Why are institutional investors important in today's business world? Because institutional investors such as pension funds and mutual funds own a large percentage of major U.S. companies, they are having more to say about the way publicly owned companies are managed. As a group, they have the ability to vote large blocks of shares for the election of a board of directors, which is suppose to run the company in an efficient, competitive manner. The threat of being able to replace poor performing boards of directors makes institutional investors quite influential. Since these institutions, like pension funds and mutual funds, represent individual workers and investors, they have a responsibility to see that the firm is managed in an efficient and ethical way Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maximization of shareholder wealth? The problem with a profit maximization goal is that it fails to take account of risk, the timing of the benefits is not considered, and profit measurement is a very inexact process. The goal of shareholders wealth maximization implies that the firm will attempt to achieve the highest possible total valuation in the marketplace. It is the one overriding objective of the firm and should influence every decision 1-8 When does insider trad ing occur? What government agency is responsible for protecting against the unethical practice of insider trad ing? Insider trad ing occurs when someone has information that is not available to the public and then users the information to profit from trading in a company's common stock In the terms of the life of the securities offered what is the difference betwe money and capital markets? Money markets refer to those markets dealing with short-term securities that have a life of one year or less. Capital markets refer to securities with a life of more than one year 1-10 What is the difference between a primary and a second ary market? a primary market refers to the use of the financial markets to raise new funds ld to the public(institutions and individuals ) they trade in the secondary market between investors. It is in the secondary market that prices are continually changing as investors buy and sell securities based on the expectations of corporate prospects Copyright o2005 by The McGranr-Hill Companies, Inc.Copyright © 2005 by The McGraw-Hill Companies, Inc. S-2 1-6. Why are institutional investors important in today's business world? Because institutional investors such as pension funds and mutual funds own a large percentage of major U.S. companies, they are having more to say about the way publicly owned companies are managed. As a group, they have the ability to vote large blocks of shares for the election of a board of directors, which is suppose to run the company in an efficient, competitive manner. The threat of being able to replace poor performing boards of directors makes institutional investors quite influential. Since these institutions, like pension funds and mutual funds, represent individual workers and investors, they have a responsibility to see that the firm is managed in an efficient and ethical way. 1-7. Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maximization of shareholder wealth? The problem with a profit maximization goal is that it fails to take account of risk, the timing of the benefits is not considered, and profit measurement is a very inexact process. The goal of shareholders wealth maximization implies that the firm will attempt to achieve the highest possible total valuation in the marketplace. It is the one overriding objective of the firm and should influence every decision. 1-8. When does insider trading occur? What government agency is responsible for protecting against the unethical practice of insider trading? Insider trading occurs when someone has information that is not available to the public and then users the information to profit from trading in a company's common stock. 1-9. In the terms of the life of the securities offered, what is the difference between money and capital markets? Money markets refer to those markets dealing with short-term securities that have a life of one year or less. Capital markets refer to securities with a life of more than one year. 1-10. What is the difference between a primary and a secondary market? A primary market refers to the use of the financial markets to raise new funds. After the securities are sold to the public (institutions and individuals), they trade in the secondary market between investors. It is in the secondary market that prices are continually changing as investors buy and sell securities based on the expectations of corporate prospects