Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

Answers to Chapter 3 Questions

1. One person, the owner, is limited in the level of capital he or she can raise. However,
   corporations can issue stocks and bonds and raise millions or billions of dollars. Partnerships
   could raise some capital because two or more partners pool their funds together.


2. Corporations can raise a substantial amount of capital, have limited liability, easily transfer
   ownership, continuity of life, and free from the mutual agency relationship.


3. Corporation could issue preferred stock or corporate bonds because it does not dilute the
   shares of the common stockholders.


4. A common fraud is a subsidiary hides a corporation’s debt and excludes the debt from the
   corporation’s financial statements.


5. Unfortunately, this was a bad investment. Your rate of return is:

38 %

$ 25

$ 15 $ 25

100

$ 25

$ 0. 5

100 



return=   

6. If you had read the chapter carefully, the U.S. experienced a massive financial crisis in 2008.
   If you examined the U.S. financial system, many business leaders became ingenious at
   circumventing regulations.


7. A bank as part of a Keiretsu can cause problems. When the Japanese economy entered into a
   two-decade recession in the 1990s, the bank kept lending to its partners, even though it
   should not have.


8. You need to examine the incentives. Counselors want to maximize their salaries, so they
   enroll as many students as possible, even students who should not enroll. University’s
   management wants the best, who possess the drive and ability to finish their education.


9. This is a case when investors use a euphemism to describe investment opportunities.
   Emerging economies were third-world countries. Would you invest in an emerging market
   or a third-world country?


10. A country could produce within the interior of a production possibilities curve. It means a
    society is not using all of its resources, such as unemployment.


11. Company can circumvent trade barriers, has access to resources in China, could ask the
    Chinese government for tax breaks and subsidies, reduce economic exposure, and diversify
    its business. Furthermore, both labor and transportation costs are cheaper. Finally, a business
    in China could branch to other cities if the business experiences a strong demand for its
    products and services.