Fi515 Chapter 1 Mini Case

miniskirt CASE a. Why is corporeal pay heavy to exclusively managers? Corpo drift finance is important to each(prenominal) managers because it provides managers the skills needed to identify and select the corporate strategies and single projects that add value to their trusty and forecast the livelihood requirements of their compevery and devise strategies for acquiring those funds. b. Describe the organisational forms a company might deliver as it evolves from a start-up to a major partnership. List the advantages and disadvantages of to each one form.The organizational forms a company might sop up as it evolves from a start-up to a major corporation atomic number 18 proprietary, partnership, or corporation. The advantages of a proprietorship be Easy and inexpensive to form, Subject to few giving medication regulations, and Income non subject to corporate evaluateation. The disadvantages of a proprietorship argon May be difficult to acquire the not bad(p) neede d for explicateth, Unlimited personal obligation for the origines debts, and Limited to the life of its founder. The advantages of a partnership ar Relatively easy to establish, Increased ability to bring forward funds, Prospective employees become attracted to the employment if given the bonus to become a partner, May good from the cabal of complementary skills of two or much people, top be woo effective, and Provide moral curb and will allow for more creative brainstorming. The disadvantages of a partnership argon Partners are jointly and each liable for the actions of the other partners, Profits must be shared, Disagreements can occur, May have limited life, Has limitations that keeps it from get a large business, Partners have to consult with each other before do decisions, and Unlimited liability.The advantages of a corporation are Unlimited life, Easy transferability of ownership occupy, and Limited liability. The disadvantages of a corporation are winnings may be subject to double appraiseation, and thickening and time-consuming set up. c. How do corporations go universal and continue to grow? What are agency problems? What is corporate memorial tablet? Corporations go public and continue to grow by selling cable to outsiders or imagine outstandingists, attracting lending from banks or raising additional funds done an initial public offering (IPO) by selling stock to the public at large. part problems are conflicts of engage arising surrounded by identificationors, shareholders and managers because of differing goals. Corporate governance is the relationship between all the s assimilateholders in the company. d. What should be the primary objective of managers? The primary objective of managers is stockholder wealth maximation, which intend to maximize the fundamental value of the unwaverings common stock and not just the genuine market legal injury. 1)Do firms have any responsibilities to bon ton at large? Yes, firm s have responsibilities to society at large.Corporate social responsibility is operate a business in a fashion that accounts for the social and environmental impact created by the business. This means a commitment to developing policies that integrate accountable practices into daily business operations and to reporting on progress made toward implementing these practices. 2)Is stock monetary value maximization good or bad for society? hackneyed terms maximization is good for society. Shareholders are members of society. Consumers benefit when companies develop products and services that consumers want and need, which leads to new engineering science and new products.Employees benefit customaryly when companies successfully annex stock prices, it opens up growth and addition for more employees. 3)Should firms behave ethically? Yes, firms should behave ethically. in that location is no room for unethical behavior in the business world. Most executives believe that there is a commanding correlation between ethics and long-run profitability. Conflicts ofttimes arise between profits and ethics. Companies must select with these conflicts on a regular basis. Failure to detention these situations properly can lead to huge product liability suits and even bankruptcy. e.What three aspects of interchange flows equal the value of any practiceing? The three aspects of interchange flows the chance on the value of any investing are the amount of anticipate cash flows, the timing of the cash flow stream, and the fortune of the cash flows. f. What are tolerant cash flows? Free cash flows are the monies obtainable for distri bution to all investors after wagesing current expenses, taxes, and making the investments necessary for growth. g. What is the weighted median(a) personify of capital? The weighted average terms of capital is the rate that a company is expected to pay on average to all its security holders to finance its pluss. . How do free c ash flows and the weighted average make up of capital interact to determine a firms value? Free hard cash Flow = Sales Revenues in operation(p) equals and revenue enhancementes need enthronizations in Operating Capital. Weighted Average Cost of Capital (WACC) is affected by market interest rates, market take chances aversion, cost of debt, cost of truth, firms debt/ loveliness 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 equating 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 nearly foreign governments are the providers (savers) of capital. Non-fiscal corporations net users and U. S. governments are users (borrowers) of capital. Financial corporations are urbane users (borrowers), but al well-nigh breakeven. Capital is transferred between savers and borrowers by direct transfer, through 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 some fundamental factors that affect the cost of money, or the general level of interest rates, in the economy? The price that a borrower must pay for debt capital is called the interest rate. The price of equity capital is the cost of equity equals required return equals dividend proceeds 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 economic conditions (including world(prenominal) aspects) that affect the cost of money? several(prenominal) economic conditions (including international aspects) that affect the cost of money are terra firma risk and supersede rate risk. Country risk depends on the countrys economic, political, and social environment. qualify 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 paper with contractual provisions that entitle their owners to special rights and claims on specific cash flows or values. Some financial instruments are U. S. treasury Bills Sold by U. S.Treasury Default-free risk 91 days to one year master maturity date Money Market Mutual finances Invest in short-term debt held by businesses and individuals dispirited degree of risk No specific maturity (instant liquidity) Consumer Credit Loans Loans by banks/credit unions/finance companies endangerment is variable Original maturity is variable U. S. Treasury Notes and Bonds Issued by U,S, government No slackness risk, but price falls if interest rate rises 2-30 years original maturity Municipal Bonds Issued by conjure 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, interchangeable savings bands, credit unions, life insurance companies, vernacular funds, pension funds, and hedge funds and private equity funds. n. What are some unalike types of markets? Some different types of markets are forcible asset markets, financial asset markets, spot markets, future markets, money markets, capital markets, owe markets, consumer credit markets, and world, national, regional and local markets. . How are petty(a) markets organized? Secondary markets are organized by location and the way that orders from buyers and sellers are corresponded. 1)List some physical location markets and some computer/ band networks. Some physical locat ions markets are New York origin Exchange, the American take Exchange (AMEX), the Chicago Board of avocation (CBOT), and the Tokyo birth Exchange. Some computer/telephone networks are NASDAQ, government bond markets, and foreign exchange markets. 2)Explain the differences between open outcry auctions, bargainer 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 demand advertisements, which are prices at which they are willing to buy and sell. There are often galore(postnominal) dealers for each stock.A computerized quotation system ke eps 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, capital of the United Kingdom 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 issue 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. Mortga ge securitization allows the originators of the loans to diversify their risk besides enabling them to secure immediate liquidity for assets which 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 better 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 fit for closing the deal. Appraisers were over-appraising house values and getting nonrecreational at the time of the appraisal. Originating institutions (e. . , Countrywide) were quickly selling the mortgages to investment banks and other institutions. Investment banks created CDOs and got rating agencies to help conception and then rate the new CDOs with rating agencies making big p rofits despite the conflicts of interest. Financial engineers use unrealistic inputs to generate high values for the CDOs. Investment banks sold the CDOs to investors and made big profits. Investors bought the CDOs but either didnt understand or didnt supervise 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 fluent owned sub-prime securities, which led to many bankruptcies, government takeovers, and sex sales including New Century, Countrywide, Fannie Mae, Freddie Mac, and many more. PROBLEMS (2-6)In its most juvenile financial statements, Newhouse, Inc. reported $50 billion of net income and $810 million of retained profits.The previous retained earnings were $780 million. How much in dividends was paid to shareholders during the year? Dividends remunerative= (Previous well-kept Earnings + Net Income) Recent Retained Earnings = ($780 million + $50 million) $810 million = $830 million $810 million = $20 million (2-7)The Talley Corporation had a nonexempt income of $365,000 from operations after all operating(a) 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 peripheral and average tax rates on taxable income? ratable Income$365,000 Less Interest Charges(50,000) Plus Dividends Received4,500? $15,000(1 0. 70) = $4,500 follow 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 periph eral Tax Rate = 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.Find 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 Yield = $487. 50/$10,000 = 0. 04875 or 4. 875% AT&T Preferred Stock $10,000 x 6% = $600 Tax Exemption = $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%