Here's a few questions I'm stuck on...
What makes a stock liquid?
A. the reputation and financial strength of the corporations that issue them.
B. the fact that a secondary market exists for publicly traded stocks.
C. the fact that they are generally short term financial assets.
Why might a firm opt for long-term debt instead of equity?
A. the impact of U.S. tax laws.
B. the debt is always cheaper.
C. equity is always cheaper.
first: the NYSE is a secondary market, answer B.
second: interest on debt is a tax deduction.
Thanks Bob appreciate it!
To determine the correct answers to these questions, let's break down each question and assess the options:
Question 1: What makes a stock liquid?
To answer this question, we need to understand what defines liquidity in the context of stocks. Liquidity refers to how easily a stock can be bought or sold in the market without causing a significant price change.
Option A states that the reputation and financial strength of the corporations that issue the stock make it liquid. While these factors can contribute to the overall attractiveness of a stock, they do not directly determine its liquidity.
Option B suggests that the existence of a secondary market for publicly traded stocks is what makes them liquid. A secondary market, such as a stock exchange, facilitates the buying and selling of shares among investors. This option is correct since having a secondary market enhances the ease and speed of trading, increasing the liquidity of a stock.
Option C states that stocks are generally short-term financial assets, implying that their short-term nature makes them liquid. However, this is not entirely accurate, as stocks can be held for both short and long-term periods. Therefore, this option does not fully explain stock liquidity.
Based on the above analysis, the correct answer to the question "What makes a stock liquid?" is B. the fact that a secondary market exists for publicly traded stocks.
Question 2: Why might a firm opt for long-term debt instead of equity?
Option A suggests that the impact of U.S. tax laws might influence a firm's decision to choose long-term debt over equity. Tax laws can play a role in the financial considerations of a firm, potentially making certain debt structures more attractive due to tax deductions or other incentives. This option is plausible and could be a valid reason in some cases.
Option B claims that debt is always cheaper than equity. However, this is an oversimplification, and it is not always the case. The cost of debt depends on factors such as interest rates, creditworthiness, and market conditions. Equity financing, on the other hand, involves sharing ownership and profit with shareholders, which may lead to a higher overall cost in the long run. Nevertheless, it is incorrect to say that debt is always cheaper than equity.
Option C states that equity is always cheaper than long-term debt. However, this is a generalization and not accurate. Equity financing typically carries higher costs compared to debt financing in terms of sharing profits and ownership. However, the cost of equity can also vary based on factors such as the firm's financial health, growth potential, and market conditions.
Considering the options provided, the most accurate answer to the question "Why might a firm opt for long-term debt instead of equity?" is A. the impact of U.S. tax laws. While this is not the only reason a firm may choose long-term debt, it is one factor that can influence the decision-making process.