You are correct that financial markets serve as a platform for bringing together people, companies, and governments with surplus funds and those in need of raising capital. Your understanding of investment banking houses and their role in assisting companies in raising capital is also accurate.
However, the question seems to be focusing on the mechanism through which financial markets allocate capital to corporations, and how market participants play a part in this process. In that sense, the answer would be (A) because it highlights the role of market participants in determining the value of a corporation's securities through their expectations. This, in turn, impacts the capital available to a corporation, as higher perceived value can attract more investment.
While the opinions of investment bankers are undoubtedly important, they are not the primary means through which financial markets directly allocate capital to corporations. Rather, they facilitate the process by helping raise capital, but their opinions do not directly determine the allocation of capital in the financial market.
32. the financial markets allocate capital to corporations by
A. reflecting expectations of the market participants in the prices of the corporation's securities
B. requiring higher returns from companies wih lower risk than their competitors
C. rewarding companies with expected high returns with lower relative stock prices
D. relying on the opinion of investment bankers
I narrowed my answer down to (A or D). I am leaning toward A as my final answer because.....
There are many types of financial markets, but all financial markets have one thing in common. The markets bring people, companies, and governments with surplus money together with people, companies, and governments than need to raise capital.
I restated the question in my head as (how does a financial market allocate capital to a corporation?)
There are many types of financial institutions and investment banking houses help companies to raise capital by designing features that are currently attractive to investors and then buy these securities from the company and resell them to savers.
This question confuses me because a financial market is a meeting place for buyers and sellers with the purpose of raising capital at an accecpetable risk vs. return. A financial market does not allocate capital.
Then investment banking houses will investigate the buyers in the market and learn how much they are will to spend and assist the sellers in developing appropriate securities and the banking houses will buy the securities. The investment banking house will allocate capital to the seller of the securities, so the investment banking houses are the ones who give the capital to the companies in exchange for the securities.
I chose (A) as my final answer, but D is also important, because the opnion of the investment banking houses will determine how much they are willing to spend on the companies securities.
1 answer