Chapter 8

Question 1

Sources of external Funding for companies

Answer 1

1. Issue Bonds(debt)
2. Sell Stock(Equity)
3. Bank loan(debt)

Question 2

What is the largest component of external funds?

Answer 2

Bank Loans

Question 3

How do financial intermediaries lower transaction cost

Answer 3

1. Economies of Scale

2. Expertise

Question 4

Economies of Scale

Answer 4

financial intermediaries are able to pool many small savers together to create a large pool that lowers average cost

Question 5

adverse selection in lemon car problem

Answer 5

prices of “lemon” cars will be lower than market value making them sold more often and good cars the owners feel their car is worth more so they won’t offered

Question 6

Tools to reduce adverse selection(Stock Market)

Answer 6

1. Research companies private production of info
2. Gov’t Regulation SEC
3. Financial intermediary
4. Collateral and new worth requirements

Question 7

How is collateral used in the housing mortgage mkt

Answer 7

Have down payments to make people have something to lose if they don’t go through

Question 8

Principle agent problem

Answer 8

interest with one isn’t the same as another’s employer wants you to productive all the time while you want to slack off.

Question 9

How do we resolve moral hazard issue?

Answer 9

1. Stock holders monitor management, but expensive
2. Gov’t regulation (if people are caught jail time, fines)
3. Financial intermediation (venture capitalist, give up ownership)
4. Use debt

Question 10

Conflict of interest in the Enron- Arthur Anderson case

Answer 10

1. Economies of scope

offering many services to this company and making a lot of money from the firm and didnt want to upset Enron

Question 11

Economies of scope

Answer 11

less costly for a firm to offer multiple products than for speciality firms to produce each good individually