Principles of Finance - Assignments PDF

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Principles of Finance Finance Fundamentals Goals and Organizations of Financial Management  Introducing Finance o Finance is the study of fund management and asset allocation. o Corporate finance focuses primarily on decisions related to o

investment and financing. The primary purpose of finance is to manage assets in a way that maximizes returns.

 Goals of Financial Management

o Valuation may be determined through a fundamental analysis of financial statements. o Valuation is the process of determining the price that market participants would likely pay for something. o The price at which an asset would trade in a competitive setting is its market value.

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Trends and Issues in Finance o A recent trend in finance that attempts to ease poverty by offering products like business loans to low-income borrowers is microfinancing. o The recent trend of making investment decisions based on a mix of financial, social, and environmental considerations is known as impact investing. o Crowdfunding is an example of a recent trend in finance known as peer-to-peer lending.

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Ethics: An Overview o Business managers who behave in accordance with their personal ethical beliefs, even in the face of difficulty, have strong moral character. o Businesses must be conscious of the culture, or social norms and beliefs in which they operate.

o When businesses work to understand, identify and eliminate unethical behaviors, they are displaying corporate social responsibility. 

Types of Business Organizations o Jenna is seeking to raise money to develop a new app where individuals can buy and sell used clothing. She is looking for longterm investors in her product, and she wants to protect her personal assets from any liabilities associated with borrowing capital. Which form of business structure would clearly meet Jenna's needs? Corporation o James is an entrepreneur who decides to open a dog walking business. He wants a simple form of organization that allows him to maintain complete control over the business and receive 100% of the profits. He is not particularly concerned about liability. Which form of business structure would clearly meet James's needs? Sole proprietorship o Vivienne is the CEO of a multinational company that produces massmarket, low-cost toys for children with sensory processing challenges. The company's workforce is grouped into specific skills and tasks, such as finance, sales, development, and production. What form of business structure is used by Vivienne's company? Functional

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Corporate Governance o What principle of corporate governance requires that organizations develop a code of conduct for their directors and executives? Integrity and ethical behavior o What is the primary focus of the recent interest in corporate governance? The mitigating conflict between stakeholders o What was one change enacted by the Sarbanes–Oxley Act of 2002? An oversight board was created to oversee the audits of public companies in the U.S.

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Agency and Conflicts of Interest o What is a root cause of agency conflicts within a corporation? Decision rights within a corporation are given to managers. o Select the true statement about the concept of agency cost. Good corporate governance can minimize agency costs by decreasing conflicts of interest. o Select the true statement about agency conflicts within a corporation. Agency conflicts occur when managers pursue actions that are potentially harmful to the interests of principals.

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Financial Markets o Jean has some extra cash sitting under her mattress, so she decides to purchase $2,000 worth of Treasury bills that mature in six months and pay a small amount of interest. What financial market is Jean participating in? Money market o Despite two years when overall prices fell, share prices in the stock market have risen consistently for eight of the past 10 years. How is this market classified? Secular bull market o Paul purchases 100 shares of stock in a technology corporation on the New York Stock Exchange seven years after the company initially sold shares to the public. What financial market is Paul participating in? Secondary capital market

Statements, Taxes, and Cash Flow  Introducing Financial Statements o Jane needs to know more about the movement of money into and out of the company through its operating activities. What type of financial statement should she look at? Cash flow statement o Steve needs to know whether his company made money or lost money in the last quarter of 2019. What type of financial statement should he look at? Income statement o Shawna wants to know if her company had more assets or liabilities on September 30, 2015. What type of financial statement should she look at? Balance Sheet

 The Balance Sheet o How can you determine a company’s network capital from a balance o o

sheet? Calculate current assets minus current liabilities How can you determine a company’s total assets from a balance sheet? Calculate total liabilities plus owner’s equity Joan is concerned about her company’s liquidity. Of the following parts of the balance sheet, which would provide her with the information she needs? Current assets

 The Statement of Cash Flows o Under GAAP, how would the purchase of equipment be accounted for on the statement of cash flows? As a decrease in cash flow from investment

o Under GAAP, how would employee salaries be accounted for on the statement of cash flows? As a decrease in cash flow from operations o Under GAAP, how would issuing shares of stock be accounted for on the statement of cash flows? As an increase in cash flow from financing 

The Income Statement o Keira is trying to sell her business and a potential buyer wants to know the company's gross profit in the previous quarter. How can Keira find that information on her income statement? Subtract her cost of goods sold from net sales o Albion is looking for ways to increase his bottom line by reducing his operating expenses, so he consults his most recent income statement. Which of the following should he focus on? Advertising costs o Nathan tells a potential investor what his “bottom” line was in the previous quarter. What information does this communicate to his potential buyer? His net income

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Tax Considerations o Which method of depreciation calculation gives a company a variable tax benefit from year to year that is based on an asset’s actual use? Activity-based o Which of the following does tax law allow companies to deduct from their gross income? Business expenses o Which organization type calls for owners to determine how much tax each will pay on distributions? Partnership

Analyzing Financial Statements  Standardizing Financial Statements o Select the correct order for the parts of an income statement. 1. o o

Revenue 2. Expenses 3. Net Income Select the option that reflects how assets are typically organized on a balance sheet. 1. Current Assets 2. Long-term assets 3. Other assets Select the correct order for the parts of a balance sheet. 1. Assets 2. Liabilities 3. Equity

 Overview of Ratio Analysis o Ratio that provides valuable information to shareholders are market ratios.

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Ratios that measure how well a company controls are expenses are profitability ratios. Ratios that measure the effective use of inventory would be found among asset management ratios.

 Profitability Ratios o If net profit is $230,000 and equity is $1.2 million, then ROE is 19.17%. o If net profit is $230,000 and operating income is $765,000, then the net profit margin is incalculable without sales data. o If total revenue is $400,000 and operating income is $250,000, then the operating margin is 62.50%. 

Asset Management Ratios o Which of the following would explain a company’s inventory turnover ratio falling from 4 to 2.5? The company's cost of goods sold has decreased while the average inventory has remained constant. o Which of the following would explain a company’s day sales outstanding ratio falling from 44.5 to 32.5? The company's accounts receivable has decreased while total sales has remained constant. o Which of the following would explain a company’s day sales outstanding ratio rising from 27.3 to 38? The company’s accounts receivable has increased while total sales has remained constant.

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Liquidity Ratios o Consider the current ratio of the following companies. Company A: 1.15 Company B: 0.8 Company C: 1.25 Company D: 1.65 Which company has adequate liquidity? Company D o What does it mean if a company has a quick ratio of 1.75? The company likely has enough resources, even when excluding inventory, to pay its debts over the next 12 months. o What does it mean if a company has a current ratio of 3.25? The company’s ability to pay off its short-term debt exceeds what is generally considered adequate.

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Debt Management Ratios o If Company A has a higher debt ratio than Company B, then Company A is likely to have less ability to pay off its long-term debt than Company B.

o If company A has a higher TIE ratio than Company B, then Company A has better interest coverage than Company B. o If Company A has a TIE of 0.8 and Company B has a TIE of 2, then Company A has a greater need to borrow funds to meet its debt obligations than Company B. 

Market Value Ratios o Consider the P/E ratios of the following companies: Company A: 8.5 Company B: 12.2 Company C: 10.4 Company D: 9.7 Which company has the lowest relative value among investors? Company A o Consider the P/E ratios of the following companies: Company A: 12.25 Company B: 15.43 Company C: 19.30 Company D: 8.75 Which company has the greatest relative value among investors? Company C o Consider the price to book ratios of the following companies: Company A: 6.3 Company B: 9.9 Company C: 2.5 Company D: 4.8 Of the four companies, Company C has the lowest dollar price per carrying value of assets.

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The DuPont Equation o Profit margin is calculated by Net Income / Sales. o Asset turnover is calculated by Sales / Total Assets. o Financial leverage is calculated by Total Assets / Shareholder Equity.

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Using Financial Ratios for Analysis o Peter is a financial analyst whose boss assigned him the task of examining a company in the travel industry. Peter compares several of the company's financial ratios to those of the leading company in the industry. What type of analysis is he performing? Benchmarking o Trend analysis is most often used for the purpose of analyzing company metrics over time. o Comparing a company’s performance over time can be done through trend analysis.

Forecasting Financial Statements  Financial Forecasting o An organization’s process for setting its overall direction is strategic planning. o The process of applying sales goals to production in order to maximize efficiency is capacity planning.

o The estimate of future outcomes stemming from a strategic plan is a(n) financial forecast 

Forecasting the Income Statement o How are expenses forecasted on a pro forma income statement? As a percentage of forecasted sales, based on historical data. o Robyn wants to prepare a pro forma income statement for her business. What must she predict before forecasting her expenses? Sales o If a sales decrease is forecasted, how will that affect expenses on the pro forma income statement if market conditions are expected to remain stable? Expenses will decrease.

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Forecasting the Balance Sheet o The pro forma balance sheet is prepared to ensure that the company's projected performance is in line with its strategic plan. o The pro forma balance sheet reflects changes required by the pro forma income statement. o The pro forma balance sheet is used as a projection of the effects of a proposed transaction on assets, liability, and equity.

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Building a Cash Budget o Select a reason why cash flow forecasting is important to a company’s success. It is central to a company’s liquidity. o Select a reason why cash flow forecasting is important to a company’s success. It helps a company avoid running out of cash to make payments with. o Select a reason why cash flow forecasting is important to a company’s success. It enables companies to use cash efficiently and avoid sitting on unnecessary cash reserves.

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Analyzing Forecasts o What is a question that should be asked about accounts receivable when forecasting? How many credit accounts will likely default? o What is a question that should be asked about accounts payable when forecasting? How much cash is needed on hand? o What is a question that should be asked about accounts payable when forecasting? How much cash is needed on hand to meet current liabilities?...