2) Distinguish Between the Money and Capital Markets

1) What are financial markets? What function do they perform? How would an economy be worse off without them?

Financial markets report price for each good; they are institutions and procedures that facilitate transactions in all types of financial claims (securities). They exist in order to allocate the supply of savings from those economic units with a surplus to those with a deficit.

The economy would suffer without a developed financial market system because the wealth of the economy would be less without them. Rate of capital formation would not be as high, followed by the slowed rate of stock contribution to (1) dwellings, (2) productive plant and equipment, (3) inventory, and (4) consumer durables. Normal business activities would be funded slowly or not at all.

2) Distinguish between the money and capital markets.

Money Markets facilitates transactions using short-term financial instruments; whereas, Capital Markets facilitates transactions using long-term financial instruments.

3) What major benefits do corporations and investors enjoy because of the existence of organized security exchanges?

(a) continuous market – price volatility reduced

(b) establishing & publicizing fair security prices – objective auction-type determination of price

(c) helping business raise new capital – new firms have a place to publicize security offerings whose price will be subjected to a competitive determinant rather than having to assign prices

4) You are a hard-working analyst in the office of financial operations
for a manufacturing firm that produces a single product. You have developed the following cost
structure information for this company. All of it pertains to an output level of 10 million units.
Using this information, find the break-even point in units of output for the firm.
Return on operating assets ??25%
Operating asset turnover ??5 times
Operating assets ??$20 million
Degree of operating leverage ??4 times

1) Compute the operating profit margin:

(Margin) x (Turnover) = Return on operating assets

(M) x (5) = 0.25

M = .05

2) Compute the sales level associated with the given output

level:

= $100,000,000

3) Compute EBIT:

(.05) ($100,000,000)

= $5,000,000

4) Compute revenue before fixed costs. Since the degree of operating leverage is 4 times, revenue before fixed costs (RBF) is 4 times EBIT as follows:

RBF = (4) ($5,000,000) = $20,000,000

5) Compute total variable costs:

(Sales) - (Total variable costs) = $20,000,000

$100,000,000 - (Total variable costs) = $20,000,000

Total variable costs = $80,000,000

6) Compute total fixed costs:

RBF - Fixed costs = $5,000,000

$20,000,000 - fixed costs = $5,000,000

Fixed costs = $15,000,000

7) Find the selling price per unit, and the variable cost per unit:

= $10

= $8

8) Compute the breakeven point:

= 7,500,000 Units

5) Allison Radios manufactures a complete line of radio and communication equipment for law enforcement agencies. The average selling price of its finished product is $180 per unit. The variable cost for these same units is $126. Allison Radios incurs fixed costs of $540,000 per year.
a. What is the break-even point in units for the company?

= 10,000 units