Question

1.Which of the following is a strength of the corporate form of business?

a. Limited life of the business

b. Unlimited access to capital

c. Unlimited liability

d. Double taxation of income

2.

A financial intermediary is an institution that:

a. None of the above

b. Issues stocks and sells shares in itself to generate cash for investing for the stockholders

c. Lends money to borrowers and raises that capital by issuing liabilities against itself

d. Lends money to borrowers and raises that capital by issuing equity

Answer 1

1.Which of the following is a strength of the corporate form of business?

Ans b. Unlimited access to capital

Large corporations find innovative ways to raise capital into financial expansion.

Bonds

Bond is a written promise to return a certain amount on a due date or in the future. In the interim, bondholders will receive interest payments at a fixed rate on specified dates. Owners can sell the bond to another person before they can pay.

Corporations benefit by issuing bonds, because the interest rate paid to investors is usually lower than for other types of loans, and the interest paid on the bonds is considered a tax-deductible business expense. However, even when profits do not show up, corporations must pay interest. If investors are skeptical of the company's ability to meet its interest obligations, they will either refuse to buy its bonds or demand a higher interest rate to compensate for their increased risk. For this reason, small corporations can raise very little capital by issuing bonds.

Preferred stock

To raise capital, a company may choose to issue new "preferred" stock. Buyers of these shares have the privilege of being in a situation where the underlying company is in a financial crisis. If profits are limited, bondholders can pay their dividends to preferred stockholders after they receive their guaranteed interest payments, but before the payment of common stock dividends.

Selling common stock

If a company is in good financial health, it can raise capital by issuing common stock. Typically, investment banks help companies issue stock, if the public refuses to buy any new shares issued at a fixed price. Although common stockholders have the right to choose a board of directors of a corporation, they place themselves behind bonds and preferred stock when sharing profits.

Investors are attracted to two types of stocks. Some companies pay huge dividends, which offer investors a steady return. Others do not pay dividends in the hope that they will attract shareholders by improving corporate profits - hence the value of shares. In general, the value of the shares increases as investors expect corporate returns to rise.

Companies whose share price rises substantially "divide" the shares, often paying each owner, that is, one additional share per share. It does not raise any capital for the corporation, but it makes it easier for shareholders to sell shares in the open market. In a two-for-one split, for example, the price of the stock is initially cut in half and attracting investors.

Borrowing

Companies can finance short-term capital - usually inventories - by borrowing from banks or other lenders.

2 A financial intermediary is an institution that:

Ans  a. None of the above

A financial intermediary is an entity that acts as an intermediary between two parties in a financial transaction such as a commercial bank, investment bank, mutual fund or pension fund. Financial intermediaries offer many benefits to the average consumer, including financial systems engaged in security, liquidity, banking and asset management. In some areas, such as investments, the advancement of technology threatens to eliminate the financial intermediary, but the fragmentation in other areas of finance, including banking and insurance, is minimal.

• Financial intermediaries act as intermediaries for financial transactions, usually between banks or funds.
• These intermediaries help to create efficient markets and reduce the cost of doing business.
• Intermediaries can provide leasing or factoring services, but do not accept investments from the public.
• Financial intermediaries offer incentives to collect risk, reduce costs, and provide financial quality.