Week 1 Assignment Template Respond to the following questions using grammatically correct language. 1.Martha Stewart was accused of insider trading for selling ImClone stocks a day before the stock went down in value. The securities fraud charges were thrown out, but she served five months in prison for obstruction of justice and lying to investigators. Do you think what Martha did (insider trading) was unethical from a financial management point of view? Explain. Martha's actions can be classified as unethical due to her possession of insider information regarding an FDA product refusal within the company, which prompted her to unload her stocks with the knowledge that their value would plummet the following day. She profited from this situation while being aware of the imminent decline. The breach of the fiduciary relationship between Stewart and her stockbroker, along with his firm, was evident when the stockbroker instructed his assistant to provide false information about a stop-loss order aimed at selling the stocks once they dipped below $60 a share to shield Stewart from potential insider trading repercussions. The entire scenario was marred by deceit, making it unethical. 2.Explain why wealth maximization is more desirable than profit maximization as a goal for any company. Wealth maximization is a more desirable goal for a company compared to profit maximization because wealth maximization takes a long-term view. In contrast, profit maximization is often short-term in nature. By focusing on wealth, a company is more likely to make decisions that benefit its stakeholders over the long haul rather than just aiming for immediate but potentially unsustainable profits. Moreover, wealth maximization focuses on shareholders since wealth maximization is closely aligned with shareholders' interests. Shareholders are the ultimate owners of a company, and their 1
wealth is directly tied to the value of their investments. By prioritizing wealth maximization, a company seeks to enhance shareholder value, which aligns with the owners' interests. Finally, wealth maximization enables proper risk management. Companies pursuing wealth maximization are generally more inclined to consider risk management. Excessive focus on profit maximization may lead to riskier decisions to achieve short- term gains, while wealth maximization encourages a more balanced approach, considering both risk and return. 3.Classify the following transactions as taking place in the primary or secondary markets by placing an "X" in the appropriate cells for questions 3 and 4. Markets TransactionsPrimary MarketSecondary Market IBM issues 200 million dollars of new common stock. X The New Company issues 50million dollars of common stock in an IPO. x IBM sells 5 million dollars ofGM preferred stock from its marketable securities portfolio. X The Magellan Fund buys 100million dollars of previously issued IBM bonds. X Prudential Insurance Co.sells 10 million dollars of GM common stock. x 2
4.Classify the following financial instruments as money market securities or capital market securities: Financial Instruments TransactionsMoney MarketCapital Market Federal Funds.x Common Stock. x Corporate Bonds.x Mortgages. x Negotiable Certificates of Deposit. x U.S. Treasury Bills.x U.S. Treasury Notes. x U.S. Treasury Bonds.x State and GovernmentBonds. x 5.Explain the shape of the yield curve concerning theunbiased expectationsandliquidity premiumtheories. The unbiased expectations theory suggests that the configuration of the yield curve is solely influenced by investors' outlook on future interest rates. Under this theory, the present yield on a bond with a specific maturity mirrors the market's forecast for the average short-term interest rate during the bond's lifetime. The unbiased expectations theory also suggests that investors are consistently rational and possess perfect foresight regarding future interest rates, which is often not true in real-world financial markets. In response to these variations, the liquidity premium theory is introduced, incorporating the 3
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