...Complexity of the US Financial System Michelle Bates Professor: Ahmad Zia Rawish Strayer University May 6, 2015 Principle of Finance 100 Complexity of the US Financial System How does the US financial market impact the economy? The financial market has different financial products including derivatives, bonds, and stocks among others. Derivatives are very complicated financial products that gain value from stocks and bonds (Altig, Christiano, Eichenbaum & Linde, 2011). These financial products are futuristic in the sense that they are based on future investments. Their effect on the economy is that they reduce its volatility. How does the US financial market impact business? One of the most significant impacts of financial markets on businesses is access to credit (Garbade, 2014). When the financial markets are not doing well, the general access to credit for businesses is also affected. Banks and financial institutions reduce their lending rates as a precautionary measure to avoid defaulters. As a result, businesses cannot get access to loans hence impeding their ability to continue running and expanding. How does the US financial market impact individual? When the financial markets are failing, the borrowing rates increases while the number of investors reduces (Garbade, 2014). Due to the raised borrowing rates, the prices of commodities go up reducing individuals’ purchasing power. As the prices go up, people are left...
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...Healthcare Finance I Questions 1.1, 1.4, 1.6 (pp. 23-24) 1.1 a. What are some of the industries in the healthcare sector? Health services, health insurance, medical equipment and supplies, pharmaceuticals and biotechnology and other such as consulting firms and educational institutions. b. What is meant by the term healthcare finances as used in this book? It means “the accounting and financial management principles and practices used within health services organizations to ensure the financial well-being of the enterprise.”(p.22) Accounting functions are needed for the financial management of the company. Educated business decision can’t be made without knowing the detailed accounting part at all times. c. What are the two broad areas of healthcare finance? Financial Accounting and Managerial Accounting. d. Why is it necessary to have a book on healthcare finance as opposed to a generic finance book? This is due to the fact that the healthcare industry has unique, as stated in the text, individual characteristics which require emphasis in these specific areas. 1.4 a. Briefly describe the following health services settings: * Hospital: Provides general, acute care, diagnostics, surgery, usually for patients who need several hours of care. * Ambulatory care: Outpatient care for patients who need less than several hours of care and is usually cheaper than hospitals. 1.6 What is the structure of the finance function...
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...Chapter 1 The Goals and Functions of Financial Management Discussion Questions |1-1. |How did the recession of 2007–2009 compare with other recessions since the Great Depression in terms of length? | | | | | |It was the longest | | | | |1-2. |What effect did the recession of 2007–2009 have on government regulation? | | | | | |It was greatly increased. | | | | |1-3. |What advantages does a sole proprietorship offer? What is a major drawback of this type of organization? | | | ...
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...FIN-516 WEEK 1 – HOMEWORK ASSIGNMENT Problem Based on Chapter 14, Residual Dividends Middlesex Plastics Manufacturing had 2011 Net Income of $15.0 Million. Its 2012 Net Income is forecast to increase by 8%. The company’s capital structure has been 35% Debt and 65% Equity since 2010, and the company plans to maintain this capital structure in 2012. The company paid $3.0 Million cash dividends in 2011. The company is planning to invest in a major capital project in 2012. The capital budget for this project is $12.0 Million in 2012. • If Middlesex increases its cash dividends in 2012 at the same rate of growth as its Net Income rate, what will be the total 2012 dividend payout in Dollars? • What is the 2012 dividend payout ratio if the company increases its dividends at 8%? • If the company follows a residual dividend policy, and maintains its 35% Debt level in its capital structure, and invests in the $12.0 Million capital budget in 2012, what would be the Residual Dividend level (in Dollars) in 2012? What would be this Residual Dividends payout ratio? • How much additional capital (Debt and/or Equity) will the company have to raise from outside sources in 2012 if it invests in this capital project, and follows a residual dividend policy? • What would be the prudent dividend policy for 2012?: Pay dividends at the current dividend growth rate of 8%, or pay the residual dividend amount. 1. If Middlesex increases its cash dividends in 2012 at the same...
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...Finance homework 1 Mini Case: a) Finance is the cornerstone of the free market. Corporate financial management is important to managers because it is critical to the economic health of every business. b) Evolution of organizational forms: 1) Startup – Proprietorship: an unincorporated firm owned by 1 person. i. Advantages: cheap and easy to start, minimal government regulations, not subjected to corporate taxation ii. Disadvantages: difficult to acquire capital for growth, unlimited liability for debt on sole proprietor, life of proprietorship limited to founder’s lifespan 2) Partnership – more than one owner conduct noncorporate business together iii. Advantages: same as proprietorship iv. Disadvantages: same as proprietorship except that partners can lose all of their personal assets because each partner is responsible for business debt. 3) Corporation – many owners; a legal entity created under state laws that is separate and distinct from its owners and managers. v. Advantages: unlimited lifespan, easy to transfer ownership interest through stock shares, limited liability to invested funds vi. Disadvantages: earnings may be subject to double taxation, setup requires preparation of a charter c) Corporations may choose to go public by offering an initial public offering where they sell stock to the public. They can continue to grow after the IPO by borrowing from banks, issuing debt...
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...Finance- decision making for common wealth. The role of finance plays a function in every aspect of all individual’s life and circumstance for the purpose of gaining financially. Efficient Market- A market in which the values of securities at any instant in time fully reflect all available information, which results in the market value and the intrinsic value being the same. The role efficient market plays in finance is to understand what causes stocks to change in price, as well as how securities such as bonds and stocks are valued or priced in the financial markets, it is necessary to have an understanding of the concept of efficient markets. Primary Market- Transactions in securities offered for the first time to potential investors. The role primary market plays in finance is facilitates capital growth by enabling individuals to convert savings into investments. Secondary Market- The market in which stock previously issued by the firm trades. The role secondary market plays in finance is it allows for the buyer to resale, instead of letting the investment go to waste. Risk- The likely variability associated with expected revenue or income streams. The role risk plays in finance is the risk varies and has to known in order for an investment to be made for future returns. Security- Stocks, bonds, and debts that a corporation uses to raise funds. The role security plays in finance is necessary in order to acquire capital in a corporation. Stock-...
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...Real Assets vs. Financial Assets I. Real Assets a. Land, buildings, equipment and knowledge that can be used to produce goods and services b. Generate net income to economy II. Financial Assets a. Stocks and bonds b. Claims to the income generated by real assets c. Define the allocation of income or wealth among investors d. Investor’s returns come from the income produced by the real assets that were financed by the issuance of those securities Taxonomy of Financial Assets I. Fixed-income/ Debt a. Promise fixed stream of income or a stream of income that is determined to a specified formula b. Investment performance is lease closely tied to the financial condition of the issuer c. Money market is fixed income securities that are short term, highly marketable, and generally very low risk i. Ex: US Treasury bills or bank certificates of deposit (CDs) d. Capital market range from very safe to relatively risky i. Treasury bonds and bonds issued by federal agencies, state and local municipalities, and corporations II. Equity a. Represents and ownership share in the corporation b. Payments are not promised, dividends may be paid c. Value will increase if firm is successful, performance is tied directly to success of firm and its real assets- tend to be riskier III. Derivative securities (options and futures contracts) a. Provide payoffs that are determined by the prices of other assets such as bond or stock prices b. Used to hedge risks or transfer them Financial...
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...Assigment 1 Problem 1 a) “The fact that firms so heavily rely on their internal capital market as a source of financing is strong evidence that internal markets are more efficient than external markets.” Firms use internal capital because it is much easier for managers to use profits from previous years to finance their investments, management don´t have to prove their investment decisions to investors. If management would need to finance investment with external capital, the cost of the capital would much higher than using internal capital. Issues would cause direct costs for (järjestämisestä) and take time and effort from the management. Indirect costs could also (accure) when management would need to underprice the issue to make sure it would succeed. Firms rely on their internal capital because it is easier and cheaper way to finance investments. It does not mean that external markets are more unefficent than internal and the (väite) is false. b) “When underwriting equity or bond issues, investment banks are merely acting as financial intermediaries without taking any risk of their own. Therefore, they are charging unrealistically high fees for their services.” Underwriters act in three different roles. Firstly, they provide financial advisory and make careful analysis what the issue is likely to be worth. Underwriters also have dialogies with the potential investors to find out how high the demand is with different prices. Secondly, underwriters will...
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...Chapter 1 ------------------------------------------------- An Overview of Corporate Finance and ------------------------------------------------- The Financial Environment MINI CASE ------------------------------------------------- Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle Dellatorre, a professional tennis player who has just come to the United States from Chile. Dellatorre is a highly ranked tennis player who would like to start a company to produce and market apparel that she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. Dellatorre is also very bright, and, therefore, she would like to understand, in general terms, what will happen to her money. Your boss has developed the following set of questions which you must ask and answer to explain the U.S. financial system to Dellatorre. ------------------------------------------------- a. Why is corporate finance important to all managers? Answer: Corporate finance provides the skills managers need to: (1) identify and select the corporate strategies and individual projects that add value to their firm; and (2) forecast the funding requirements of their company, and devise strategies for acquiring those funds. ------------------------------------------------- ...
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...Chapter 1 Finance is the study how people allocate scarce resources over time. Why should finance be studied? • To manage your personal resources • To deal with world business • To pursue interesting and rewarding opportunities • To make informed public choices as a citizen • To expand your mind Discuss and provide examples of the four basic financial decisions every household faces • Consumption and saving decisions: How much of their current wealth should the y spend on consumption and how much of their current income should they save for the future? • Investment decisions: How should they invest the money they have saved? • Financing decisions: When and how should households use other people’s money to implement their consumption and investment plans? • Risk-management decisions: How and on what terms should households seek to reduce the financial uncertainties they face or when should they increase their risks? Describe the types of financial decisions firms make • Strategic planning. What business the company wants to be in. • Capital budgeting process. Determining what asset to acquire. • Investment project. Investing in the selected asset. • Working capital management. The long term and the day-to-day operations. List the three types of business organizations, and describe the advantages and disadvantages of each Sole Proprietorship- a firm owned by an individual or a family, in which the assets and liabilities for the firm are the personal...
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...P1-1 a. Calculate the tax disadvantage to organizing a U.S. business today as a corporation, as compared to a partnership. Partnership Corporation Operating Income $500,000 $500,000 Less Tc = 0.35 0 $175,000 Net Income $500,000 $325,000 Cash dividends $500,000 $325,000 Less Tdiv = 0.15 0 $48,750 Less Tp = 0.35 $175,000 0 After tax disposable income = $325,000 $276,250 b. Now recalculate the tax disadvantage using the same income but with the maximum tax rates that existed before 2003. Partnership Corporation Operating Income $500,000 $500,000 Less Tc = 0.35 0 $175,000 Net Income $500,000 $325,000 Cash dividends $500,000 $325,000 Less Tdiv = 0.15 0 $48,750 Less Tp = 0.386 $193,000 0 After tax disposable income = $307,000 $276,250 P2-2 a. OCF = NOPAT + DEPRECIATE = $2,400 + $1600 = $4,000 b. FCF = OCF – FA - WC = $4,000 - $1,400 - $1,300 = $1,300 c. There is a $2,700 difference in the two cash flow estimates, the OCF is the amount the firm received for its business operations. The FCF is the money that represents true profit. While the $4,000 is a larger number this money will be used to pay expenses, while the FCF is extra and can be used to pay investors or to pay more towards decreasing debt. P2-4 The appropriate action on Aluminum Industries Inc loan request, in regards to its debt ratio would be to deny the request. For three reasons: 1. The Firms debt ratio is 73%, which is 22% higher than the industry average of 51%...
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...receive the dividends) and retained earnings will drop to $57 Million. c) A 2 for 1 reverse split will show that the number of outstanding shares will decrease to 1,000,000, but the other values remain undisturbed except that the par value will increase to $100. 5) The effect of the stock dividend is Common stock increases by $20,000, outstanding shares increase by 20,000 and Additional Paid in Capital increases by $60,000, while retained earnings decreases by $80,000. The effect of the cash dividend is that cash decreases by $30,000 and retained earnings will drop by an equal amount. 7. a. EPS drops to $2.10, b) no change, c) no change, d) no change, e) doubles to 2,000,000, f) no change. Chapter 11 1. a) V= 2 (1.06)/4%= $25 is the value of the stock. b) The value of the stock changes to $79.5 c) The value of the stock increases to $141.33 d) The value of the stock changes to 34.66 e) The value of the stock changes to $39.87 2) I'd be willing to pay $77. 3) a) The maximum prices based on the dividend growth model would be $15.29, 25.5 and 49.6 respectively. b) The implied percentage return would be 4.65% if the investor buys stock A c) If the P/E ratio was 12, the prices would be $24, 38.4 and 84. If the P/E was 7, they'd change to 14, 22.4 and 49. d) The negative growth rate for stock C implies that future dividend will be lesser than current dividend. Chapter 14: Answer 1: If required rate of return is 13%, then the value is $69.23. If the...
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...Chapter 1 Finance is the study how people allocate scarce resources over time. Why should finance be studied? • To manage your personal resources • To deal with world business • To pursue interesting and rewarding opportunities • To make informed public choices as a citizen • To expand your mind Discuss and provide examples of the four basic financial decisions every household faces • Consumption and saving decisions: How much of their current wealth should the y spend on consumption and how much of their current income should they save for the future? • Investment decisions: How should they invest the money they have saved? • Financing decisions: When and how should households use other people’s money to implement their consumption and investment plans? • Risk-management decisions: How and on what terms should households seek to reduce the financial uncertainties they face or when should they increase their risks? Describe the types of financial decisions firms make • Strategic planning. What business the company wants to be in. • Capital budgeting process. Determining what asset to acquire. • Investment project. Investing in the selected asset. • Working capital management. The long term and the day-to-day operations. List the three types of business organizations, and describe the advantages and disadvantages of each Sole Proprietorship- a firm owned by an individual or a family, in which the assets and liabilities for the firm are the personal...
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...PART I Overview and Background Chapter 1 An Introduction to Multinational Finance True / False 1. 2. MNCs have investment or financial operations in more than one country. ANS: True. Because of globalization in the world's markets, a multinational financial manager is more likely than a domestic financial manager to specialize in finance to the exclusion of other fields of business. ANS: False. The multinational financial manager must be well versed in each of the business disciplines in which the MNC is involved. The domestic financial manager must be knowledgeable in several areas within finance, whereas the multinational financial manager usually specializes in a single area, such as corporate finance, investments, or financial markets. ANS: False. The multinational financial manager is likely to require knowledge of several fields within finance. The investment opportunity set is the set of investments available to the corporation; that is, the set from which the company must select. ANS: True. Types of market efficiency used to describe the performance of financial markets are allocational, operational, and transactional efficiency. ANS: False. Three types of market efficiency are allocational, operational , and informational. An informationally efficient market is one with abundant information. ANS: False. It is a market in which prices fully reflect available information. Allocational efficiency refers to how efficiently a market channels capital toward its most productive...
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...Introduction to Finance - 1 Instructor: Kevin Higgins Class Discussion Week 1 1-12-2015 Now that the basics of the financial planning process are clear, you are ready to learn the basic principles of the time value of money. Creating a financial plan is essential for proper financial planning. The following exercises will assist you in understanding the concept of time value of money. Download and complete this worksheet for problem 2 below which is taken from the Do the Math exercises on pages 30-31 of your textbook. Do the Math Problem #2: Present and Future Values. Rachael Berry, a freshman horticulture major at the University of Minnesota, has some financial questions for the next three years of school and beyond. (a) If Rachael’s tuition, fees, and expenditures for books this year total $12,000, what will they be during her senior year (three years from now), assuming costs rise 4 percent annually? Use Appendix A-1 on page A-4 of your textbook. (b) Rachael is applying for a scholarship currently valued at $5000. If she is awarded it at the end of the next year, how much is the scholarship worth in today's dollars, assuming inflation of 3 percent? Use Appendix A-2 on page A-6 of your textbook. (c) Rachael is already looking ahead to graduation and a job, and she wants to buy a new car not long after her graduation. If after graduation she begins an investment program of $2,400 per year in an investment yielding 6 percent, what will be the value of the...
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