Finance

Q.1    hat is the capital market How is the primary market different from the secondary market In your opinion, are these markets efficient Why or why not

The term Capital Market refers to those markets where only broad and long term range of financial products and services like Mortgages, Treasury Notes and government Bonds and Corporate Bonds etc. are traded. This is the place where companies and government raise their funds by issuing long term bonds where any potential investor or company buys a bond for certain time period and issuing bond authority promised to pay higher return to that person.

THE BASIC DIFFERENCE BETWEEN THE PRIMARY AND SECONDARY MARKET
Newly issued securities firstly offer in the primary market to the investors. In this type of transaction investments banks are engaged and settle all the arrangements of IPOS (Initial Public Offering). Secondary market is quite different from primary market because in this market existing and outstanding securities are traded in stock exchange.

Yes, these markets are efficient and investors shown great deal of interest in it. Basically, these markets provides information to the potential investors about the stocks, bonds etc. of the companies and importantly allows them to trade securities under the one roof.

Q.2    What is three primary roles of the SEC How does the Sarbanes Oxley Act augment the SECs role in managing financial governance Do you think that businesses are more ethical after the passing of the Sarbanes Oxley Act What examples are there to support you answer.
   
The three objectives of Sarbanes Oxley Act are to provide a guarantee that securities market is functioning in a comfortable and organized manner. Securities industry specialists are dealing clearly with their customers. Corporations provide all material information to public so that investors made sound and accurate decisions about investments. Sarbanes Oxley Act enhanced the role of financial governance by mandating companies to disclose the financial information in front of investors. The act contains 11 sections ranging form additional corporate board responsibilities to criminal penalties. These all sections empowered and ensured the finance governance. After the implementation of this act companies are more ethical about the facts and figures. Because all financial information must be disclosed in front of the investors and if there is any sort of manipulation occurred in the financial information which in the lead towards penalties. For instance, investors are more relying on this act and if company manipulates their financial information that leads the investors to make a wrong decision. In the end, potential investor sues over the company in the court of law.

Q3    Which ratios measure a corporations liquidity What are some of the problems associated with using financial ratios How would the DuPont analysis overcome some of these problems

The following are the below ratios measure the Liquidity of the company
Current Ratio
Quick Ratio Net
Working Capital Ratio
Some problems associated with using financial ratios
Ratio analysis just deals with numeric values printed on financial statements and dont examine the other factors that affected the performance of the company.

It is difficult to predict whether certain ratio is good or bad. Like, the high current ratio of the company that showed an excellent liquidity position but on the other hand this shows that company is holding excessive amount of cash.

Different accounting procedures may affect the analysis of the ratio. Currently there are four commonly used methods to measuring the inventory. (1) Specific identification (2) FIFO (3) LIFO (4) Weighted Average. Different Depreciation methods to calculate depreciation like (1) Straight line (2) Diminishing Method etc.

The affect of inflation is not properly proposed in financial statements and figures based on historical numbers.

The differences in approaches to analyze the ratio also create the hurdle in elaborating the clear and fair finding of the ratio.

DuPont analysis means assets are measured on the basis of gross book value instead of net book value in order to show the higher return on equity (ROE). This analysis gives a plat form to resolve the some problems regarding the interpretation of the ratio like taken the assets on gross book value provide a higher return on equity. It avoids the effect of accounting depreciation method that resulting in higher ROE.