Exam 3: Financial Markets and the Investment Banking Process

Money markets are markets for

Informational efficiency generally exists when the financial markets have a large number of participants in search of the most profitable investments.

Machina Corporation is financing an ongoing construction project.The firm needs $8 million of new capital during each of the next three years.The firm has a choice of issuing new debt and equity each year as the funds are needed, or issuing the debt now and the equity later.The firm's capital structure is 40 percent debt and 60 percent equity.Flotation costs for a single debt issue would be 1.6 percent of the gross debt proceeds.Yearly flotation costs for three separate issues of debt would be 3.0 percent of the gross amount.Ignoring time value effects due to timing of the cash flows, what is the absolute difference in dollars saved by raising the needed debt all at once in a single issue rather than in three separate issues?

All financial markets are physical locations in which parties meet to exchange financial assets.

The trade-through rule states that

When a firm issues new equity, market pressure applies first to the new shares issued and then to existing shares.Subsequent to the new issue, the value of the new shares will rise to the equilibrium price of the old shares.

Going public establishes a true market value for the firm and ensures that a liquid market will always exist for the firm's shares.