Rey Joyce B.

Abuel July 3, 2018

AEC 13-ACB

SMYTH BARRY & COMPANY INTEGRATED CASE

C. Why are financial markets essential for a healthy economy and economic growth?

Financial markets are essential for a healthy economy and economic growth because the
economy depends on the efficient transfer of funds, without them the economy would not be
able to function. Clearly, the level of employment and productivity would be much lower as
well, so it is essential that financial markets function efficiently, not only quickly, but also at a
low cost.

G. If Apple Computer decided to issue additional common stock and Varga purchased 100
shares of this stock from Smyth Barry, the underwriter, would this transaction be a primary or a
secondary market transaction? Would it make a difference if Varga purchased previously
outstanding Apple stock in the dealer market? Explain.

If Apple Computer decided to issue additional common stock and Varga purchased 100
shares of this stock from Smyth Barry, who is acting as an investment banker in the
transaction, the transaction would be a primary market transaction. Yes, it would make a
difference if Varga purchased previously outstanding Apple Computer stock in the dealer
market, because the transaction would be a secondary market transaction.

J. After your consultation with Michelle, she asks to discuss these two scenarios with you.

1. While in the waiting room of your office, she overheard an analyst on the financial TV
network say that a particular medical research company just received FDA approval for
one of its products. On the basis of this “hot” information, Michelle wants to buy many
shares of that company’s stock. Assuming the stock market is highly efficient, what
advice would you give her?

I would tell Varga not to buy many shares of the stock because if the market is
highly efficient, the news she saw and the information she heard would have been
incorporated into the medical research company’s stock price. So, it’s probably too late
for her to capitalize the information.
2. She has read a number of newspaper articles about a huge IPO being carried out by
a leading technology company. She wants to purchase as many shares in the IPO as
possible and would even be willing to buy the shares in the open market immediately
after the issue. What advice would you have for her?

I would tell Varga that it is usually hard for small investors to receive shares of
hot IPOs before the stock begins trading, and that she won’t be able to receive an
allocation of shares before the trading starts since she can only get the shares after its
issue from the open market. Thus, the long-run track record of hot IPOs are not that
great so I would tell her not to buy from the technology company.