Corporate Finance Tools in Daily Life
Many of the concepts associated with corporate finance also have applications in everyday life. A range of corporate finance tools are already used in everyday life, often without realization as corporate finance tools are often an extension of common financial practices. More complex corporate finance tools may also provide a great deal of potential to enhance daily life financial management. By looking at task associated with daily life it is possible to see the alignment.
A task undertaken in almost every household will be budgeting for household expenses, for example this will include budgeting for utility bills, insurance, food and travel. The budgeting may take place at different levels, for example, monthly or daily. The main budget will be undertaken each month, accounting for the essential items and liabilities. Where wages are paid on a monthly basis assessing outgoing in the same way is common sense.
My time horizon is long-run. I would want a diversified portfolio, but can afford to take the risk of equities. So the first decision is to go with 1% equities. I am not interested in company stock at the moment, because I want a diversified portfolio and I only want liquid securities with values set by the market. The company stock does not meet those criteria.
In that case, I would emphasize the Small Cap fund for its growth characteristics -- 5%, and a further 5% in the S&P index fund. The Index Fund has a substantially lower MER than the Large Company fund. The Large Cap has outperformed the market lately, but cannot be expected to do that every year, and it has a lower Sharpe ratio so is a riskier fund that the S&P -- it should outperform. On a risk-adjusted basis, net of the…...
This is assuming book value weights. With market value weights, Dell has $36.86 billion in debt, so the weight of debt is 59.7% and equity is 40.3%. The weighted average cost of capital in that case is 0.85 + 3.52 = 4.37%
6. Dell is a poor comparable. Dell does not own its own stores. It might have a similar manufacturing model, but it is almost entirely online, and it is also a much larger company at $62 billion in sales versus $95 million. Moreover, Dell sells mainly to institutional (business) clients, in apparent contrast with Goff. Goff also has a much different capital structure, so is a less risky company. These differences are not insignificant -- the similarities with Dell are more superficial. A better comparable would be a niche electronics retailer, even if that means looking at a company outside the computer industry.
Corporate Finance
Potential Impacts of an Increasing Interest Rates
Interest rates have a strong influence in the economy. his influence is one reason many central banks utilize interest rates as a monetary tool in an effort to control the supply of money. Since December 2008 the U.S. has seen some of the lowest central bank interest rates, with the Federal Reserve holding down rates in order to help stimulate economic growth. he Federal Reserve may have recently forecast interest rates remaining close to zero until some point in 2013, but at some point they will have to increase (Anonymous, 2011). When the interest rate rise does occur it will impact on a number of areas of the economy; this paper will consider some of those impacts.
Impact on the Financing of Big icket Items
Big ticket items are expensive goods which will often require the purchaser to obtain some type of credit agreement. If…...
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The calculation of the present value of an annuity is complex, as this involves discounting the future cash flows into today's value. If interest rates increase the cash flow from the annuity increases (increasing the future value). The present value will depend on inflation, inflation may increase, but if the economy is managed correctly inflation should be held at a rate lower than the proportional increase in interest rates. Theoretically, the present value may also increase, but this will be less pronounced compared to the future value and is dependant on many divergent factors, apart from inflation which may include diverse issues which are not directly related to interest rates, such as the cost of labor and the cost of oil.
Impact on NPV Calculations
Net present value calculations look at the value of an investment in the future by taking the futures cash flows and discounting them into today's value by allowing for the time value of money. The discount rate may be based on the expected rate of inflation; however firms will often base the discount rate on their actual cost of capital (Drake and Fabozzi, 2009). As interest rates increase the cost of capital (which is discussed in the next section) will also increase. Assuming the same cash flows the following tables demonstrate the difference that that an increase in interest rates will have on the NPV. The example of a five-year investment of $10,000 creating an annual return of $3,500 may be used. In table 2 the discount rate
Corporate Finance
3a) This depends on the project. b) Better than the company or industry average, whichever is higher. C) Higher than the cost of capital. d) e) over 0.
The objection is based on speculation. Since we do not know what the future reinvestment rate is going to be, we must work with the best information we have today.
Again, the objection is the same. A complaint that we have less than perfect information when we are forecasting the future is absurd. We also do not know precisely what the future cash flows will be. We still need to make a decision, and that decision must therefore be made on the basis of the best information that we have today. The criticism has no validity.
Ch 9-1. Forecasting risk reflects the risk associated with forecasting future cash flows. There is more forecasting risk for a new product than for a cost-cutting proposal. This…...
The DuPont equation, according to Besley and Brigham (), can be captured as follows: OE = Net Profit Margin * Total Assets Turnover
In a tabular form, this would be:
Net profit margin
Total assets turnover
OE
The current ratios of Jaedan Industries do not differ significantly from the industry ratios for the two years under consideration. According to Besley and Brigham (2007, p. 52), this particular ratio "provides the best single indicator of the extent to which the claims of short-term creditors are covered by assets that are expected to be converted to cash fairly quickly." Jaedan Industries' current ratios for the two years under consideration indicate that the firm would have no problem settling its short-term obligations if they were to become due. Next, we have the activity ratios, in which case the inventory turnover…...
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References
Besley, S. & Brigham, E. (2007). Essentials of Managerial Finance (14th ed.). Mason, OH: Cengage Learning.
Graham, J., Smart, S. & Megginson, W. (2010). Corporate Finance: Linking Theory to What Companies Do (3rd ed.). Mason, OH: Cengage Learning.
To include: Rangers, Special Forces, Delta Force, Special Air Service, Special oat Service and Navy SEALs. (Dunnigan, 2010) As a result, many people within the U.S. military and the government will often discuss the valuable services that these companies are providing. Where, private security contractors can bring a wide range of experience with them, in dealing with a host of possible security challenges that could be faced within a theater of operations.
However, the main reason why both government and military personal have such favorable views of private security contractors, is because they are professionals and are effective at achieving their objectives. What is happening, is the personnel that private security firms can introduce to a conflict, can help prevent a situation from going to bad to worse. Where, a possible insurgent or terrorist attack that could send most people running; will cause these individuals to remain at their positions.…...
The firm, which was conceptualized in 1944 as MPRSA changed to ndesa, in the year 1997. In 2006-2007, both by nel in Italy and Gas natural targeted ndesa. .ON, located in Germany also had interest in ndesa. Despite its smaller size, Gas Natural had backup from the then socialist government. After .ON offered 38.75 pounds to ndesa for each share, they took over the company, among others like SNT. Acciona and nel jointly took over to control ndesa. nel however was the higher bidder, with a share of 67.05% of the entire share capital. In 2009, nel bought the shares of Acciona, assuming ownership with over 92% share capital. It was agreed that some of the assets owned by ndesa, would be sold to Acciona. According to Reuters (February, 21) The nel Corporation was to get funding from different banks, amounting to eight billion, which was to…...
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ELEN's Financial Plan
The firm, which was conceptualized in 1944 as EMPRESA changed to Endesa, in the year 1997. In 2006-2007, both by Enel in Italy and Gas natural targeted Endesa. E.ON, located in Germany also had interest in Endesa. Despite its smaller size, Gas Natural had backup from the then socialist government. After E.ON offered 38.75 pounds to Endesa for each share, they took over the company, among others like SNET. Acciona and Enel jointly took over to control Endesa. Enel however was the higher bidder, with a share of 67.05% of the entire share capital. In 2009, Enel bought the shares of Acciona, assuming ownership with over 92% share capital. It was agreed that some of the assets owned by Endesa, would be sold to Acciona. According to Reuters (February, 21) The Enel Corporation was to get funding from different banks, amounting to eight billion, which was to assist in the financing of the company's deals.
The C.E.O of the Enel Company was optimistic about the firm's growth possibilities even during the harsh economic situations. The company's consolidated accounts indicated that the firm's revenue had increased with over 40% increase, due to its strategic business plans, that included the operation of different geographical areas, including the business transactions that were to be done abroad. The firm had a financial plan of generating income, through the new dividend policy, and they had the plan to dispose off most of the assets that were non-strategic. The proper management of the investment plans and the generation of a growing cash flow were the strategies that were to be implemented to recover their stand in the market and economy. This was meant to allow the company realizes its goals and business objectives. Already there was improvement, as proved in 2009 when the subsidiary company, had within months, gained over 300 million Euros. The increase was related to the increase in margins of the divisions of the company.
At first, it would seem that debt has more advantages than new equity. However, that is not always the case. The fact is that certain equilibrium between issuing debt and issuing equity has to be found. The cost of debt rises constantly, since the financial risk of a company grows together with the level of debt the company has to face. The cost of debt is the market interest rate that the firm has to pay on its borrowing and depends upon three components: the general level of interest rates, the default premium and the firm's tax rate. The cost of debt rises if the company has other debts, since the degree of risk a creditor takes increases. The company's beta indicator increases, so it does not have access to sources of financing as it once did. Therefore, issuing new equity becomes an interesting alternative.
What a company needs to do…...
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References
1.Welch, Ivo, the Primer on Capital Structure, Finanzmarkt und Portofolio Management, 1995, welch.econ.brown.edu/academics/capitstruct.pdf
2.Campbell, Harvey, How do CFO's Make Capital Structures and Budgeting Decisions, Duke University, faculty.fuqua.duke.edu/~charvey/Research/Working_Papers/W62_How_do_CFOs.pdf
3.Damodaran, Aswath, "Finding the Right Financing Mix: The Capital Structure Decision, Stern School of Business, chapters 7,8,9 www.stern.nyu.edu/~adamodar/pdfiles/ovhds/ch7.pdf www.stern.nyu.edu/~adamodar/pdfiles/ovhds/ch8.pdf www.stern.nyu.edu/~adamodar/pdfiles/ovhds/ch9.pdf
Additionally, alternative 2 provides the lowest coefficient of variation as well as the lowest standard deviation. The level of risk given the expected return is high and offers stability when compared to the other alternatives.
8-22
a. Stock B, stock A, stock C
b. If the market portfolio has a return of 12%, then stock a will realize a return of just below 12% or .096%. Stock b will have a return of 1.4 * 12% or .168%. Stock c will have a return of -.30 * 12% or -.036%
c. If the market portfolio has a negative return of 5%, then stock a will realize a return of -.04%. Stock b will realize a return of -.07%. Stock c will realize a return of -.015%
d. If the stock market were about to experience a decline, then the stock to add to the portfolio would be the stock with the lowest or negative…...
orporate Finance
Analysts' independence refers to the ability of the analyst to publish opinions about the stocks they cover, free from corporate interference or oversight. In this pre-SOX example, analysts were under pressure from the investment banking arm of their parent company to run downgrades past management. The implication is that the analyst loses independence, that his or her views are going to be sterilized by senior management to avoid offending a current or potential future customer for some of the other services that the bank offers.
Maintaining a buy recommendation after a stock's price falls is not evidence that the analysts' independence is compromised. If the analyst thought the stock was undervalued before the drop, surely the analyst thinks the stock is still undervalued at the lower price point. The independence of an analyst cannot be judged on the basis of his or her recommendations. Independence is an input into the…...
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Case #2
It does not appear that Target's credit card portfolio is out of line with its historic norms. Target has always had a credit card portfolio that is among the riskiest in the business, and this is built into the company's cost structure. Target knows that a relatively high percentage of total loans will be written off, but it makes provision for that, and as a result it has never reported losses greater than expected. Thus, the current policy does not seem to be anything particularly different.
The other factor is the timing of the concern, which was at the outset of the recession in 2008. At that time it was believe that Target should reduce its loans because more customers were going to struggle to repay them. The strategy that Target took, however, is somewhat the opposite. By extending credit, it would be able to engender greater brand loyalty among existing customers and also to attract new customers who would be otherwise unable to shop elsewhere. It is worth noting that Kmart enacted a similar strategy with its credit products as the result of the recession. Target's approach has not created too much trouble for the company, and its ability to identify good people to which to lend money does not appear to have waned. If that confuses some analysts, so be it. Target sometimes lends to riskier customers, but it has priced that into its credit policy.
Moran's retirement annuity would be in perpetuity, with all other terms as equal (Ceteris Paribus), this is to mean that there is not a 20-year period till maturity. Additionally, as there is not a 20-year distribution period, the company will move the funds over to another interest bearing account at 12% yet not expect to have an account balance of $0 at the end of the term.
Generally speaking, actuaries will claim that a perpetuity will be planned for the client to payout its obligations via annuitized payments until the client age of 98 years old. Ms. Moran's current age is unclear, and we only know that her retirement annuity stream would last for 20 years. If she is 50 and retires in 12 years at 62, then her 20-year annuity stream would run out at 82 years old, with the perpetuity having to extend to cover an additional 16…...
Using the above assessments each may indicate which investment may be preferred. Using the payback period project a has a payback period of 4 years, whereas project B. has a payback period of 3 years 8 months. If the fastest payback period is preferred than project B. will be chosen.
The NPV which discounts the net revenues into a net present value shows that Project a has a loss of 1,576 and the loss for Project B. is 1,074. If assessed only on this basis, project a makes the greatest loss. However, the basic rule of NPV is that investments should only be made in projects where there is a new positive value, otherwise the firm is not earning the amount it is costing them in payments to support the capital used to fund the project (Weetman, 2010, p269).
The I calculation also shows…...
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References
Bennouna, Karim; Meredith, Geoffrey G; Marchant, Teresa, (2010), Improved capital budgeting decision making: evidence from Canada, Management Decision, 48(2), 225-247
Cooper DW; Cornick MF; Redmond a, (2011), Capital Budgeting: A 1990 Study of Fortune 500 Company Practices, Journal of Applied Business Research, 8(3), 20-23
Evans, Dorla a; Forbes, Shawn M, (1993, Fall), Decision Making and Display Methods:the Case of Prescription and Practice in Capital Budgeting, the Engineering Economist 39, No. 1, 87-92
Favaro J, (1996, April), a Comparison of Approaches to Reuse Investment Analysis, Proceedings of the Fourth International Conference on Software Reusability
The curve describing this relationship between risk and return is a hyperbole connecting one and the other. Logically and economically, this also makes sense: if the investor is willing to assume more risks, he is also likely to potentially discover more alternatives and solutions in which to invest his money and open his investment to a greater impact from the market, in a positive sense.
Additionally, spending more money on the open market can even involve the investor in the decision making process, essential in determining the way the business is likely to evolve in the future. Putting your money at more risk than another investor will bring about higher returns.
The investments in securities or in a business are just as much subjected to the impact of inflation as the time deposits are. There are however important temporal differences. With the investment in a business or in securities, the rate…...
Corporate Finance
It is important to note, from the onset, that for some projects, NPV may be more effective than I as far as discounting cash flows is concerned. This is particularly the case given that one of I's key limitations is its utilization of only a single discount rate in the evaluation of investments. Essentially, I would most likely work perfectly in those instances where, for instance, the two projects being evaluated have a discount rate that is common, have similar risks, and have cash flows that are predictable. It is, however, important to note that over time, discount rates do change. Essentially, with no modification, I doesn't capture the flexible discount rates. In the final analysis, therefore, I cannot be seen as being appropriate for long-term projects whose discount rates keep changing. I users could also face challenges in those instances where the discount rate is unknown. Further, I,…...
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References
Baker, H.K. & Powell, G. (2009). Understanding Financial Management: A Practical Guide. Malden, MA: Blackwell Publishing.
Peterson, P.P. & Fabozzi, F.J. (2004). Capital Budgeting: Theory and Practice. New York, NY: John Wiley and Sons.
Or that he is to make expenses on dropping pollution outside the quantity that is in the best welfare of the business or that is mandatory by law in order to add to the social objective of improving the atmosphere (Friedman, 1970).
Corporate culture has been established as an administration tool. Corporate culture can aid to attain corporate objectives comprising profit enlargement. Advocates of corporate culture as a tool propose that bureaucratic control should be substituted with culture control in that the management of rewards should be exchanged for the management of culture comprising principles, philosophies, language, ceremonial and legend. This procedure of socialization can comprise: selection at entrance level that makes applicants ask if they are good enough; humility-inducing familiarities in the first months; advancement tied to established record; consideration to corporate values and strengthening legend (Van den Berghe and Levrau, 2004).
Over the last several years, numerous Vietnamese corporations…...
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References
Anh, Nguyen Hoang. 2008. Business Ethics in Vietnam- Reality and Perspective. [online]
1. The role of internal capital markets in corporate finance and investment decisions 2. How internal capital markets can affect the financial performance and risk management of a firm 3. The impact of internal capital markets on corporate governance and decision-making processes 4. The advantages and disadvantages of using internal capital markets within a firm 5. Case studies of companies that have successfully utilized internal capital markets to achieve strategic objectives 6. The relationship between internal and external capital markets and how they interact within a firm 7. The role of information asymmetry in internal capital markets and its implications for decision-making 8. The impact of globalization....
The Impact of Diverted Profit Tax (DPT) on Multinational Corporations (MNCs) in the United Kingdom has been a topic of debate and research in recent years. This literature review aims to provide a comprehensive overview of existing studies and research on this subject, focusing on quantitative analysis. One study by Alstadsæter et al. (2017) analyzed the impact of the UK's introduction of DPT on MNCs. The study found that the tax had a significant effect on the behavior of MNCs, leading to a decrease in profit shifting activities. However, the study also highlighted some unintended consequences, such as a decrease in....
Corporate Governance and Performance in Industrial Engineering Sector in Bursa Malaysia Corporate governance, a system of rules and practices that guide how a company is managed and controlled, plays a crucial role in determining the performance of organizations. In the industrial engineering sector in Bursa Malaysia, effective corporate governance practices have been identified as key drivers of success. Impact on Performance Empirical research has established a strong correlation between corporate governance and performance in the industrial engineering sector. Below are some key ways in which corporate governance impacts performance: Enhanced Risk Management: Robust corporate governance mechanisms, such as independent audit committees and risk....
The debate over whether sustainability-themed mutual funds genuinely promote responsible investing or merely capitalize on the green trend has been a focal point in financial literature. Sustainability-themed mutual funds are investment vehicles that focus on companies adhering to environmental, social, and governance (ESG) criteria. The core question revolves around the authenticity of these funds in driving sustainable practices versus their use as a marketing tool to attract environmentally conscious investors.
One perspective argues that these funds are indeed responsible, as they integrate ESG factors into their investment decisions, thereby influencing corporate behavior towards sustainability. For instance, a study by Friede, Busch,....
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