34 Chapter 1 An Overview of Financial Management and the Financial Environment

Money markets are the markets for debt securities with maturities of less than 1 year. Capital markets are the markets for long-term debt and corporate stocks. Primary markets are the markets in which corporations raise new capital. Secondary markets are markets in which existing, already outstanding securities are traded among investors. Orders from buyers and sellers can be matched in one of three ways: (1) i n an open outcry auction, (2) through dealers, and (3) automatically through an electronic communications network (ECN). There are two basic types of marketsthe physical location exchanges (such as the NYSE) and computer/telephone networks (such as Nasdaq).

Questions
Define each of the following terms: a. Proprietorship; partnership; corporation b. Limited partnership; limited liability partnership; professional corporation c. Stockholder wealth maximization d. Money market; capital market; primary market; secondary market e. Private markets; public markets; derivatives f. Investment banker; financial service corporation; financial intermediary g. Mutual fund; money market fund h. Physical location exchanges; computer/telephone network i. Open outcry auction; dealer market; electronic communications network (ECN) j. Production opportunities; time preferences for consumption k. Foreign trade deficit What are the three principal forms of business organization? What are the advantages and disadvantages of each? What is a firms fundamental, or intrinsic, value? What might cause a firms intrinsic value to be different than its actual market value? The president of Eastern Semiconductor Corporation (ESC) made this statement in the companys annual report: ESCs primary goal is to increase the value of our common stockholders equity. Later in the report, the following announcements were made: a. The company contributed $1.5 million to the symphony orchestra in Bridgeport, Connecticut, its headquarters city. b. The company is spending $500 million to open a new plant and expand operations in China. No profits will be produced by the Chinese operation for 4 years, so earnings will be depressed during this period versus what they would have been had the decision not been made to expand in that market. Discuss how ESCs stockholders might view each of these actions, and how the actions might affect the stock price.
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