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One difference between industries with high leverage and low leverage is a split between the need for fixed assets (high leverage) and a reliance on intellectual capital (low leverage). Airlines need planes, construction companies need equipment, and communications and hotel companies need infrastructure capacity. This compares with computers, drugs, biological products, educational services and electronics, all of which rely heavily on intellectual property to derive value. The conclusion that one can draw from this is that firms with a need for more fixed assets are more likely to borrow to acquire those assets. The borrowing can be long-term, to match the useful life of the fixed assets. Moreover, the interest and depreciation expenses can offset some of the costs of paying down that debt. Companies that are IP-intensive expense their research & development costs, making equity a more natural form of financing, as it tends to match up better…
Income before taxes
a) Bauman Company's current and quick ratios for the past four years are as follows:
b) The firm's liquidity during the 2009-2010 period was generally good. Both the current ratio and the quick ratio during this period were relatively high, to the point where a creditor would be comfortable lending this company money in the short run. There was, however, a decline in both ratios over this period. The current ratio slipped slightly, and there was an equally slight slip in the…
Investopedia. (2013). Definition of DuPont analysis. Investopedia. Retrieved March 7, 2013 from http://www.investopedia.com/ terms/d/dupontanalysis.asp#axzz2MnoRW6v9' target='_blank' REL='NOFOLLOW'>
Though financial systems change over time, their functional perspectives do not. Operational financial systems are expected to be similar in all economies, hence, its necessitated reliability in the system. A functional perspective is mainly used in doing financial analysis in a financial system. It provides a foundation for referring to a country's financial system. The financial perspective also assists in evaluating the system actions. Using a financial perspective in activity levels leads to risk management and transfer of resources inter-temporally.
Financial Innovation and Market ates
A financial innovation system is an integral part in analyzing financial systems. It is a scheme implicit in the state innovation systems. It mainly addresses the issues in business finance that are used in initializing the financing of technological and innovative developments. Financing policies and programs need to dig into dynamics of this system. The financial innovation systems strengthen capabilities of achieving developments…
Burton, M & Brown, B. (2009). The Financial System and the Economy: Principles of Money and Banking. New York: M.E Sharpe.
Deaves, R & Ackert, L. (2009). Behavioral Finance: Psychology, Decision-Making, and Markets. New York: Cengage Learning.
Houston, J. F & Brigham, E.F. (2009). Fundamentals of Financial Management. New York: Cengage Learning.
Rieger, M. O & Hens, T. (2010). Financial Economics. New York: Springer.
Furthermore, the assumed 'cooperation' of these assets when put in portfolio maybe perceived differently by the manager than the reality will be which can lead to losses.
On the difficulties side, first of all, the opportunity cost of capital is the hardest assumption to be drawn. Opportunity cost of capital is the expected rated of return which could be achieved from investing in a business endeavor with the same risk. It can be looked upon as the 'depreciation rate' of the future earnings for the investor. The opportunity cost of capital thus reflects the inflation rate and the risk of the project. For example, one can invest $1,000 today in project a and generate $1,100 in a year. This will give the expected rate of return of 10%. Also, another business idea with the same risk level exists, which will yield $1,200. As the risk for the project B. is…
Graham J., Campbell J.R., the Theory and Practice of Corporate Finance: Evidence from the Field, Journal of Financial Economics, 60, 2001: 187-243.
Russell Thomas, Business Value Analysis: Coping with Unruly Uncertainty, Strategic Leadership, 29/2, 2001, p. 16-23.
David Brookfield, Risk and Capital Budgeting: avoiding the pitfalls in using NPV when risk arises, Management Decision, Vol. 33, No. 8, 1995: 56-59.
The structuring of debt and its implications on cash flows, the structuring of payback periods, the use of fixed vs. adjustable-based loans, the use of accelerated loans, and conversely, the use of annuities, compound saving strategies, asset appreciation and portfolio planning all are based on finance. For the small business owner balancing these many strategies the need to trim down liabilities and aggressively manage debt while maintaining and growing annuity from customers is critical, in fact the lifeblood of their businesses. In many respects this same balance of managing liabilities and assets needs to pervade individual financing decisions. This goes beyond simply staying within budget; it requires the use of insightful tools and analytical techniques for managing to financial goals and objectives.
The pervasive use of financial analysis tools and key measures of risk vs. potential returns for managing personal and professional investments is invaluable. Quantifying risk and its implications…
Assessing a Potential Investment in Facebook
Under the concept of time value, money today is worth more than the same amount in the future (Nellis and Parker, 2006). This is over time, inflation will erode the value of money and in a years time $100 will buy less than it will buy today. If Facebook is offering a $100,000 bond, for one year, the investor, wanting to make a profit and account for the money that could be made elsewhere, will offer less that the face value.
Using the CAPM, shown in question 2, to allow for the time value of money, the interest rates I may get elsewhere and the risk associated with Facebook investments, the price I would pay is $86,333. However, if I were risk adverse I may want to discount this even further to a gain a higher risk premium, as there are other indicators…
Bloomberg (2013) U.S. Generic Government 10-Year Yield, retrieved 16th September 2013 from http://www.bloomberg.com/quote/USGG10YR:IND
Nellis JG, Parker D, (2006), Principles of the Business Economics, London, Prentice Hall.
Yahoo Finance, (2013), Facebook Inc., retrieved 16th September 2013 from http://finance.yahoo.com/q/ks?s=FB+Key+Statistics
Yahoo Finance, (2013), Google Inc., retrieved 16th September 2013 from http://finance.yahoo.com/q/ks?s=GOOG+Key+Statistics
In short, the financial institution offered loans to virtually all customers, regardless of their ability to reimburse the loan. As the clients defaulted on their payments, the company found itself in an impossibility to recuperate its investments. Gradually, the value of its share decreased, the investors lost interest and confidence, their assets devalued and they were eventually forced to declare bankruptcy. The same situation was present and Merrill Lynch.
4. Using debt to expand the business
The scenario presented in the article, as well as the entire crisis as a whole, has had the general impact of making economic agents more prudential in terms of financial operations. This could also translate in the desire to use lower levels of debt when financing a business endeavor. ather, one could be inclined to use more equity than debt. A first reason to explain this stand is given by the fact that shareholders…
Cheng, A., 2009, Urban Outfitters Upgraded by Barclays Capital, Market Watch, http://www.marketwatch.com/story/urban-outfitters-upgraded-by-barclays-capital-2009-08-07 last accessed on November 23, 2009
Morgenson, G., September 27, 2008, Behind Insurer's Crisis, Blind Eye to a Web of Risk, The New York Times
Schwartz, DH, 2009, Debt vs. Equity -- Advantages and Disadvantages, Small Business, http://smallbusiness.findlaw.com/banking_financing/be1_5debtvsequity.html last accessed on November 23, 2009
2009, Urban Outfitters, Inc. Financials, Google Finance, http://www.google.com/finance?q=NASDAQ:URBN&fstype=ii last accessed on November 23, 2009
58 (YHOO), 13.38 (NKE) and 8.15 (BA). There are many explanations for the differences between the P/E ratios of these companies. One is the expected rate of growth. Each of these companies is operates mainly in one market, and is either the dominant player or in an industry with only one other major competitor. Some of the factors that contribute to the growth rate will contribute to differences in the P/E. For example, the stage of the industry life cycle is important. Nike and Yahoo are in industries that are entering maturity in western markets, but still have significant overseas growth potential. FedEx and Boeing, however, are in fuel-dependent transportation businesses that may be approaching a declining stage.
Another key potential factor is the company's earnings. Nike, for example, as high earnings, which since earnings are the denominator will lower their P/E. FedEx, on the other hand, has struggled in…
McClure, Ben. (2008). Understanding Rights Issues. Investopedia. Retrieved October 24, 2008 at http://www.investopedia.com/ articles/stocks/05/062905.asp' target='_blank' REL='NOFOLLOW'>
S. Legal, 2008). This is primarily due to the fact that unlike equity issues, they do not dilute shareholder's equity or suppress share price. Debt issues are typically conducted with financial institutions only, rather than the markets. However, debt issues have several disadvantages. Debt is an obligation that must be paid. The obligation is both short-term (interest payments) and long-term (principle repayment). However, the payment of this obligation is tax-deductible, as it is in classified as an operating expense. This means that debt has an inherent tax advantage (Richards, no date), one of the main reasons why the cost of debt is typically lower than the cost of equity. There are other disadvantages to debt as well. Debt issues typically require collateral and/or restrictive covenants. For a greenfield investment, the firm would have to post existing fixed assets as collateral, not the new factory. Any restrictive covenants can impact management's…
Hillstrom, Laurie Collier. (2009) Debt Vs. Equity Financing. eNotes. Retrieved July 9, 2009 from http://www.enotes.com/management-encyclopedia/debt-vs.-equity-financing
No author. (2008). Equity Financing Law & Legal Definition. U.S. Legal. Retrieved July 9, 2009 from http://definitions.uslegal.com/e/equity-financing/
Richards, Daniel. (no date). Debt Financing -- Pros and Cons. About.com. Retrieved July 9, 2009 from http://entrepreneurs.about.com/od/financing/a/debtfinancing.htm
They have relatively high unemployment, giving us access to some of those highly-skilled workers. There are several distinct cultural features of the Finns that conflict with American culture, but none so significant that they cannot be overcome with some training.
The Japanese have much higher cultural barriers. Japanese culture is insular and difficult to penetrate for outsiders. Many Japanese do not speak English. Japanese corporate culture is also vastly different from our own, and American firms have difficulty establishing American corporate values in Japanese subsidiaries. However, Japanese corporate culture is moving more towards our own, with cornerstones such as the keiretsu and lifetime employment replaced by western concepts. Moreover, the Japanese are hard-working, loyal, highly-educated and have high technological literacy.
It is recommended that we set up greenfield in Finland. The cultural similarities will allow us to translate many of our operational competencies easily to the new facility. Setting up…
Eiteman, K.D., Stonehill, I.A., & Moffett, H.M. (2007). Multinational Business Finance (7th ed.). Boston, MA: Pearson Education, Inc.
Over the last several years, dividend stocks have become an important tool that is helping investors to realize above average returns. According to Paul (2012), these areas have been accounting for 40% of profits on the Dow Jones Industrial Average since 1930. This is because they can provide a number of benefits in assisting investors to realize their long-term objectives with him saying, "Those areas that offer sustainable and growing dividends hedge income streams against inflation, to provide growing income to investors without the need to sell shares and to signify strength to investors. These firms generally exhibit lower stock price volatility, while delivering attractive and even superior returns." This is illustrating how these kinds of securities can provide protection, lower amounts of volatility and higher returns to investors. (Paul, 2012)
In 2012, these returns have been greater for those companies in contrast with growth areas (such as the…
Current Rates. (2012). Edward Jones. Retrieved from: https://www.edwardjones.com/en_US/market/rates/current_rates/index.html
Dow Jones Industrial Best Dividend Stocks. (2012). Top Yields. Retrieved from: http://www.topyields.nl/Top-dividend-yields-of-DJIA.php
Russell. (2012). Russell. Retrieved from: http://www.russell.com/indexes/data/US_Equity/Russell_US_index_returns.asp
Utility Common Stocks. (2012). Dividend Yield Hunter. Retrieved from: http://www.dividendyieldhunter.com/Utility_Issues_By_Yield.html
Unionization is almost unheard of. China's economy has been built with over 200 million laborers that have moved from the countryside to the booming coastal cities. China is reducing the public payroll, which means the country is faced with the challenge of finding employment for millions of workers. This means that employers have the buying power. The result is that working conditions are often poor. There have been some strides made recently. For example, all workers now have contracts. As a result of new rules enacted earlier this year, costs have gone up along with worker's protections.
I would include all relevant information in my report. My duty as compiler of this data is to present the data. Making decisions based on the data is the role of higher executives. The CEO can determine whether or not it is worth doing business in China. Moreover, this knowledge is key to…
No author (2008). "Guide to Doing Business in China (2008 Edition)" Hong Kong Trade & Development Retrieved December 6, 2008 at http://info.hktdc.com/chinaguide/index.htm
Chen, Peter P.W. (2007) "China" Executive Planet. Retrieved December 6, 2008 at http://www.executiveplanet.com/index.php?title=China
No author (2008) "China" CIA World Factbook. Retrieved December 6, 2008 from https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
No author (2008) "All-Around Financing" China Merchant Bank Retrieved December 6, 2008 at http://english.cmbchina.com/corporate+business/gofortune/fortune4.htm
Finance Management (Discussion questions)
Accounts receivable (A)
Accounts receivable (A) refers to the means by which companies record sales and send statements and bills to their customers. In simple terms, A keeps track of the customers' unpaid bills and the company's revenues. When sales are recorded, invoices are sent to customers. Apart from the total debt owed by customers, invoices contain information about discounts offered by the company to customers as incentives to pay invoices in a timely manner (Baker & Powell, 2010). When the invoice is posted, the revenue is documented as income. In most cases, when the invoice is posted, the system increases or credits the balance within a revenue account. Since the client has not yet paid the invoice, the invoice amount also increases or debits an asset account referred to as accounts receivables. Most common forms of receivable accounts include customer accounts receivable, employee…
Berger, S. (2008). Fundamentals of health care financial management: A practical guide to fiscal issues and activities. San Francisco: Jossey-Bass.
Baker, H.K., & Powell, G.E. (2010). Understanding Financial Management: A Practical Guide. Oxford: Blackwell Pub.
Brigham, E.F., & Ehrhardt, M.C. (2011). Financial management: Theory and practice. Mason, OH: South-Western Cengage Learning.
Salek, J.G. (2006). Accounts Receivable Management Best Practices. Hoboken: John Wiley & Sons.
he overall impact of financial management is not only on the finances of the students but also their overall academic performance. he higher the overall expenses of a student, the higher will be his inclination to find work and invest more hours in earning a respectable wage as opposed to studying. Lyons (2003) in his study found that the overall ratio for students who felt that their academic performance was affected by financial mismanagement was 1:3. In contrast to that, Bodvarsson and Walker (2004) in their study asserted that, under controlled conditions, the likelihood of failure was more common amongst students who received some form of help form their parents or committees then those who were earning their finance personally.
here have been numerous studies that have focused on the financial management of college students, with special attention to their use of credit cards. Davies and Lea in their study…
The National Council on Economic Education (2005) conducted a study where they focused on the financial management strategies and priorities of different states within America. They found that a total of 38 states had incorporated a thorough and comprehensive finance management structures within their educational institutes, especially colleges so that the students could not only understand the impact of their financial spending but also learn to manage their finances intelligently in the long-term. Furthermore, they also found that out of these 38 states, 21 states were very strict in monitoring the proper application of the financial management principles.
The overall impact of financial management is not only on the finances of the students but also their overall academic performance. The higher the overall expenses of a student, the higher will be his inclination to find work and invest more hours in earning a respectable wage as opposed to studying. Lyons (2003) in his study found that the overall ratio for students who felt that their academic performance was affected by financial mismanagement was 1:3. In contrast to that, Bodvarsson and Walker (2004) in their study asserted that, under controlled conditions, the likelihood of failure was more common amongst students who received some form of help form their parents or committees then those who were earning their finance personally.
There have been numerous studies that have focused on the financial management of college students, with special attention to their use of credit cards. Davies and Lea in their study (1995) explain that the students with an overall high socioeconomic background prefer maintaining their lifestyle in college either through taking debts or merely expecting their self-financed meager wages to just a temporary phase. Some of the common factors that the researchers have discussed in their studies include: the impact of gender on financial management (Armstrong & Craven, 1993; Hayhoe et al., 1999, 2000), mind-sets on the overall usability of credit cards and their impact on financial management (Hayhoe et al., 1999, 2000, 2002; Roberts & Jones, 2001), the impact of marital status on financial management (Hayhoe et al., 2000), income (Hayhoe et al., 2000; Zhou & Su, 2000; U.S. General Accounting Office, 2001), and the impact of parental involvement on financial
According to Shim and Siegel (1999), "The price-earning ratio equals market price of stock divided by earnings per share. It is used by potential investors in deciding whether to invest in the company. A high P/E ratio is desirable because it indicates that investors highly value a company's earning by applying to it a higher multiple" (p. 343). A company's P/E ratio is dependent on a number of factors, including the quality of the company's earnings, the stability of those earnings, risk trends in earnings, cash flow, liquidity position, solvency status, and growth potential; however, financial analysts who believe that the company will generate future profits at higher levels than currently may value the stock higher than its current earnings justify (Shim and Siegel, 1999).
This speculative factor has frequently proven sufficiently compelling to add as much as 4 percentage points annually to the fundamental return, or to reduce it…
Black's Law Dictionary. (1990). St. Paul, MN: West Publishing Co.
Bogle, John C. (1999). Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor. New York: Wiley.
Desmet, Driek, Tracy Francis, Alice Hu, Timothy M. Koller and George a. Riedel. (2000). "Valuing Dot-Coms," the McKinsey Quarterly, 148.
Droms, William G. (1997). Finance and Accounting for Nonfinancial Managers: All the Basics You Need to Know. Cambridge, MA: Perseus Books.
Americans receive one of the most annoying health-care delivery systems even though they have the benefit of the most refined medical care that money can purchase. (Brownlee, 2003) There have long been niggling suspicions over whether health-care spending has given value for money, even though there is an extraordinary growth in health-care spending over the past 40 years. (Money well spent?) We cannot get a way to offer health insurance for 41 million citizens, though we pay out about $1.2 trillion each year, two to four times per capita what other developed nations spend. (Brownlee, 2003) The average of the subsequent 29 industrialized countries was about $2,100 per person, lower than half the United States. All citizens of these countries have national health insurance. Compared to any other modern country, we receive less and pay more. (Disparity in Health Care)
To enhance people's health, much medical developments like vaccines…
Brownlee, Shannon. (1 February 2003) "The Over-treated American" The Atlantic Monthly. http://www.newamerica.net/index.cfm?pg=article&DocID=1145
Disparity in Health Care" Retrieved at http://www.mcdermottforcongress.com/news/health.html. Accessed on 29 October, 2004
Forest, Adam. (Fall 2004) "How to Fix the American Healthcare System: Three Simple Ideas to Improve Upon Dysfunctional Economics." The Health Insurance. www.fracturedatlas.org/site/news/newsletter/3" Retrieved at http://www.fracturedatlas.org/site/news/newsletter/article/15Accessed on 29 October, 2004
Marwick, Charles. (10 March, 2001) "U.S. healthcare system too geared to acute medicine - News" British Medical Journal. Retrieved at http://www.findarticles.com/p/articles/mi_m0999/is_7286_322/ai_72606660Accessed on 29 October, 2004
For the same reasons that smaller biotechnology carry more risk with each product, they are also more dependent on the profits from that product. By refraining from licensing until the drugs has made it through pre-clinical and phase one trials, the company is able to leverage a much bigger profit out of licensing deals because they are ten licensing a product that has already been proven of some value in a concrete way. It is certainly riskier to hold on to the product instead of transferring that risk through licensing, but I think you may be exaggerating that risk; I agree with the authors that the payoff, if the firm is able to get the product through testing, is well worth the risk. I also see collaborative development financing more as a means of generating capital than mitigating risk. The option to reacquire allows for an opportunity for…
Also, sale of the property to an unknown entity also represents a threat to Real Cortez. Faus could argue that he can look after Cortez' interests or give them a seat at the table during the sale, in exchange for their cooperation on the management agreement. So there is some room for bargaining. In particular, if offering a €19 million parcel of land for concessions that increase the NPV of the Arts Hotel by more than €19, then that is an avenue that Faus should pursue. While it is unlikely that Real Cortez would respond favorably to this aggressive application of leverage, something dramatic is needed to bring Real Cortez to the table.
4. Branding is important in the hotel business, for two reasons. Travelers often seek consistent experiences, and brands are key reference points for a reliable experience. Many frequent travelers belong to loyalty programs as well, so they…
2. The capital asset pricing model can be used to estimate the cost of capital because it allows for an estimate to be drawn as to the company's cost of equity. This can then be plugged into a weighted average cost of capital calculation along with the company's debt and, if relevant, preferred shares. The cost of equity reflects the company's risk in relation to the risk associated with the market in general. Investors will want the returns of the company to be commensurate with the risk that they are taking on, in order to justify that investment.
The capital asset pricing model is as follows:
Ra = Rf + ?(Rm-Rf)
That weighted average cost of capital is the discount rate that should be used to discount the expected future cash flows of the project to determine whether or not the project adds value to the firm.
3. The risk…
Finance Management (Discussion Questions)
Explain the difference between the accrual basis of accounting and the cash basis of accounting. What are the major reasons for accrual accounting? How are revenues defined under accrual accounting?
In the words of Snyder (2008), "the difference between cash and accrual basis accounting has to do with the time frame in which revenues and expenses are recorded and reported." According to the author, revenues when it comes to the cash basis of accounting are recorded on receipt. This could be before or even after the said revenues are earned. On the other hand, revenues as per the accrual accounting approach are recorded once they are earned (Snyder, 2008). This could be before or after the said revenues are received. Next, when it comes to the cash basis of accounting, expenses according to Snyder (2008) are recorded on payment. This could be before or…
Fishman, S. (2013). Cash vs. Accrual Accounting. Retrieved from http://www.nolo.com/legal-encyclopedia/cash-vs.-accrual-accounting-29513.html
Goyal, V.K. (2007). Financial Accounting (2nd ed.). New Delhi: Excel Books.
Investopedia. (2013). Investopedia. Retrieved from http://www.investopedia.com/
Norton, C.L., Diamond, M.A. & Pagach, D.P. (2006). Intermediate Accounting: Financial Reporting and Analysis (2nd ed.). Boston, MA: Cengage Learning.
the beta of Spock's portfolio is (.5)(.7)+(.5)(1.1) = 0.9
The beta of Kirk's portfolio is (.9)(1) + (.1)(0) = 0.9
The risk of these two portfolios is the same. Both have the same beta, which implies that they are equally risky, even though their composition is quite different.
Essentially, all securities should be priced at their fair market value, under the efficient market hypothesis. Investors should be completely ration. However, there are two possibilities to explain underpricing of assets. The first is that the investors are not entirely rational. There is certainly enough evidence to support the idea that investors behave irrationally, and the science on the subject is far from certain. So there is at least the possibility of irrational behavior leading to underpricing. Another possible explanation is that the markets are not strong form efficient. This would mean that, if the markets were weak form efficient, that…
Bond yield to maturity calculator. Retrieved December 11, 2013 from http://www.miniwebtool.com/bond-yield-to-maturity-calculator/?current_bond_price=1153.72&bond_par_value=1000&bond_coupon_rate=12&years=15
There are two different approaches to finding fault with the efficient market hypothesis. The first approach is to attack the assumptions -- for example noting that there are high degrees of information asymmetry. Indeed, this should be the case because even if the asset is priced fairly, not all investors know this for a fact based on their own analysis -- their knowledge is just an extension of their belief in efficient markets. In essence, rather than come to a rational conclusion about the value of the asset, they simply trust that the other market participants have already done so.
The other approach to refuting the efficient market hypothesis is to demonstrate that investors are not actually rational. A good place to start is to look at the rise of program trading. Program trading is when institutions use computer programs to trade securities. The analysts will input certain parameters…
NYSE. (2013). Program trading averaged 43.1% of the NYSE during Dec 16-20. New York Stock Exchange. Retrieved May 1, 2014 from http://www.nyse.com/press/1387194756904.html
Sias, R. (1996). Volatility and the institutional investor. Financial Analysts Journal. Vol. 52 (2) 13-20.
Bracelet Blanks, Inc. (BB) generated $43,803,000 in sales (all on credit) during 2010. The cost of goods sold was 57% of that total. Accounts receivable totaled $3,240,222, inventory totaled $842,020, and accounts payable totaled $1,826,070.
DIO 84050/(24967710/365) = 84050/68404 = 1.23
DSP 324020/(43803000/365) = 3240222/123042 = 26.3
DPO 186070/(24967710/365) = 186070/68405 = 2.7
Calculate BB's current cash conversion cycle.
CCC = DIO + DSO -- DPO CCC 1.23 + 26.3 -- 2.7 = 24.83
BB currently uses 3,000 ingots of aluminum each year to manufacture bracelet blanks. The order cost (including shipping) is $5,000 per order, and carrying costs are $75 per unit per year. Determine the economic order quantity, the amount of safety stock, and the reorder point for aluminum ingots assuming there is a 1-week lead time and the firm would like a safety stock of 3%.
Sqr 2 * 3000…
The experience has proven to be a real world confirmation of what I want to do in my professional life. I was charged with handling financial computations, modeling, forecasting and transactions. While doing so, I knew I have found my niche in life and need only gain both theoretical training and further real world experiences to become the best I can be in my chosen field. Once I have completed my graduate studies in Finance, I intend to apply for work at leading firms specializing in international finance and trade. This will enable me to apply knowledge learnt in undergraduate and graduate studies. Graduating from two prestigious institutions in the United States will accord me the opportunity to practice anywhere in the world since I have had the global education necessary. It will be a different world since I would have left the secure confines of the academe and enter…
Any Asset Pricing Theory forms the basic foundation of finance theory, in that it deals with the value of any asset under unknown or uncertain circumstances. The relationship between an asset and its price is the mainstay of the asset pricing theory: the lower the price, the poorer the expected performance. The Arbitrage Pricing Theory derives from this theory. The basic idea in the APT theory is that any sort of risk in asset returns must not affect the pricing of the asset in any way; it must depend on the covariance of assets with the risk factors. (Bayesian Approach of the Arbitrage Pricing Theory) The APT originated from Stephen oss, 1976-1978. oss had used a statistical procedure for assets returns, with the belief that there are in existence no arbitrage probabilities. The APT must of necessity involve a lot of risk taking processes, (Definition of Arbitrage Pricing Theory.)…
An Introduction to Investment Theory" Retrieved at http://viking.som.yale.edu/will/finman540/classnotes/class6.html . Accessed on 29 July, 2004
Bayesian Approach of the Arbitrage Pricing Theory" Retrieved at http://184.108.40.206/search?q=cache:Sa6l536IAccessed on 29 July, 2004
Capital Asset Pricing Model" Retrieved at http://www.investorwords.com/698/Capital_Asset_Pricing_Model.html . Accessed on 29 July, 2004
Definition of Arbitrage Pricing Theory" Retrieved at http://economics.about.com/cs/economicsglossary/g/apt.htm?terms=economic+theoryAccessed on 29 July, 2004
Question 1.a) Bond ratings encompass a wide range of elements related to the credit risk of the firm. Moody's notes that bond ratings include elements of default probability, loss severity, "financial strength" and "transition risk" (Cantor & Fons, 1999). The authors note that within the same sector, bonds of the same rating tend to be comparable both with respect to overall credit quality and specific credit quality characteristics. Over different segments of the bond market, this is not necessarily the case. Bond ratings tend to take in factors like the balance sheet strength of the firm, as well as the expected loss in the event of a default. Thus, the type of assets that the firm holds is an important characteristic. The transition risk reflects the likelihood that the firm will experience outright default without transitioning down through the different risk categories. Firms that are almost assuredly going to…
Cantor, R. & Fons, J. (1999). Rating methodology: The evolving meaning of Moody's bond ratings. Moody's. Retrieved April 27, 2012 from http://www.moodys.com/sites/products/AboutMoodysRatingsAttachments/2000400000300541.pdf?frameOfRef=corporate
Investopedia. (2012). Net present value. Investopedia. Retrieved April 27, 2012 from http://www.investopedia.com/ terms/n/npv.asp#axzz1tFv4YkMI' target='_blank' REL='NOFOLLOW'>
For example, many of the large investment banks may choose to deal only with large deals will have minimum transaction sizes. Therefore, the first consideration may be the suitability of the bank given the size of the organization. There may also need to be consideration of the degree of attention and expertise that the investment banker direct with the company, even if the minimum is met, large organizations with a large number of clients may have a higher level of expertise that can be directed, but they may also be more focused on large clients. This can only be assessed by talking to the relevant investment bank.
Prior to taking on any investment bank it will be necessary to allow the investment banker to make a pitch. oss details of the organization's financial position may be given prior to this pitch, but an investment banker should be willing to sign…
Friedman, Benjamin M, (1982), The Changing Roles of Debt and Equity in Financing U.S. Capital Formation, University of Chicago Press
Miller, M. H, (1988), The Modigliani -- Miller Propositions after Thirty Years, Journal of Economic Perspectives 2(4), 99 -- 120.
Turo, J, (2013, October 2), How to Choose The Right Investment Banker to Sell Your Business, Entrepreneur, accessed 27th April 2014 at http://www.entrepreneur.com/article/228671
P = 2.60 / (.0739)
P = $35.18
This example clearly shows that by reducing the risk premium, the denominator is lowered and this will have the impact of increasing the stock's price.
P7-23. a) The company's dividend apparently is not growing. The stock price would then be as follows:
P = 5.00 / .11
P = $45.45
b) The credibility issue adds 1% to the required rate of return. Thus, the new rate of return is .11 + .01 = .12
P = 5.00 / .12
P = $41.67
The company's stock is worth less as the result of its credibility problem.
c) The value difference is $45.45 - $41.67 = $3.78. The difference can be interpreted as the investor needs to earn a greater return on the investment in order to be willing to make that investment. The only way to achieve a greater return on the…
Lawrence Sports Simulation
Lawrence Sports are facing a challenge; they have a single buyer for their goods and deal with two main suppliers. he firm is facing delays in collecting the accounts receivable from the buyer; Mayo, while the payments for the suppliers; Garner Products and Murray Leather Works remain due. he strategy suggested is to readjust the credit terms with Lawrence and the suppliers to reduce the pressure o the cash flow and decrease the requirement for borrowing. he strategy requires the balancing of the different stakeholders needs in order to retain the good business relationships. he strategy of tightening the credit policy is to be accompanied by the use of the balanced scorecard which will help the firm focus on the overall performance and Cash Conversion Cycle
he cash conversion cycle measures the time between a firm spending cash and collect cash from the sales. he longer…
The alterative many be to review the payment terms offered to Mayo in order to reduce the time they are taking to pay their invoices, even offering a small discount may be preferable to the incurring of interest charges on large amounts of outstanding capital. Mayo may also resist, so this would also take negotiation and may place the business prelateship under strain; especially if Mayo has low switching costs and other suppliers are available (Mintzberg et al., 2008). A combination of the two may be advisable as it would allow for moves at both ends of the cash conversion cycle.
Balanced Scorecard Measures
The balanced scorecard is being introduced as a way of guiding and measuring the firm performance. If implemented it is necessary to assess the measures which may
The topic of finance and managerial accounting inclusively, are broad and incorporate a critical skill set in the modern day business student. Finance involves corporate and investment finance and managerial accounting is complimentary as it involves cost accounting and essentially stresses cost management. Together, these topics provide a comprehensive financial analysis skill set yielding capability in solving the day's most critical business financial quandaries. The literature review will seek to narrow down the literature and funnel the topic into the main financial analysis area.
According to Musvoto, (2011), "Studies in accounting measurement indicate the absence of empirical relational structures that should form the basis for accounting measurement. This suggests the lack of objectivity of accounting information. Landmarks in the development of finance theory indicate the use of accounting measurement information as a basis for their development. This indicates that subjective accounting information is incorporated in finance theory. Landmarks…
Allen, D. (1992). Financial management: The leading edge of management accountancy. Strategic Finance, 73(12), 53. Retrieved from http://search.proquest.com/docview/229748882?accountid=13044
Black, T., & Gallagher, L. (1999). Are physical capacity constraints relevant?: Applying finance-economics theory to a management accounting misconception. Australian Journal of Management, 24(2), 143. Retrieved from http://search.proquest.com/docview/200627217?accountid=13044
Brewer, P.C. (2008). Redefining management accounting. Strategic Finance, 89(9), 26. Retrieved from http://search.proquest.com/docview/229763529?accountid=13044
Coakley, J.R., & Brown, C.E. (2000). Artificial neural networks in accounting and finance: Modeling issues. Intelligent Systems in Accounting, Finance and Management, 9(2), 119. Retrieved from http://search.proquest.com/docview/214368060?accountid=13044
The Steps that Can be Taken to Address Financial and Reimbursement Issues
The most effective way for controlling costs, is to find out where specific waste and misuse of funds is occurring. This will help administrators to identify those areas where there is a lack of accountability and ineffective controls. Once this occurs, you would then begin seeking out specific recommendations from the different department heads about: how they can control costs and increase productivity. This will allow us to determine specific tactics that can be utilized on the divisional level to effectively control costs. (Santerre, 2010. pp. 416- 432)
The next step is to seek out other sources of outside financing (such as grants). These can be used to help modernize the facility and provide funding for new programs that are in demand. This will allow the hospital to be able to finance and expand the different services that…
Pickert, K. (2010). The Unsustainable U.S. Health Care System. Time. Retrieved from: http://swampland.time.com/2010/02/04/the-unsustainable-u-s-health-care-system/
Santerre, R. (2010). Health Economics. Mason, OH: Cengage.
Zelman, W. (2009). Financial Management of Health Care Organizations. San Francisco, CA: Josey Bass.
Financial Analysis of Morrison's PLC
Morrison's, the UK supermarket may be assessed as a potential investment. The firm may be considered by looking at the way that the share price is performing, comparing it to its past performance as well as benchmarking the performance against the industry
The share price will reflect the market expectations, so as well as looking a past performance it is also necessary to look to the potential future; this is often achieved by looking at the financial ratios of the firm considering the performance both vertically and horizontally.
Morrison's appears to have had a relativity mixed year; the share price stands at 277.60, closing price on the 24th August, 2012 (FT, 2012). The share price has been volatile, increasing and decreasing, over the last 52 weeks the high has been 340.00 and the low has been 261.00 (Yahoo Finance, 2012). Over the year the…
Baye Michael, (2007), Managerial Economics and Business Strategy, McGraw-Hill/Irwin
Elliott B, Elliott J, (2011), Financial Accounting and Reporting, London, Prentice Hall.
Financial Times, (FT), (2012), WM Morrison Supermarket PLC, retrieved 25th August 2012 from http://markets.ft.com/Research/Markets/Tearsheets/Summary?s=MRW:LSE
Financial Times, (FT), (2012), Tesco PLC, retrieved 25th August 2012 from http://markets.ft.com/Research/Markets/Tearsheets/Financials?s=TSCO:LSE
Wal-Mart would probably not bother merging with another retailer unless it was overseas, but would instead look to acquire a strategic partner with some of its other success factors, like logistics or information systems. A good example of such a company is Magellan Technology, a company specializing if FID technology, something that has been an important part of Wal-Mart's logistics strategy in recent years (Traub, 2012).
Wal-Mart has basically three options for such an acquisition -- equity, cash or a combination thereof. When purchasing a private company, Wal-Mart is more likely to use cash I would suspect, as that company's owners might not want to own stock in Wal-Mart. One of the big reasons is that Wal-Mart is so much larger than Magellan, and Magellan's former owners would probably not benefit much from ownership of Wal-Mart shares since their involvement with Magellan is not going to be a major…
Berfield, S. (2013). Where Wal-Mart isn't: Four countries the retailer can't conquer. Business Week. Retrieved January 20, 2014 from http://www.businessweek.com/articles/2013-10-10/where-walmart-isnt-four-countries-the-retailer-cant-conquer
Traub, T. (2012). Wal-Mart used technology to become supply chain leader. Arkansas Business. Retrieved January 20, 2014 from http://www.arkansasbusiness.com/article/85508/wal-mart-used-technology-to-become-supply-chain-leader?page=all
5x -- 50,000
200,000 / 7.5 = 26,6667 units
1e) the ROE for the first scenario is 140,000 / (0.85*350,000) = 47%
the ROE for the second scenario is 140,000 / (0.65*350,000) = 61.5%
The difference is 61.5 -- 47 = 14.5%
1f) the dividend payout structure is going to be as follows. The taxable income will be as follows:
($200,000 * .35) = $70,000 of debt. The interest will be (70,000)(.105) = $7,350
So taxable income will be $200,000 -- 7350 = $192,650
Tax at 30% is $57,795
Thus, net income is $192,650 - $57,795 = $134,855
The equity needed for the capital budget is (.65)(150,000) = $97,500
The dividends are therefore calculated as $134,855 - $97,500 = $37,355
The payout is therefore $37,355 / $134,855 = 27.7%
2. a) the company faces some risks if it tightens the credit policy. It will reduce its accounts receivable if it…
There is no evidence yet that federal involvement in the education system has improved outputs, which would be a prerequisite for efficiency. Part of this problem is data deficiency -- it is simply too early to tell if students reared under NCLB are more competitive because the first wave have barely left school, if they have left at all.
ith respect to Liberty, certainly federal involvement in education funding has constricted liberty. Even a small amount of federal funding can result in a strong federal influence on policy (Shelley, 2007). This influence on the system contributes to the erosion of state control. hile the states control the curriculum de jure, they are subject to varying degrees of influence from the federal government, depending on their dependence on Title I financing.
US Department of Education website. Retrieved April 24, 2009 from http://www.ed.gov/about/offices/list/ous/international/usnei/us/edlite-org-us.html
No author (2007). Congress to eigh 'No…
US Department of Education website. Retrieved April 24, 2009 from http://www.ed.gov/about/offices/list/ous/international/usnei/us/edlite-org-us.html
No author (2007). Congress to Weigh 'No Child Left Behind'. CBS News. Retrieved April 24, 2009 from http://cbs2chicago.com/politics/No.Child.Left.2.278792.html
Shelly, Bryan. (2007). A Small Lever: Federal Funding and State Compliance to No Child Left Behind. Wake Forest University. Retrieved April 21, 2009 from http://www.allacademic.com//meta/p_mla_apa_research_citation/1/9/8/5/6/pages198564/p198564-1.php
In this situation, the cost of the car is $25,000 and I have $10,000, meaning I am $15,000 short. The interest rate is 3%. The $5,000 that I have in cash will in three years be worth:
This will not be enough to purchase the car. However, collecting $5,000 three years instead of $5,000 today is absurd. The value of $5,000 in three years is going to be:
Thus, I would be giving away the difference either between this amount and $5,000 today, or the difference between $5,000 and $5,463.64 in the future.
As noted the value of $5,000 today, given three years at 3% interest, is $5,463.64. Thus, I would take $5,000 today and invest it, over taking $5,250 in three years' time.
Given that $5,000 invested today at 3% will be worth $5,463.64 in three years' time -- assuming annual compounding -- I would take $5,500 in…
Investopedia. (2012). Annual percentage rate. Investopedia.com. Retrieved June 19, 2012 from http://www.investopedia.com/ terms/a/apr.asp#axzz1yHSMIRVt' target='_blank' REL='NOFOLLOW'>
Cost of Capital
The capital which is used by a firm, and shown n the balance can be divided into two main classifications; debt and equity. When a firm assesses its total cost of capital, this will usually be calculated on a weighted basis, using the costs of the different types of capital (Elliott and Elliott, 2011). An understanding of this can be appreciated by looking at some of the main sources of capital and the costs associated with each type of capital.
One of the most common forms of capital is debt. Debt is capital that is obtained through borrowing. There are many kinds of debt, which may include long-term debt such as structured loans from banks or other financial institutions, and short-term debt, such as overdraft facilities and credit agreements with suppliers. The cost of debt is relativity simply to calculate, with most debts having an…
Collins, Bill; Mckeith, John (2009), Financial Accounting and Reporting, McGraw-Hill Higher Education
Elliott B, Elliott J, (2011), Financial Accounting and Reporting, London, Prentice Hall
Hillier, David; Ross, Stephen A.; Westerfield, Randolph W; Jaffe, Jeffrey, (2010), Corporate Finance, McGraw-Hill Higher Education
Managing exchange rate risk can be a daunting task for many international firms attempting to expand overseas, acquire new companies, or simply manage its cash flows. Globalization has created a dynamic environment in which competition can arise to disrupt entire industries. Aspects such as technology, pharmaceuticals, banking, and automobiles have all experienced rapid change as a result of globalization and the competitive forces that underline it. As a result, companies, particularly smaller firms, have a higher propensity to experience volatile earnings overtime. Aspects that impact one sector of the globe can have a residual impact on other areas of the individual firm or industry. Managing exchange rates is therefore a viable option for firms to reduce volatility in earnings while subsequently managing its cash flows from operations. Below, is a 5 step program which could be implemented by a firm attempting to manage its exchange rate risk after an…
1. Jorion, Philippe (2009). Financial Risk Manager Handbook (5 ed.). John Wiley and Sons. p. 287. ISBN 978-0-470-47961-2.
2. Bartram, Sohnke M. (2006). "The Use of Options in Corporate Risk Management." Managerial Finance 32 (2): 160 -- 181
To start with, budgets assist companies function within their earnings over the long-term. Budgets aid companies in expending less money than they make. Budgets also aid companies attain their monetary goals by scheduling for the future and managing money into groups such as revenue, operating expenses, and savings. In brief, budgets aid businesses steer clear of credit troubles, better get ready for monetary crisis, and construct better capital administration skills by generating an ordered plan (Nelson, 2011).
Businesses make budgets for an assortment of causes. They can serve a diversity of function, and therefore a lot of methods can be put into practice to develop them. Budgets can be utilized as a way of forecasting and scheduling for the future. Their formation can also be utilized as a motivational device. The plan can be utilized as a way of assessment and direct as well as a supply for knowledge and…
Elmerraji, Jonas. (2010). How Budgeting Works for Companies. Retrieved February 10, 2011,
from Web site: http://www.investopedia.com/ articles/07/budgetingforcompanies.asp' target='_blank' REL='NOFOLLOW'>
On top of this, it's important to remember that FDI inflows to the LDCs are highly concentrated geographically: four petroleum-producing LDCs - Angola, Chad, Equatorial Guinea and Sudan - received more than half (56%) of the total FDI inflows going to all 50 LDCs in 2000-05 (United Nations Conference on Trade and Development, 2007).
LDCs are riskier investments than emerging countries. Emerging countries show signs of advancement in their financial structures - banks, stock markets, regulatory bodies, and have reached a certain level of maturity in terms of depth, breadth and liquidity in its financial structure and economy as a whole (What is the distinction between less developed and emerging markets?). Less developed countries, on the other hand, have not yet reached this stage of financial and economic development.
OCO Global. http://www.earthtimes.org/articles/show/global-foreign-direct-investment-grows-to-almost-1-trillion-in,301274.shtml
Foreign direct investments in 2007. EconomyWatch. http://www.economywatch.com/foreign-direct-investment/2007.html
United Nations Conference on Trade and Development. http://www.unctad.org/Templates/webflyer.asp?docid=8624&intItemID=4431&lang=1…
OCO Global. http://www.earthtimes.org/articles/show/global-foreign-direct-investment-grows-to-almost-1-trillion-in,301274.shtml
Foreign direct investments in 2007. EconomyWatch. http://www.economywatch.com/foreign-direct-investment/2007.html
United Nations Conference on Trade and Development. http://www.unctad.org/Templates/webflyer.asp?docid=8624&intItemID=4431&lang=1
It was also very interesting to note that many large suppliers may actually step in to help their troubled client. Again, this makes sense, especially if the client is a long-term business partner doing a major amount of business with the company. Saving a company actually makes sound financial sense in these cases, and uniting with a group of company creditors is also a good idea. It seems that for the most part, when a company runs into financial difficulties, if they are a viable and respectable company, there are resources available to help them regain their footing and continue business. This shows how important it is to always have excellent relationships with customers, no matter what business you engage in.
Brownstein, Howard and Edward Gavin. "When Bad Things Happen to Good Customers." Business Credit, June 2003, retrieved from ProQuest…
Brownstein, Howard and Edward Gavin. "When Bad Things Happen to Good Customers." Business Credit, June 2003, retrieved from ProQuest 27 June 2007.
For example, a collectivistic society is typically preoccupied with high-context communication while an individualistic society is often characterized by low-context communication. (Gudykunst and Stella, 1991, p. 96). China, as a whole, is a collectivists society and thus uses high-context communications. This means that the fashion in which they transmit information is dependent on whether it is "in the physical context or internalized in the person." (Hall, 1976, p. 91). In other words, Chinese typically communicate in an implicit way. As such, in Chinese society one will observe people placing the greatest emphasis on interpersonal relationship in which they communicate with in an "indirect, ambiguous and roundabout way." (Gudykunst, 1991, p. 51).
This type of information is important for a Western business person to understand if they are to successfully do business in the Chinese marketplace. Therefore, it is essential that Western businesses and business school focus their training on cultural…
Gudykunst, William B. (1991). Effective Intergroup Communication. Newbury Park: Sage Publications.
Hall, Edward T. (1976). Beyond Culture. New York: Anchor Books.
Sorkin, however, posits no argument per se. ather, his book offers insight into how the financial crisis manifested from a far more personal perspective of those involved than anything else. The book is informative in nature, and give insight into some of the thought processes and activities those on the outside may not otherwise be exposed to or privy to. The title of the book sums it up best, and the book outlines how the banks and the primary players and stakeholders have become too big to fail. The book highlights the self-interest of those in charge of some of the biggest financial institutions in the world and their blatant disregard for Main Street.
The book has a place in the larger academic debates raised within public knowledge because it adds to the public's real knowledge of those involved in the nation's financial industry and government offices. Instead of speculating…
Cassidy, J. (2008). Anatomy of a meltdown, New Yorker, 84(39), 1-756.
Cherry, C. (1998). God's new Israel: Religious interpretations of American destiny.
UNC Press Books.
Cohan, W. (2010, Nov. 27). The power of failure. New York Times. Retrieves from www.thenewyorktimes.com.
One batch takes 20 hours to make and produces 400L of ice cream. Sales last year totaled 50,000,000 liters of ice cream and the plant was working at full capacity. Therefore, the plant's capacity in working hours is:
50,000,000 / 400 = 125,000 batches * 20 hours per batch = 2.5 million machine hours. That is 285 machines in the plant, each working 24 hours per day.
Fixed manufacturing costs are $3,000,000 in total. The plant produces 50,000,000 liters of ice cream last year. Thus costs are 3,000,000 / 50,000,000 = $0.06 per liter of ice cream.
Variable factory overhead is $1,000,000 for the plant, or one-third of the fixed manufacturing overhead. This means that the variable factory overhead is going to be $0.02 for every liter of ice cream.
Based on the costs of inputs, the total cost of a liter of ice cream is as follows:
Globusz Publishing (2010). Standard cost. Globusz Publishing. Retrieved November 9, 2010 from http://www.globusz.com/ebooks/Costing/00000014.htm
The difference in the interest rates would have predicted a much greater change in the exchange rates between these two countries. This begs the question as to why the rates did not change further.
There are a few possible explanations for this discrepancy. The first is that the expected inflation in Brazil failed to material, and the second is that inflation in the U.S. was higher than expected. U.S. inflation is not high, but it is growing, whereas interest rates are not growing yet. In contrast, the Brazilian government's response to its inflation situation is more in line with what would be expected.
The real has underperformed expectations, and there could also be domestic factors. If we look at the six factors that affect exchange rates, we can see that there may be issues with respect to public debt (if Brazil has performed worse than expected) or political stability and…
Bureau of Labor Statistics. (2012). Consumer price index -- February 2012. BLS.gov. Retrieved March 16, 2012 from http://www.bls.gov/news.release/pdf/cpi.pdf
Investopedia. (2012). Inflation and interest rates. Investopedia. Retrieved March 16, 2012 from http://www.investopedia.com/ university/inflation/inflation3.asp#axzz1pI61aUrV' target='_blank' REL='NOFOLLOW'>
Discuss some of the motivations firms have for setting up production facilities in other countries. Will the effect on the host country differ depending upon the motivation? Explain. Will the effect on the source country differ depending upon the motivation? Explain. What relationship might trade barriers (or the lack of trade barriers) have in determining a company's primary motivation for producing abroad?
The reasons for the foreign investment are high profit returns, and the rate of return is dependent upon the capital invested, the tax reductions and employees' fund. The foreign investment or production company is highly welcomed by the government because the company is expected to bring in foreign exchange. THz enhances the purchasing power of the country in international currency; thereby the nation has to rely minimum on loans and international borrowing.
The major motivation that the international investor has towards foreign investment is that cheap labor…
The FCF-based valuation model is based on the following formula:
EBIT (1-Tax Rate) + Depreciation & Amortization - Change in Net orking Capital - Capital Expenditure
is the free cash flow each year, C0 is the original cash outlay, and r is the discount rate. The free cash flows in this type of calculation are only those cash flows that are incremental to the investment decision. Thus, they do not include such non-cash items as depreciation or amortization expense, and they do not include either sunk costs or non-incremental flows like overhead allocations. The r is the discount rate, and the firm can select its discount rate from a number of different options. The most common, and arguably logical, is the firm's weighted average cost of capital. This reflects the firm's cost of equity, its cost of debt and its capital structure, with allowances for preferred shares…
Berkman H., Bradbury, M. & Ferguson, J. (2002). The accuracy of price-earnings and discounted cash flow methods of IPO equity valuation. Journal of International Financial Management and Accounting. Vol. 11 (2) 71-83.
Del Vecchio, J. (2000). Dividend discount model. Motley Fool. Retrieved April 27, 2012 from http://www.fool.com/research/2000/features000406.htm
Demirakos, E., Strong, N. & Walker, M. (2004). What valuation models do analysts use? Accounting Horizons. Vol. 18 (4) 221-240.
Francis, J., Olsson, P. & Oswald, D. (2000). Comparing the accuracy and the explainability of dividend, free cash flow and abnormal earnings equity value estimates. Journal of Accounting Research. Vol. 38 (1) 45-70.
Investments and the Irrelevance Proposition
The expected rate of return on an investment is calculated by taking the expected return and dividing it by the amount invested. If there is a return of $6 on an investment of $100 the rate of return is 6%.
When a customer states they are unhappy with this return, and it is suggested that they borrow $90 to help pay for the investment, which has an interest rate of 4%, the broker is suggesting that the investor goes from an unleveraged position where there is no borrowing, to a highly leveraged position, where there is a high level of borrowing.
Looking at the effect this will have on the investment the first consideration is to look at the investment itself; if the investor borrows $90 and invests $10 of their own, there is still a total investment of $100, and the return for…
Baye Michael, (2007), Managerial Economics and Business Strategy, McGraw-Hill/Irwin
Miller, M. H, (1991), Financial Innovations and Market Volatility, Cambridge, Massachusetts: Blackwell Publishers
Calculating nvestment Values
When a firm has a number of investment options but can only undertake one, the firm is likely to undertake some assessments in order to determine which is likely to provide the optimal return. n the first scenario there are three potential factory expansion choices, with the need to determine which will create the greatest value for the firm. The investment levels and the expected net profit per annum have been supplied. This may be used as the basis for a comparison.
The assessment method used is a straightforward approach which looks at the return on the capital to be invested. t is assumed that the firm want to gain the greatest potential return and that there will be other investment opportunities for any capital that is not used to fund the factory expansion.
To calculate the expected return the expected net profit is divided by…
If it is assumed that the profit level remains the same, the use of the dividend discount model can be used to assess the firms' value
. If it is assumed that the profit level remains the same, and does not decrease, and an alternate investment over a long period of time will yield 11%, this will give the firm a value of $509,090, this is above the asking price. Therefore, while the firm has a low level of assets, it is generating income. The issue that would hold back a purchase would be the current decline in profit and concern for the reason this is declining and Gino's reason for sale. If there are no other negative factors then $200,000 may be a fair price.
Dividend discount model calculator can be found at http://www.moneychimp.com/articles/valuation/dcf.htm
Flexible Budget for Yum Brands Inc.
Flexible budgeting allows a firm to look at different potential scenarios, often this may be undertaken for an optimistic, pessimistic and most likely scenario. Firms will often undertake forecasting exercises; these may be based on complex approaches to assess likely demand, for example, considering past patterns of sales, the impact advertising they will have and other factors such as the influence of the economic climate, competition and social factors. However, forecasts are unlikely to be fully accurate, the development of a flexible budget allows the firm to look at different scenarios, and create a more flexible approach towards planning. This can be particularly important when the firm is planning for a longer period of time, such as a full financial year, this can be seen by preparing a flexible budget for a well-known company. Yum! Brands is a large corporation which develops, operates…
McDonalds, (2013), Shareholder Information, accessed http://www.aboutmcdonalds.com/mcd/investors/shareholder_information.html on 4th Jan 2014
Trading Economics, (2014), U.S. GDP Growth Rate, accessed http://www.tradingeconomics.com/united-states/gdp-growth on 4th Jan 2014 from Yum! Brands Inc., (2013), 10-k for 2012, Yum Brands Inc.
Yum! Brands Inc., (2011), 10-k for 2010, Yum Brands Inc.
Financial Projections for Touch My Knuckles
Touch My Knuckles, a firm selling mixed martial arts appeal, including shirts, fleeces, hats and sweatshirts will provide a great potential for investment. The aim of this paper is to look at the financial statements for the first three years of operating, including start-up costs, cash flow, income statement and balance sheet. Following the financial analysis consideration will be given to the way in which the may be raised an issue of capital structure.
The following financial statements indicate potential of the business. The financing being requested in $248,560, this can been calculated with reference to the start up costs, less the available capital, with an allowance of the operating loss that will be made in the first month.
The start up costs are relativity modest due to the use of outsource suppliers who will send the goods directly to the…
I would advise that Mr. Haskins has to understand that the banks are businesses, and make strategic investments when they think those businesses will pay off. This means that AMD needs to ensure that the banks are happy, in order to secure financing. That means giving the banks what they need to feel secure in this investment. Receivables are not adequate collateral, for a lot of reasons, and ancient receivables are especially worthless. Likewise, giant stockpiles of inventory are not good collateral for a bank. Mr. Haskins has to understand that banks are not interested in these things as collateral, but if he gives the banks what they want he can have loans on the strength of his business.
Mr. Haskins must realize that banks are partners, but they need something out of the deal as well, and do not operate on blind faith. As such, Mr. Haskins needs to…
3) a. If $1.25 represents a 40% dividend payout ratio, earnings per share are $3.13. A six percent return (the required return) would put future earnings at $3.32. ((3.32-3.13)*100)/3.13 = 6.07%
b. 40% (the dividend payout ratio) of $3.32 (future estimated earnings) is $1.33
c. The price of the stock cannot be calculated accurately with the information given, however if its is assumed that the earnings per share (currently $3.13 with dividends of $1.25 and a dividend payout ratio of 40%) represent the 20% return on equity, then the price is simply five times the earnings per share, or $15.65.
d. assuming the dividend payout ratio and return on equity remain constant at 40% and 20% throughout this period, a and the same relationship for the ROE and stock price, in the first year, a dividend of $2 means EPS increases to $5, translating to a stock price of…
Since 2010 the organization has demonstrated a decline in revenue of 11.08%. However, one would expect some decline as a result of the divestments took place in 2011.
The gross profit for the year ending 2012 was $8,019, which equates to a gross profit margin of 22.21%. However, the operating profit demonstrated a loss of $519, hindered by high ongoing Goodwin and intangible asset charges. However, was a lower operating loss compared to the operating loss in 2011 when it was $976.
The income statement shows the net earnings. In financial ***** earnings may be presented either before or after tax. As Supervalu are struggling and benefited from a negative tax payment in 2011, this report will use the definition of net earnings being earnings after tax. Calculated after provisions for income tax, showed a loss of $1,040, equating to -2.88%. However, it is notable that this is an improvement…
This company is well positioned to capitalize on the growing population of older Americans whose children have moved out and are in search of more efficient and cost-effective homes. Like the business model adopted by NVR, Toll also takes advantage of efficiencies in its value chain by developing its properties on land that the company has either acquired and/or developed.
For the 5-year period ended October 31, 2004, Toll had completed 24,271 homes in 456 communities, including 6,627 homes from 273 communities during the fiscal year ended October 31, 2004 (Toll 2).
Toll also operates its own land development, architectural, engineering, mortgage, title, security monitoring, landscape, cable television, broadband Internet access, lumber distribution, house component assembly and manufacturing operations, as well as owning and operating golf courses and country clubs in connection with a number of the company's master planned communities (Toll 3). hile Toll's stock performance cannot compare with…
NVR, Inc. (2005). Yahoo! Finance. Retrieved February 18, 2005 at http://finance.yahoo.com/q?s=TOL .
Toll, Inc. (2005). Yahoo! Finance. Retrieved February 18, 2005 at http://finance.yahoo.com/q/pr?s=TOL .
An investor choosing between two different companies must undertake several steps in order to determine the best investment. In addition to understanding the industry of the company from a strategic perspective, a thorough financial analysis should be conducted. The strategic analysis will help to understand the underlying trends of the financial assessment. The financial analysis should include a ratio analysis, and should focus on the key areas of liquidity, solvency, leverage and profitability. In addition, the performance of the company's equity should be analyzed, particularly in relation to the company's financial performance. This will help to determine if the current share price is good value. This report will analyze two different companies -- Marks & Spencer and Tullow Oil -- using these criteria. There will also be a brief corporate social reporting analysis.
Marks & Spencer Overview
M&S is a department store retailer based in the UK, but operating…
Marks & Spencer 2010 Annual Report. Retrieved February 11, 2011 from http://annualreport.marksandspencer.com/overview/about-us.aspx
Yahoo! Finance: Marks & Spencer. Retrieved February 11, 2011 from http://finance.yahoo.com/q/bs?s=MKS.L+Balance+Sheet&annual
TullowOil.com. (2011). Retrieved February 11, 2011 from http://www.tullowoil.com
Yahoo! Finance: Tullow Oil. Retrieved February 11, 2011 from http://finance.yahoo.com/q/is?s=TLW.L+Income+Statement&annual
Starbucks is engaged in the quick service food industry, primarily focused on coffee and related snacks. The company has come under strong competitive and economic pressures recently, and this has impacted its performance. However, Starbucks has turned around its financial performance in the past year, which has restored investor confidence in the company.
Starbucks is both liquid and solvent. In the past year or so, they have improved their liquidity and solvency ratios. They added long-term debt to their balance sheet in 2007 but have not increased this debt since. The company's margins have slowly eroded over the past five years, mainly due to a decline in customer side pricing power as the result of competition from low price providers. Starbucks has also seen its efficiency erode, likely due to expanding into less-saturated markets around the world in search of growth. Overall, however, the company's financial performance has been…
Allison, M. (2010). Starbucks tests new names for stores. Seattle Times. Retrieved October 24, 2010 from http://seattletimes.nwsource.com/html/localnews/2009479123_starbucks16.html
Groom, N. (2007). Starbucks shares hit 18-month low -- time to buy? Reuters. Retrieved October 24, 2010 from http://www.reuters.com/article/idUSN1541189820070515
MSN Moneycentral: SBUX. (2010). Retrieved October 24, 2010 from http://moneycentral.msn.com/investor/invsub/results/hilite.asp?Symbol=SBUX
Starbucks 2005 Annual Report. Retrieved October 24, 2010 from http://library.corporate-ir.net/library/99/995/99518/items/178286/Annual_Report_2005_part2.pdf
Coca-Cola and Pepsi are the world's two largest producers of non-alcoholic beverages. Both companies are global in scope, and market hundreds of different products. Each has multiple billion-dollar brands. Yet, there are significant differences between the two. Coca-Cola has typically focused on its soft drink businesses, while Pepsi has sought to build market size through diversification. Corporate restructuring has allowed Pepsi to divest itself of its restaurant businesses and its bottling business, leaving the company in recent years with a structure similar to that of its rival and a focus on the beverage and snack food industry. The intent of this paper is to analyze the two soft drink giants in the context of their finances. The financial performance of these companies derives from their business practices, so some attention will be paid to strategic issues in this report. The bulk of the report, however, will be focused on…
MSN Moneycentral: Coca-Cola Company. (2010). Retrieved October 23, 2010 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=KO&lstStatement=CashFlow&stmtView=Ann
MSN Moneycentral: PepsiCo. (2010). Retrieved October 23, 2010 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=PEP
PepsiCo 2009 Annual Report. In possession of the author.
Coca-Cola Company 2009 Form 10-K. In possession of the author.
("On the Ground Floor of Global Growth," 2010)
The average rate growth in net income is 6.5%. The below table is illustrating the different projections over the next three years.
Net Income Estimates
("On the Ground Floor of Global Growth," 2010)
These figures are highlighting how the net income will be consistently increasing between 2011 and 2013.
Earnings Per Share
("Yum rands," 2010) ("On the Ground Floor of Global Growth," 2010)
The average rate of growth for the EPS is 15.05%. The below table is: showing how these numbers are expected to increase in the future.
Earnings Per Share Estimates
("On the Ground Floor of Global Growth," 2010)…
2010 Annual Report. (2010). Yum Brands. Retrieved from: http://www.yum.com/annualreport/
Fundamental Analysis. (2011). Investopedia. Retrieved from: http://www.investopedia.com/ terms/f/fundamentalanalysis.asp' target='_blank' REL='NOFOLLOW'>
Finance & Management
The acid test, or quick, ratio adjusts current assets by removing less liquid assets, primarily inventories. It is expressed as coverage of so many times and is used to calculate working capital as the excess of current assets over current liabilities. By subtracting the inventories, or less liquid assets, it adjusts the assets to calculate for a truer working capital picture.
The current ratio measures short-term solvency, the extent current assets are sufficient to cover current liabilities. This ratio relates total current liabilities to cash, marketable securities, and receivables. If the current ratio is less than 1 and a competitor in the same industry is higher than 1, it shows that the company is carrying less inventory than its industry counterparts.
The inventory turnover ratio measures the liquidity of the inventory by calculating the number of times on average a company sells the inventory during…