September 14, 2017
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The Capital Market

1. That is the capital market? How is the primary market different from the secondary market? In your opinion, are these markets sufficient? Explain. Capital markets are common markets that involve individuals and institutions taking part in financial securities. This covers both public and private sectors organization and institutions and the major interest is to sell securities on the capital markets in order to raise funds for the institutions. These markets can be classified as either primary or secondary markets. ‘Both the bond and stock markets make the main part of the capital markets and it is in essence why companies engage in the investing in the IPO’ (Gurusamy, 2009, p. 73). Mortgages, equities and bonds and other investment funds are also traded. The primary markets involve the distribution of new issues among the investor. Secondary markets in which the already existing markets securities are traded. The secondary market has to been used to refer to the market for any used good or asset which can also be an alternative use for an existing product or asset on which the customer base is the consideration of the second market. The primary market involves issuance of primary securities or financial instruments or the purchase of the securities directly from the issuers such as corporations that give the issuers as corporation giving out the shares and an IPO. These markets are sufficient and vital in that they allow the securities to be transferred from one investor and speculator to another. 2. What ratios measure a corporation’s liquidity? What are some problems associated with using such ratios? How would the DuPont analysis overcome these problems? Current ratio, quick ratio and the operating cash flow ratio are used in measuring the corporation’s liquidity. The current ratio usually refers to the ratio of current assets to the current liabilities while the quick ratio which is also known as the acid-test establishes whether the corporation can pay short-term liabilities without selling the inventory. On the other hand, operating cash flow ratio is determined by summing up the cash and the marketable securities over the current liabilities. It does not include all the current assets but the cash and cash equivalents. Basically, all these ratios try to measure if the firm can be able to pay its short-term debts by comparing the liquid assets to the short term liabilities. When the value of the ratio is higher then there is a larger margin of safety for the corporation to pay-off its short-term debts. However, these ratios have a great problem because they differ depending on the industry or the kind of corporation hence giving different values. ‘They also depend on the balance sheet date and therefore they cannot determine the position of the corporation round the year’ (Kirsch, 2010, p.113). Moreover, they don’t give the future trends but only give the present and past trends of the organization. Inflation cannot also be determined properly by these ratios. ‘These problems can be solved by using the DuPont analysis because it gives information on why the corporation’s profitability is low or high basing on its performance and the returns on equity’ (Rocher & Patrick, 2005, p 51). 3. What is the main difference between an investment banker and a commercial banker? Why were commercial banking and investment banking separated by the Banking Act of 1933? How has this separation affected current day banking practices Regulations have changed the way in which commercial banking and investment banking is conducted. ‘A commercial banking has the main role in taking deposits for checking and savings accounts from the consumers which is not done by the investment banking’ (Efrat, 2005, p.35). They do not have an inventory of cash deposits to lend money as a commercial bank. It deals mainly with stock and bond markets. This separation was done in order to maintain the core aspects of these different lines of businesses in order to remain intact. ‘Both the investment bank and the commercial bank have the same end’ (Kapoor, 2004, p.56). That is, if a company may need a loan, it may consult a commercial bank for a financial support in form of a loan or it may also consult an investment bank to sell equity or debts in form of stocks or bonds. 4. What are three primary roles of the U.S. Securities and Exchange Commission (SEC)? How does the Sarbanes-Oxley Act of 2002 augment the SEC’s role in managing financial governance? Do you think that businesses became more ethical after Sarbanes-Oxley was passed? Provide examples to support your answer. The U.S Securities and Exchange Commission has the role of protecting the investors, maintaining fair orderly and efficient markets and finally facilitates the capital formation. ‘The Sarbanes- Oxy act requires the SEC to be able to conduct a study on financial adoption system of reporting which is a principle based accounting system’ (Wolf, 2005, p.109). This has the advantage of protecting investors in the USA from some of the big company collapses that happened as early as 2000. The SOX a timely solution for the people and companies, it was able to eliminate a number of conflicts of interest and established a self defensive checks and balances to work as they were supposed to have been working. This created room for the development of the private sector, the nonprofit corporation, public companies accounting oversight boards whose role was that they were to oversee the accountants of public companies.

September 14, 2017
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