates and some other stakeholders
8. Is the agency problem an ethical issue or an economic issue?
9. Compare and contrast the terms stockholder and stakeholder.

Answer 1

Solution:

Primary Factory that determines the price of securities :

Answer: Share prices are set based on a variety of factors, including a company's projected performance and its present value. For larger well-known private companies that make an IPO, the valuation is the most important factor. Market news, rules of supply and demand, and herd instinct can also affect initial share prices.

Differences between finance and accounting:

Answer:Accounting focuses on the day-to-day flow of money in and out of a company or institution, whereas finance is a broader term for the management of assets and liabilities and the planning of future growth.

If you want to exercise high-level control over a company’s strategy, finance could be for you. If you want to take a detailed look at a company’s books you’re probably more interested in accounting.

Accounting is more about accurate reporting of what has already happened and compliance with laws and standards. Finance is about looking forward and growing a pot of money or mitigating losses.

Similarities between finance and accounting:

Answer:Both are determining and measurement of costs for different accounting periods and even for different departments and sections.

Both are concerned with financial statements, revenues, expenses, assets, liabilities and cash flows.

Both are the parts of total accounting information system and Economic events are dealt in the both system of accounts.

The economic events are qualified only in terms of dollar.

Ties between finance and accounting:

Answer:Accounting involves bookkeeping, maintaining as well as calculating financial aspect of the company. So overall, accounting is related to the past and present financial aspects. Whereas, finance is related to future aspects.

The relationship between finance and economics:

Answer:Finance is the study of managing money for government or large companies, economics is the study of either the individual, company, national, or global economy of buying and selling, production, value of currency, etc.

Finance is about making correct investment decisions with capital, and is essentially different ways to discount cash flows back in time,economics is the study of scarce resource allocation.

How does the activity of investors in financial market affects the decisions of executives within the firm:

Answer:The primary goal of management is to maximise shareholder wealth, which is taken to be equivalent to maximising the price of the firm's stock. Senior corporate executives are therefore graded (and compensated) largely on the price performance of their companies' stock. That means they evaluate the impact of most decisions on investors in terms of how the decision will affect the price of securities For example, an action that's likely to make the company more risky will be considered very carefully because it might cause investors to lose interest in the stock, which would lower its price.

The significant financial advantages and disadvantages of the sole proprietorship/partnership form in comparison with the corporate form:

Answer:The proprietorship form is easy to start and is taxed only once. However, it is difficult for a proprietorship to raise money since it must do so by borrowing. The corporate form is harder to start, and suffers from double taxation. However, it allows the sale of stock to raise money, which is much more attractive than debt to potential investors in new small businesses.

Is limited liability a meaningful concept? Why or why not? And if so, for whom:

ANSWER:Limited liability is most meaningful to investors who own stock in firms they don't operate.To people who operate their own businesses the rule is of minimal value. With respect to loans, this is because banks demand personal guarantees from the owners of small firms to which they lend money.

With respect to lawsuits it is because individuals within companies can be sued for damages they cause along with the companies.

Conflict(s) of interest can you imagine arising between members of the community in which a company operates and some other stakeholders? (Hint: Think about pollution.)

ANSWER:It's generally cheaper to pollute than not to pollute; i.e., cleaning up industrial waste is expensive. That means profits are lower and shareholders are poorer if a company doesn't pollute. The people who live in the community, however, are better off if it doesn't foul the local environment. This creates a conflict between the community and shareholders

Is the agency problem an ethical issue or an economic issue:

ANSWER: It's both. It's an ethical issue because management may appropriate resources for their own benefit that rightly belong to stockholders. It's an economic issue because the resources so diverted make companies less efficient.

Compare and contrast the terms “stockholder” and “stakeholder.

ANSWER: A stockholder owns part of a company and is entitled to income in the form of dividends. Stockholders also elect directors who run the company. Stakeholders are groups of people who have an interest in how the firm is run. These include stockholders, employees, management, creditors and customers among others. Each group is interested in the firm’s operation and profitability for its own reasons. All stockholders are stakeholders, but all stakeholders aren’t stockholders.