BUS FPX 3062 Assessment 1 Financial Management and Markets
Student Name
Capella University
BUS-FPX3062 Fundamentals of Finance
Prof. Name
Date
Financial Management and Markets
1. Ethical Considerations in Martha Stewart’s Case
The ethicality of Martha Stewart’s actions, particularly insider trading, from a financial management perspective is subject to debate. Stewart’s decision to sell ImClone stocks was influenced by information provided by her broker regarding the CEO’s stock sale, which is not inherently unethical as such transactions are publicly disclosed. Therefore, Stewart may not have perceived her actions as unethical given the information available to her. However, her subsequent attempts to cover up her actions were clearly unethical. These actions, though, are not directly related to financial management decisions or responsibilities.
2. Importance of Wealth Maximization over Profit Maximization
Wealth maximization is preferred over profit maximization as it takes a long-term perspective, focusing on sustained growth and returns. While profit maximization may boost shareholder equity in the short term, it can lead to behaviors that may undermine long-term performance or create other issues over time.
3. Classification of Market Transactions
Markets
Transactions
Primary Market
Secondary Market
| Transaction | Primary Market | Secondary Market |
|---|---|---|
| IBM issues 200 million dollars of new common stock | X | |
| The New Company issues 50 million dollars of common stock in an IPO | X | |
| IBM sells 5 million dollars of GM preferred stock from its marketable securities portfolio | X | |
| The Magellan Fund buys 100 million dollars of previously issued IBM bonds | X | |
| Prudential Insurance Co. sells 10 million dollars of GM common stock | X |
4. Classification of Financial Instruments
| Financial Instruments | Transactions | Money Market | Capital Market |
|---|---|---|---|
| Federal Funds | X | 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 Government Bonds | X |
BUS FPX 3062 Assessment 1 Financial Management and Markets
5. Explanation of Yield Curve
The shape of the yield curve is explained by both the Unbiased Expectations Theory (UET) and the Liquidity Premium Theory (LPT). Under UET, the curve slopes upward if future one-year rates are expected to increase, remains flat if rates are expected to stay the same, and slopes downward if future rates are expected to fall. LPT suggests that long-term rates are determined by the geometric averages of current and expected short-term rates, adjusted by liquidity risk premiums that increase with maturity. Therefore, an upward-sloping yield curve may indicate expectations of rising, flat, or falling future interest rates, as long as liquidity premiums rise sufficiently with maturity.
6. Calculation of Equilibrium Rate of Return
The equilibrium rate of return for the security is calculated as follows:
Default risk premium + Inflation risk premium + Real risk-free rate + Liquidity risk premium + Maturity risk premium
= 2% + 1.75% + 3.50% + 0.25% + 0.85% = 8.35%
References
The Associated Press. (2014, August 15). Timeline of Events in Stewart Stock Scandal. Chicagotribune.com; Chicago Tribune. https://www.chicagotribune.com/sns-apmartha-stewart-chronology-story.html
Cornett, M. M. (2021). M: Finance (5th Edition). McGraw-Hill Higher Education (US). https://capella.vitalsource.com/books/9781264109685
BUS FPX 3062 Assessment 1 Financial Management and Markets
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