The capital allocation process involves the transfer of capital among different entities that include individuals, small businesses, banks, financial intermediaries, companies, mutual funds, and other market participants. In a developed market economy, capital flows freely between entities that want to supply capital to those who want it. This flow of capital can be classified in three ways. In the table below, identify the nature of capital transfer given in the scenario with its appropriate classification: Scenario Direct Transfers Indirect Transfers through Investment Banks Indirect Transfers through Financial Intermediaries Elliot invests $25,000 by purchasing 1,000 shares of an emerging markets mutual fund. This mutual fund invests in companies in Brazil, India, and China. He bought the mutual fund from the mutual fund company. Steve’s grandfather loans him $30,000 to start a small coffee shop in the East Village in Manhattan. A small startup firm has each of the partners contribute $50,000 in capital to help the company make payroll for the next three months. xEdu.com is an early-stage start-up company that plans to issue its first public common stock—called an initial public offering (IPO)—in six months. It hires an investment bank to underwrite the issue.

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter13: Capital Structure And Leverage

Section: Chapter Questions

Problem 1TCL

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Capital allocation process

The capital allocation process involves the transfer of capital among different entities that include individuals, small businesses, banks, financial intermediaries, companies, mutual funds, and other market participants. In a developed market economy, capital flows freely between entities that want to supply capital to those who want it. This flow of capital can be classified in three ways. In the table below, identify the nature of capital transfer given in the scenario with its appropriate classification:

Scenario	Direct Transfers	Indirect Transfers through Investment Banks	Indirect Transfers through Financial Intermediaries
Elliot invests $25,000 by purchasing 1,000 shares of an emerging markets mutual fund. This mutual fund invests in companies in Brazil, India, and China. He bought the mutual fund from the mutual fund company.
Steve’s grandfather loans him $30,000 to start a small coffee shop in the East Village in Manhattan.
A small startup firm has each of the partners contribute $50,000 in capital to help the company make payroll for the next three months.
xEdu.com is an early-stage start-up company that plans to issue its first public common stock—called an initial public offering (IPO)—in six months. It hires an investment bank to underwrite the issue.

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