Principles of Finance I assignment 1

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Principles of finance 1

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Question A

Corporate finance has the ability to provide the managers with the insight of identifying and selecting strategies to use in the corporation as well as the needed projects. Corporate finance also allows the managers to create ability on planning strategies for acquiring funds through the funding requirements of the company.

Question B

All businesses start up as sole proprietorships or partnerships with different individuals which in other words are unincorporated businesses. This is because to start a business in this form is the simplest way and cheapest way of starting a business. As the business starts as partnerships or proprietorship it is difficult to make ownership alone until it grows to become corporations due to the unlimited liabilities and difficult in raising capital. Corporations are known to have unlimited life which allows for easy transfer of ownership (Brealey et al. 2012).

Question C

Through initial public offering which allows any individual to purchase the shares may lead to a corporation going public because of the open stock exchanges. Agency problems may be defined as the plausible conflict of the acquired interest between the management and the stakeholders. Methods to use may include giving stock options to the managers in order to incentivize the growth. Corporate governance is the set of rules which are able to control the company’s behaviors. The company should work hand in hand with the directors, managers, employees, customers, the community and also the competitors (Dalton, 2011).

Question D

The primary objective of the managers should be the maximization of the stakeholders’ wealth. Every decision that the managers make in the organization should be considerable to the stakeholders’ interest. This is because the stakeholders cover the largest part of the organization making the biggest percentage of the decision making process.

Yes, firms have an ethical responsibility of ensuring that the working environment is safe for all the people.

  • 1)

2)

Stock price maximization is the goal of every organization to ensure that the public traded stock prices are maintained to the highest level. Stock price maximization needs high quality goods which are efficient and are also low cost operated. The high quality goods should be ensured that they are sold in low cost as possible in order to benefit the society. This would be possible if the goods and services are produced according to the needs and demands of the society. Therefore, the stock price maximization should benefit the society through the consumer benefits and also creation of job opportunities (Brealey et al. 2012).

3)

Ethical behavior in firms brings various benefits. Therefore, firms should behave ethically for the success of the corporation. Where the organizations or company behave unethically, they could be answerable to the law whereby it may lead to the corporation becoming bankrupt. In addition, unethical behavior within the organization may cause damaged of the brand equity and the image of the organization.

Question E

Amount of expected cash flow is one of the aspects whereby positive cash flow is an indication of increasing liquid assets and the company is now able to pay the debts. Secondly, time of the cash flow stream is another aspect whereby the manager must time all the relevant cash flows before executing any time value money. The third aspect is cash flow risks which enable the company to plan the operations according to time and the level of payment.

Question F

Free cash flows are the measure of all cash flows which are available for a company after paying all the expenses. In other terms, this is the available cash flow in the company after paying all the employees and the debts which is used for the company’s growth and development.

Question G

Weighted average cost of capital is the expected returns of the company from the investors. Each category of capital in an organization is weighted in order to calculate the weighted average.

Question H

The greater the free cash flows and the lower the weighted average cost of capital are more valued in a company. Therefore, free cash flows are then divided by the WACC to get the company’s value.

Question I

Individuals are the savers whereas households are the net savers. The net borrowers are the non-financial corporations but according to United States government one becomes a net saver when he or she runs the surplus. There are ways through which capital is transferred from the savers to the borrowers. They include; direct transfers of money and the securities, through financial intermediaries like banks and lastly through indirect transfers.

Question J

Interest rate is the amount of money which the debtors must pay for his or her debt capital. Return on equity is the amount that comes in as dividends in addition to the gained capital. There are four important factors that affect the cost of money which in other terms can be said as the interest rates of the economy. They include; time preferences for the production of goods and services, production opportunities and lastly the risks factor.

Question K

There are four economic conditions that greatly affect the cost of money which include; international factors, such as foreign trade balance and exchange rates, the federal budget deficit or surplus, federal reverse policy and level of business activity (Moffett et al. 2014).

Question l

Financial securities can be defined as those instruments sold by institution to different clients, retail, private sectors and also other institutions. These financial securities can be equity, debts or derivatives. Some of the financial instruments include; certificate of deposits, treasury bills and money market accounts (Brealey et al, 2012).

Question M

Investment banks and brokerages, commercial banks, savings and loan associations, private equity funds and many more are some of the financial institution types (Dalton, 2011).

Question N

Market is a place where goods and services are exchanged. There are various types of market and some include; money versus capital markets, primary versus secondary markets, physical versus financial assets market and spot versus future markets.

Question O

Trading procedures take two dimensions which are the location of the trade and the method of matching orders. In addition, secondary market can also take physical location exchange or computer network for the orders and exchange of goods and services. The ways of orders is also useful from the sellers and the buyers (Moffett et al. 2014).

Question p

Market orders are responsible in the execution of orders and cannot be accepted outside the market hours while limit orders are able to allow an individual to set a maximum purchase price for the order made (Brealey et al. 2012).

Question Q

Broker dealer networks are those individuals or institutions whereby the main purpose of engaging in business is for their own goods. Alternative trading system is a non-exchange trading venue used by US and Canadian states for transactions between the buyers and sellers. The main purpose of alternative trading system is to bring together or create market for the buyers and the sellers of securities. On the other hand, stock exchanges are exchanges whereby the traders and the stock brokers are able to purchase goods and services (Brigham, 2017).

Question R

Mortgage securitization is the process through which investment bank packages a different group of loans together and therefore sells the loans as investments. The global economic crisis can be divided into three parts which include; the beginning or the start, the middle and the end. Therefore, the mortgage securitization contributed to global economic crisis whereby the home owners were in need of better homes than their efforts could satisfy them. The brokers then encouraged these people to borrow mortgages which in turn were sold to investment institutions (Brigham, & Ehrhardt, 2013).

References

Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.

Brigham, E. F. (2017). Financial management: Theory and practice. (15 ed.). South Western Educational Publishing. ISBN:

Brealey, R. A., Myers, S. C., Allen, F., & Mohanty, P. (2012). Principles of corporate finance. Tata McGraw-Hill Education.

Dalton, H. (2011). Principles of public finance (Vol. 1). Psychology Press.

Moffett, M. H., Stonehill, A. I., & Eiteman, D. K. (2014). Fundamentals of multinational finance. Pearson.




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