principles of finance 1 W7 assignment

Principle of Finance 1 Week 7 Assignment

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18-8 MINICASE QUESTION

The agencies that regulate the security markets according to (Peters, 2015) include; Federal Reserve Board which deals with impacting credit, money and liquidity, Federal deposit insurance corporation deals with insurance, office of the comptroller of the currency which involves monitoring banks in the U.S, office of thrift supervision that deals with monitoring and regulating loans, commodity futures trading commission which gives and protects future markets against forms of fraud.

• What agencies regulate security markets?

The financial industry regulatory authority which deals with brokers and financial professionals, state bank regulators deal with state-chartered banks, state insurance regulators deals with insurance industry and finally state security regulators which deal with investment advisor and finally securities exchange commission which regulate investment investors.

Start-up firms can be financed in so many different ways. There are two major ways to finance start-up firms. This includes; debt financing and equity financing ( Altfest , 2016). Equity financing involves giving out a portion of your firm can be in terms of shares or stock or ownership units in order for the firm to be financed. It is usually a permanent form of investment and the duration of payment usually takes a long term kind of duration of time. The firms usually come up with ways that control the ownership rights of the investors. Some of the investors are usually given a position at the board of members depending on their investment in the company.

• How are start-up firms usually financed

According to (Altfest , 2016), the equity financing can be acquired from personal savings where it involves using money from one’s savings, some equity real estate loans, funds from retirement or insurance policies. Friends and family can also give out financing in form of equity where they agree to invest in the firm for some ownership. This makes the friends or relatives gain profits inform of ownership interests.

Venture capital and angel investors are also under equity financing. Venture capital is a form of financing that comes from corporate people, individuals or firms who deal with investing in businesses in exchange for the share of a firm. Angel investors gives more concentration to small businesses with the aim that they can see them grow and become successful. Other equity financing involves government grants , equity offerings where a company sells its shares to the public, initial public offerings where it involves a company that is interested in investing in its own products or services. Warrants are also a form of equity financing suitable mostly for long term financing (LeRoy & Werner, 2014).

A start-up firm can use debt for financing. This usually involves a company borrowing money from another company or investor or the bank and it should be repaid at a certain period of time. Debt financing can either be secure where a leverage can be issued failure to paying the loan or unsecured where there is no leverage. They can either be for a short period of time or a long period of time. Debt financing can be issued by friends and relatives, banks, companies in commercial finance where they give out loans and failure to payment they use leverage, the government or Bonds where a company specifies the interest to be paid.

Lease can also be used to finance a start-up. It involves two firms or parties that have set of terms and conditions for the use of a certain product or service or resource for a certain period of time. They are usually paid annually. When a lease ends, the firm’s belongings are usually returned back. This is usually a long term kind of financing and the firm usually gets time to repay the loan (Ram & Titman, 2011).

Differentiate between a private placement and a public offering.

Private placement is selling security to specific investors in order to raise capital where as a public offering is selling security in the open market. In private placement, the paper work is few and there is no need for registration in the United States securities and Exchange commission where as in public offering the company is regulated by United States securities exchange for registration. As shared by (Ram & Titman, 2011) the Public offerings gives investors the opportunity to determine the future of the company whereas in private placement, it does not require investors to determine the future of the company.

Companies go public mostly for the reason of raising money, capital is raised through selling of shares to potential investors and this also therefore reduces the risk of ownership among many shareholders. Debts owed to others by the company can also be paid off using the funds raised from the sale of shares to the public and thus reduction of company expenses which is an added advantage to the good will of a business or firm. The firm gains prestige once the goodwill of the business entity is well known publicly after various marketing strategies and proper advertising. This ensures the products and services of a company are well known by the public.

• Why would a company consider going public? What are some of advantages and disadvantages?

Advantages of going public

It ensures that the business has enough public awareness on financial markets through global media coverage. Taking your business public will give it ongoing exposure through global media. The company is used for comparison. The enhanced visibility an IPO brings to a firm brings about opportunities for the entity for expansion. Ability to hire the best fit employees and also have the strategies to retain these best employees. Thus being at a better edge in competition with other competitor public firms.

According to ( Altfest , 2016) Major shareholders require liquidity in companies. They invest in your business entity for a specified time and there after they need to liquidate the fund in order to get back their investment. When you make your company public, you will be able to pay off these shareholders. Creation of a good impression among business partners such as suppliers, distributors, and customers just by them having in mind that your business is a public company (Hyman, 2014).

Disadvantages

According to (LeRoy & Werner, 2014)High costs and expenses of having to comply with the regulatory bodies to meet their requirements including fees used to generate financial documents and audit fees, hiring of specialists, accounting and underwriters is also an added cost. The process is very lengthy and thus consumes much time in preparation of reports and ensuring they comply with the securities exchange commission regulations.

The pressure from the market as shared by (Hyman, 2014) causes them to focus on short term results and objectives instead of concentrating more on development of the long term objectives and achievements of results. Investors tend to pursue too much into the company business thus causing management to act questionably as investors insist on rising profits. In order to attain such targets, the management is forced to boost earnings in whatever possible ways.

Liability of the firm increases and thus for cases of false representation or omissions of useful information to shareholders and investors of the company, and also information related to the operations of the business entity must be well relayed otherwise the business entity might be sued (Hyman, 2014).

Reference

SF LeRoy, J Werner, (2014), Principles of financial economics

DN Hyman, (2014), Public Finance,A contemporary application of theory to policy

Ram Brooks, S Titman, (2011), Financial Management

L Altfest , (2016), Personal Financial planning

BG Peters, (2015), American public policy, Promise and performance