Fi515 Chapter 1 Mini Case

MINI CASE a. why is bodied pay pregnant to all in all managers? somatic finance is important to all managers because it provides managers the skills needed to identify and select the corpo graze strategies and individual projects that summate valuate to their firm and forecast the funding requirements of their association and devise strategies for getting those bully. b. Describe the organizational forms a company talent have as it evolves from a start-up to a study corporation. List the advantages and disadvantages of each form.The organizational forms a company might have as it evolves from a start-up to a major corporation ar proprietorship, partnership, or corporation. The advantages of a proprietorship argon slow and inexpensive to form, Subject to few politics regulations, and Income non subject to corporate taxation. The disadvantages of a proprietorship atomic number 18 May be difficult to start out the capital needed for offset, Unlimited personal li ap titude for the businesses debts, and Limited to the conduct of its founder. The advantages of a partnership atomic number 18 Relatively easy to establish, Increased ability to raise funds, Prospective employees bring about attracted to the business if given the incentive to become a partner, May benefit from the combination of complementary skills of two or more people, Can be comprise effective, and Provide moral champion and will allow for more creative brainstorming. The disadvantages of a partnership atomic number 18 Partners ar jointly and individually liable for the actions of the separate partners, Profits must(prenominal) be shargond, Disagreements can occur, May have limited life history, Has limitations that keeps it from becoming a large business, Partners have to consult with each other before qualification decisions, and Unlimited liability.The advantages of a corporation are Unlimited life, Easy transferability of possession interest, and Limited liability. The disadvantages of a corporation are Earnings may be subject to double taxation, and Complex and time-consuming set up. c. How do corporations go public and continue to grow? What are agency problems? What is corporate organization? potbelly stoves go public and continue to grow by selling comport to outsiders or venture capitalists, attracting lending from banks or raising additional funds through an initial public offering (IPO) by selling phone line to the public at large.Agency problems are conflicts of interest arising betwixt commendationors, shareholders and managers because of differing goals. Corporate governance is the relationship between all the stakeholders in the company. d. What should be the elemental objective of managers? The primary objective of managers is stockholder wealth maximization, which means to maximize the fundamental damage of the firms common stock and non just the current market harm. 1)Do firms have any responsibilities to society at lar ge? Yes, firms have responsibilities to society at large.Corporate genial state is operating a business in a manner that accounts for the social and environmental impact created by the business. This means a commitment to underdeveloped policies that integrate responsible practices into daily business operations and to reporting on progress made toward implementing these practices. 2)Is stock price maximization good or bad for society? Stock price maximization is good for society. Shareholders are members of society. Consumers benefit when companies develop products and services that consumers want and need, which conducts to radical technology and new products.Employees benefit generally when companies successfully increase stock prices, it opens up growth and addition for more employees. 3)Should firms behave ethically? Yes, firms should behave ethically. There is no room for unethical behavior in the business world. Most executives swear that there is a positive correlation between ethics and semipermanent profitability. Conflicts often arise between pay and ethics. Companies must deal with these conflicts on a regular basis. Failure to handle these situations properly can lead to huge product liability suits and even bankruptcy. e.What three aspects of currency flows partake the valuate of any investment? The three aspects of cash flows the walk out the value of any investment are the amount of expected cash flows, the measure of the cash flow stream, and the risk of the cash flows. f. What are discharge cash flows? Free cash flows are the monies available for distribution to all investors afterward paying current expenses, taxes, and making the investments necessary for growth. g. What is the weighted average represent of capital? The weighted average live of capital is the rate that a company is expected to pay on average to all its earnest holders to finance its assets. . How do free cash flows and the weighted average cost of capital interact to nail down a firms value? Free Cash Flow = Sales Revenues Operating Costs and taskes necessitate Investments in Operating exhaust hoodital. Weighted Average Cost of Capital (WACC) is disturb by market interest rates, market risk aversion, cost of debt, cost of fairness, firms debt/equity mix, and firms business risk. Therefore, free cash flows and the weighted average cost of capital interact to determine a firms value by the following comparison Value=FCF1+FCF2+ +FCF00 (1 + WACC)1(1 + WACC)2(1 + WACC)00 i.Who are the providers (savers) and users (borrowers) of capital? How is capital transferred between savers and borrowers? Households and some inappropriate governments are the providers (savers) of capital. Non-financial corporations net users and U. S. governments are users (borrowers) of capital. Financial corporations are slight users (borrowers), but al most(prenominal) breakeven. Capital is transferred between savers and borrowers by study transfer, th rough an investment banking house, or through a financial intermediary. j. What do we call the price that a borrower must pay for debt capital? What is the price of equity capital?What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the prudence? The price that a borrower must pay for debt capital is cal guide the interest rate. The price of equity capital is the cost of equity equals required return equals dividend digest plus capital gains. The four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy are production opportunities, time preferences for consumption, risk, and expected inflation. k. What are some frugal conditions (including outside(a) aspects) that affect the cost of money? slightly economic conditions (including international aspects) that affect the cost of money are country risk and exchange rate risk. Country risk depends on the countrys economic, political, and social environment. transmute rate risk is dependent on the non-dollar denominated investments value. l. What are financial securities? Describe some financial instruments. Financial securities are pieces of report card with contractual provisions that entitle their owners to unique(predicate) rights and claims on specific cash flows or determine. Some financial instruments are U. S. Treasury Bills Sold by U. S.Treasury Default-free risk 91 days to one year first maturity Money Market Mutual Funds Invest in short-term debt held by businesses and individuals Low degree of risk No specific maturity (instant liquidity) Consumer Credit Loans Loans by banks/credit unions/finance companies Risk is variant Original maturity is variable U. S. Treasury Notes and Bonds Issued by U,S, government No default risk, but price falls if interest rate rises 2-30 long time pilot program maturity Municipal Bonds Issued by state and local government to individuals and institutions Riskier than U. S. overnment guides, but exempt from most taxes Up to 30 years original maturity m. List some financial institutions. Some financial institutions are commercial banks, investment banks, savings and loan, mutual savings bands, credit unions, life damages companies, mutual funds, pension funds, and hedge funds and private equity funds. n. What are some different types of markets? Some different types of markets are sensual asset markets, financial asset markets, spot markets, future markets, money markets, capital markets, mortgage markets, consumer credit markets, and world, national, regional and local markets. . How are secondary markets unionised? Secondary markets are organized by location and the way that orders from buyers and sellers are matched. 1)List some physical location markets and some computing device/telephone networks. Some physical locations markets are New York Stock permutation, the American Stock Exchange (AMEX), the Chicago Boa rd of Trade (CBOT), and the Tokyo Stock Exchange. Some computer/telephone networks are NASDAQ, government bond markets, and foreign exchange markets. 2)Explain the differences between open outcry auctions, dealer markets, and electronic communications networks (ECNs).Auction markets are markets where participants have a seat on the exchange, meet face-to-face, and place orders for themselves or for their clients. The two largest auction markets for stocks are the New York Stock Exchange and the American Stock Exchange. The New York Stock Exchange is a modified auction with a specialist. Dealer markets are markets where dealers keep an inventory of the stock (or other financial assets) and place bids and ask advertisements, which are prices at which they are impulsive to buy and sell. There are often many dealers for each stock.A computerized quotation system keeps track of bid and ask prices, but does not automatically match buyers and sellers. Examples of dealer markets are the NASDAQ National Market, NASDAQ Small Cap Market, London SEAQ, and German Neuer Market. Electronic communication networks (ECNs) are computerized systems that match orders from buyers and sellers and automatically execute the transaction. It is a low cost to transact. Examples of ECNs are Instinet (U. S. stocks owned by NASDAQ), Archipelago (U. S. stocks owned by NYSE), Eurex (Swiss-German futures contracts), and SETS (London stocks). p.Briefly explain mortgage securitization and how it contributed to the global economic crisis. mortgage securitization is the pooling of various mortgage loans and their usage as collateral to sheer securities. This process allows the originator of the mortgage loans to restructure its balance sheet by reducing the receivables and using the funds received from the sale of securities to invest elsewhere. Mortgage securitization allows the originators of the loans to diversify their risk besides enabling them to secure immediate liquidity for assets wh ich would otherwise have face some difficulty in trading. http//www. economywatch. com/finance/high-finance/mortgage-securitization. html) Mortgage securitization contributed to the global economic crisis in many ways. Homeowners wanted interrupt homes than they could afford. Mortgage brokers encourage homeowners to take mortgages even though they would reset the payments to amounts that the borrowers might not have been able to afford because the brokers got a commission for closing curtain the deal. Appraisers were over-appraising house values and getting salaried at the time of the appraisal. Originating institutions (e. . , Countrywide) were apace selling the mortgages to investment banks and other institutions. Investment banks created CDOs and got rating agencies to help soma and then rate the new CDOs with rating agencies making big profits despite the conflicts of interest. Financial engineers used unrealistic inputs to generate high values for the CDOs. Investment bank s sold the CDOs to investors and made big profits. Investors bought the CDOs but either didnt understand or didnt care about the risk. Some investors bought insurance via credit default swap. When the mortgages were reset and the borrowers defaulted on them, the values of the CDOs plummeted. Many of the credit default swaps failed to provide insurance because the counterparty failed. Many originators and securitizers still owned sub-prime securities, which led to many bankruptcies, government takeovers, and fire sales including New Century, Countrywide, Fannie Mae, Freddie Mac, and many more. PROBLEMS (2-6)In its most recent financial statements, Newhouse, Inc. reported $50 gazillion of net income and $810 million of retained earnings.The previous retained earnings were $780 million. How much in dividends was pay to shareholders during the year? Dividends Paid= (Previous hold Earnings + exonerate Income) Recent Retained Earnings = ($780 million + $50 million) $810 million = $8 30 million $810 million = $20 million (2-7)The Talley Corporation had a rateable income of $365,000 from operations after all operating costs but before (1) interest charges of $50,000, (2) dividends received of $15,000, (3) dividends paid of $25,000, and (4) income taxes.What are the firms income tax liability and its after-tax income? What are the companys marginal and average tax rates on taxable income? Taxable Income$365,000 Less Interest Charges(50,000) Plus Dividends Received4,500? $15,000(1 0. 70) = $4,500 Total Taxable Income$319,500 Tax Liability= $22,250 + ($319,500 $100,000)(0. 39) = $22,250 + ($219,500)(0. 39) = $22,250 + $85,605 = $107,855 After-Tax Income Total Taxable Income$319,500 Less Tax Liability(107,855) Plus Non-taxable Dividends Received10,500? 15,000(0. 70) = $10,500 Net Income$222,145 Marginal Tax measure = 39% Average Tax Rate= Tax Interest Income/Taxable Operating Income = $107,855/$319,500 = 0. 33757 or 33. 76% (2-9)The Shrieves Corporation has $10, 000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 7. 5%, state of Florida muni bonds, which yield 5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrieves corporate tax rate is 35%, and 70% of the dividends received are tax exempt. make the after-tax rates of return on all three securities. AT&T Bonds $10,000 x 7. 5% = $750 Taxes = $750 x 35% = $262. 50 $750 $262. 50 = $487. 50 AT&T Bond reelect = $487. 50/$10,000 = 0. 04875 or 4. 875% AT&T Preferred Stock $10,000 x 6% = $600 Tax freedom = $600 x 70% = $420 Taxable Income = $600 $420 = $180 Taxes = $180 x 35% = $63 $600 $63 = $537 AT&T Preferred Stock Yield = $537/$10,000 = 0. 0537 or 5. 37% Florida Muni Bonds $10,000 x 5% = $500 Not taxable, so no tax deductions Florida Muni Bonds Yield = $500/$10,000 = 0. 05 or 5%