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 investing in the IPO’. 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 the 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 a 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’. Moreover, they don’t give 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’.