...Being a financial advisor to a business takes some preparation. I will need to outline the goals of my client, long term and short term and come up with the best advice I could give with regards to raising capital for the business. The main sources for raising capital are through debt and equity. “Debt financing means borrowing money from an outside source with the promise of paying back the borrowed amount, plus the agreed-upon interest, at a later date.” (Palermo, 2014) One of the advantages of debt financing is that the lender does not receive on ownership share to the business because after the debt is paid, there are no more obligations to the lender. Therefore it preserves ownership. Debt financing can be done for small or large businesses and it comes through loans from commercial banks or through organizations like the SBA (Small Business Administration) loan programs. There are disadvantages to this type of financing especially for the businesses that don’t do well and still has the obligation to pay the loan. Instead of all the profits going back into the business, part of it will have to be used to repay the loan. It does not matter if the company is doing well or not, the debt will still have to be repaid monthly or whenever it is due. “Carrying too much debt is a problem because it increases the perceived risk associated with businesses, making them unattractive to investors and thus reducing their ability to raise additional capital in the future.” (Hillstrom, n...
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...diversification. For instance, equities have many representations in the mutual fund world. Variants or subclasses refer to more granular characteristics of the asset class. Here are some examples: Equities can vary according to: * the size of companies represented in a “basket” (e.g. large vs medium vs small cap stocks) * the way the stocks’ prices move as the stocks chart their growth (e.g. growth vs value stocks) * the geographical market in which the stock moves (e.g. domestic vs international) Bonds can vary according to: * their maturity dates (e.g. short term vs long term bonds) * their level of risk (e.g. junk bonds, anyone?) * who issues the bond (e.g. government vs corporate) * how they pay out Cash vehicles vary mostly according to rates of return and level of security offered, which are usually characteristics that are inversely proportional to each other. Generally, within the investment world, the higher the rate of return, the less stable the fund value is expected to be. Tip: You can find additional diversification down to the class variant level from mutual fund institutitions, Treasury Direct, or online stock brokers who can assist with giving you more information. Try Morningstar as well to help you with more details on this topic. Note though that most of the time, you don’t really need to seek this kind of detailed representation to achieve a well diversified portfolio, as positions in basic asset classes...
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...to maximize their own wealth rather than the shareholders wealth) – This is called an Agency Problem because the managers are acting as agents for the shareholders. Examples of agency problems: 1. Purchasing private jets for personal use 2. Overindulging in expense account dinners 3. Avoiding risky projects because they are worried about the security of their jobs 4. Manipulating accounting earnings to increase their compensation Reducing Agency Problems The goal is to align the interests of managers and shareholders. This can be accomplished through: • Compensation plans tied to the performance of the firm (assuming of course that the reporting of the numbers is not fraudulent!). It is best is performance is measured by stock value or other cash flow measure. • The Board of Directors oversees management and can fire them -problems with the board of directors lack of independence arises here. Oftentimes the Board and top management are part of (as they call it) “the old-boy network”. They are related, or play golf together, their families know each other, they socialize together, and most likely they all make money off of each other through various business ventures. This lack of independence inhibits the Board’s monitoring power, or willingness to report/question questionable practices. 2. Goal of financial manager and problems w/ alternative goals such as profit maximization Goal- to maximize the wealth of the owners, the stockholders. The financial...
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...AC 410B Intermediate Accounting II Final Exam Topics Chapter 11: Depreciation, Impairments, and Depletion Questions 1. Explain the meaning of depreciation. 2. Describe factors involved in the depreciation process. 3. Describe the different methods of depreciation. 4. Identify the conditions for impairment of fixed assets. 5. Explain the treatment of impairments for different kinds of assets. 6. Describe the full cost vs. successful efforts concepts for depletion. 7. Explain liquidating dividends. 8. Explain the required disclosures related to depreciation and depletion. Exercises 1. Calculate depreciation using the following methods: [E11-6] a. activity method b. straight-line method c. sum-of-the-years’ digits method d. declining balance method e. group & composite methods [E11-9] 2. Calculate partial-period depreciation. 3. Calculate depreciation based on revision of salvage value or estimated life. [E11-11], [E11-13] 4. Conduct a recoverability test for impairment. [E11-17] 5. Determine the amount of impairment to be recorded on a fixed asset. [E11-17] 6. Prepare the journal entries to record: a. depreciation expense b. the impairment of a fixed asset c. the restoration of impairments d. impairment and restoration of impairment for an asset held for disposal [E11-17] e. depletion of a natural resource...
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...Jacque Final Review Guide 1) Operating Leverage vs. financial leverage: Laurence A high degree of Operating Leverage means that a relatively low change in sales will result in large change in EBIT. If all things are held constant, the higher the firm’s fixed cost the greater its Operating Leverage. In Jacque’s words, this has to do with volatility of the top line. Those firms are usually highly automated, capital intensive, hire highly skilled individuals (read pay them huge salaries), and engage into costly R&D activities. Effects of Operating Leverage on Business Risk: (if all other things held constant) the higher a firm’s Operating Leverage, the higher its business risk. This is because in lower economical cycles, the firm will still be incurring its fixed cost. However, remember that higher risk usually commands for a higher return on investment. Financial leverage is the use of debt to finance the activities of a business. Financial risk is the additional risk put on the shareholder when management decides to finance with debt. The more debt a firm takes on, the more concentrated the business risk on the shareholder because the shareholder is a residual claimant. This results in a higher expected rate of return on the investment by the shareholder. Consequences of an increase in leverage (Leverage ↑): * Expected ROE ↑ * Stockholder risk ↑ * Standard deviation ↑ * Coefficient of variation ↑ 2) Cash-Flow statement and valuation: Natalia ...
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...FINA 4200 Chapters 6-15 Outline I. Common Stocks A. Basic Characteristics 1. Common stock as Corporate Security a. Issuing New Shares b. Stocks Spin-Offs c. Stock Splits 2. Buying and Selling Stocks a. Reading the quotes b. Transaction costs B. Common Stock Dividends 1. The dividend decision a. Corporate vs Market factors b. Important dates 2. Types of dividends a. Cash b. Stock II. Analyzing Common Stocks A. Security analysis 1. Top-down approach 2. Principles of security analysis B. Fundamental analysis 1. Balance Sheet 2. Statement of Cash Flows 3. Income Statement III. Stock Valuation A. Stock valuation models 1. Dividend valuation model 2. Dividends-and-Earnings approach 3. Expected return IV. Market Efficiency and Behavioral Finance A. Efficient Markets 1. Efficient markets hypothesis 2. Weak form 3. Semi-strong form 4. Strong form B. Market Anomalies 1. Calendar Effects 2. Small-Firm Effect 3. Post Earnings Announcement Drift 4. The value effect V. Fixed-Income Securities A. Features of a bond 1. Interest and Principle 2. Maturity date 3. Bond price behavior B. Market for Debt Securities 1. Treasury bonds 2. Agency bonds 3. Municipal bonds VI. Bond Valuation A. Behavior of Market Interest Rates 1. Keeping tabs on interest rates 2. What causes interest rate...
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...Limited liability- the lower the risk the higher the value, all else equal * Growth opportunities: corporations can raise capital easier to take advantage of these opportunities. * Liquidity: an asset value also depends on how easy it is to sell it. Management’s primary goal Our focus: profit, publicity held companies Management’s goal: maximize shareholder wealth, which translates into maximizing the stock price. Maximizing shareholder value: A company’s shareholder wealth is equal to the number of shrares outstanding times market value per share. * We need to know what factors affect the stock price. * The value of a share of stock is the present value of the cash flows an “average investor” expects to receive in the future id he or she bought the stock. * Long-term view important. Market price VS intrinsic value Stock’s market price: actual market price of the share of stock. Value based on perceived returns and risk. (could be wrong) Intrinsic value: what a fully informed analyst would estimate as the “true” value of a stock...
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...LONG TERM PERFORMANCE OF VALUE VS. GROWTH STOCKS: EVIDENCE FROM INTERNATIONAL MARKETS Zugang Liu, Pennsylvania State University Hazleton, USA Jia Wang, Rowan University, Glassboro, NJ, USA ABSTRACT This paper studies the long-term risk and return characteristics of value stocks versus growth stocks for three international markets: Asia, Scandinavia, and Europe. We focus on the downside of returns and use Value at Risk as our risk measure. We find that value stocks outperform growth stocks in terms of both risks and returns across all time horizons for all three markets. We further conduct cross country analysis. Interestingly, we find that there is some risk and return trade off in short term investment horizon across the three countries. When investment horizon lengthens, Scandinavian market has the best performance in both risks and returns for both value and growth indexes. Keywords: Value, Growth, Risk, Time Horizon 1. INTRODUCTION Value or growth? This is an age old debate in the investment world. Value style stock commonly refers to a stock that is undervalued relative to its fundamentals (i.e. dividends, earnings, sales, etc) and often has a low market to book ratio, a high dividend yield or a low P/E ratio. Growth style stocks are often shares from companies that are expected to grow at a higher than average rate and such stocks often have high market to book ratios, low dividend yields or high P/E ratios. Which one is more profitable? Basu (1977), among others, reports...
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...Theory Covariance: how close two variables move Together The reward-to-volatility = sharpe ratio Serial correlation of daily returns is close to zero => very hard to predict from their past Value-at-Risk (VaR): a measure of downside risk ->Measures the potential loss over a specified horizon such that there is a (low) probability α that the actual loss will be larger No clear guidelines as to the choice of sample length m: small m means that the VaR will be more influenced by recent events; large m is needed for precise estimates - No way to extrapolate the 1-day VaR to a longer n-day horizon (except if nonoverlapping n-period returns are considered to re-calculate the n-day VaR) A risk-averse investor: - Accepts risk-free or speculative prospects with positive risk-premiums - Rejects portfolios that are fair games (or worse) The higher the indifference curve, the higher the utility levelT he steeper the indifference curve, the higher the risk aversion -> higher compensation required for the same level of risk Two major sources of uncertainty for the risky assets in a portfolio: 1. Market risk -? Systematic, non-diversifiable 2. Firm-specific risk -> Non-systematic, diversifiable The minimum-variance frontier, which gives the lowest variance that can be attained for any target level of expected portfolio return The separation property The portfolio choice problem may be separated into two independent tasks -Determination of the optimal...
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...whiskey in sealed glass bottles has now flourished in to a company with sales of $3.8 billion dollars (BROWN-FORMAN Our Company, 2012.) The following will contain information on the organizations most recent financial statements. Corporate debt Securities A debt security in finance is when a lender such as a bank or corporation lends money to an interested party looking for financial gain in the form of bonds. Debt securities are interesting because they serve the purpose of creditors who loan money to a borrower and accrue interest to sell them. They have value. For example, a creditor creates a binding agreement with a borrower listing all the financial terms for loan payment in the form of a contract in which will carry value because of the accrued interest attached to it. So with the accrued interest attached, these contracts carry value and now can be sold or even traded; hence debt security (secure debt). This is how creditors secure debt. According to Introduction to Financial Statements reading material, a debt security is also called bonds. Bonds are debt instruments to gain capital. In the Brown-Forman company,...
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...financial market is the New York Stock Exchange. This establishment trades trillions of dollars on a daily basis. Both financial markets and financial institution play a vital role within any economy. There are also primary and secondary markets as well as money markets and capital markets. We will take a look at the differences and what role they play in the economy. Let’s start with financial institutions and the example I gave earlier was a bank. A bank is the most common financial institution and is pretty straight forward. You give the bank money and they hold it for you. Then, you ask, how does a bank make money? A bank also lends out money to individuals that are looking to make a large purchase, such as a house. The bank uses the money people deposit to loan out to others and interest is paid on the loan. A bank allows consumers to take out loans for purchases, then with a set time frame, pay back the money loaned with interest. That is one reason the recession of 2008 hit so hard. The bank loaned many people money but then many of those people were not able to pay the money back. Another financial institution is an insurance company. You pay the insurance company a monthly payment and they cover damages done to your home or your car. Financial markets are quite different from financial institutions. A financial market is a term that describes a place where buyers and sellers trade assets such as equities, currencies, and bonds....
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...Ownership Investments Ownership investments are what comes to mind for most people when the word "investment" is batted around. Ownership investments are the most volatile and profitable class of investment. The following are examples of ownership investments: Stocks Stocks are literally certificates that say you own a portion of a company. More broadly speaking, all traded securities, from futures to currency swaps, are ownership investments, even though all you may own is a contract. When you buy one of these investments, you have a right to a portion of a company's value or a right to carry out a certain action (as in a futures contract). Your expectation of profit is realized (or not) by how the market values the asset you own the rights to. If you own shares in Sony and Sony posts a record profit, other investors are going to want Sony shares too. Their demand for shares drives up the price, increasing your profit if you choose to sell the shares. Business The money put into starting and running a business is an investment. Entrepreneurship is one of the hardest investments to make because it requires more than just money. Consequently, it is also an ownership investment with extremely large potential returns. By creating a product or service and selling it to people who want it, entrepreneurs can make huge personal fortunes. Bill Gates, founder of Microsoft and one of the world's richest men, is a prime example. Real Estate Houses, apartments or other dwellings that...
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...NINJA CPA REVIEW® NINJA Notes 2015 Financial Accounting & Reporting Table of Contents The N.I.N.J.A. Framework I. IFRS 8 II. Accounting Changes 19 III. Financial Reporting 20 IV. Bonds & Debt Restructure 38 V. Consolidations 47 VI. Deferred Taxes 50 VII. Derivatives, Hedging, & Translation 52 VIII. Fixed Assets 56 IX. Governmental Accounting 62 X. Personal Financial Statements, Segments, & Interim Reporting 73 XI. Partnership Accounting 76 XII. Inventory 79 XIII. Investments 85 XIV. Leases 87 XV. Current Assets & Liabilities 91 XVI. Not-For-Profit Accounting 93 XVII. Pensions 99 XVIII. Statement of Cash Flows 101 XIX. Stockholders’ Equity 103 2 The N.I.N.J.A. Framework NAIL THE CONCEPTS Watch your CPA Review videos first – before working any assigned homework questions. The CPA Review industry says to watch a section of CPA Review video and then work the accompanying MCQs. This perspective stems from the old-school approach to the paper and pencil exam where you had to sit in a live classroom and learn from an instructor on weekends. Today, there is a smarter way to study. You don’t have to go to a weekend live course. You can fire up the laptop on a Tuesday morning and knock out two hours of material before you even brush your teeth. If you work MCQs in week one over your week one topic, guess what? You will work them again in week 5 or 6 when you review because you will forget what you learned. If you watch a...
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...NINJA CPA REVIEW® NINJA Notes 2015 Financial Accounting & Reporting (Updated as of July 2015) Table of Contents The N.I.N.J.A. Framework I. IFRS 8 II. Accounting Changes 19 III. Financial Reporting 20 IV. Bonds & Debt Restructure 39 V. Consolidations 48 VI. Deferred Taxes 51 VII. Derivatives, Hedging, & Translation 53 VIII. Fixed Assets 57 IX. Governmental Accounting 63 X. Personal Financial Statements, Segments, & Interim Reporting 74 XI. Partnership Accounting 77 XII. Inventory 80 XIII. Investments 86 XIV. Leases 88 XV. Current Assets & Liabilities 92 XVI. Not-For-Profit Accounting 94 XVII. Pensions 100 XVIII. Statement of Cash Flows 102 XIX. Stockholders’ Equity 104 2 The N.I.N.J.A. Framework NAIL THE CONCEPTS Watch your CPA Review videos first – before working any assigned homework questions. The CPA Review industry says to watch a section of CPA Review video and then work the accompanying MCQs. This perspective stems from the old-school approach to the paper and pencil exam where you had to sit in a live classroom and learn from an instructor on weekends. Today, there is a smarter way to study. You don’t have to go to a weekend live course. You can fire up the laptop on a Tuesday morning and knock out two hours of material before you even brush your teeth. If you work MCQs in week one over your week one topic, guess what? You will work them again in week 5 or 6 when you review because you will forget what you learned. If you watch a video in week one and score...
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...known. However, the decision makers do not know the probabilities of the various outcomes (Render, M.Stair Jr., Hanna E., & Hale S., 2015, p. 85). 2 Determination of Possible Alternatives The interested parties have four alternatives in the investment scenario regarding Julia Day’s business plans which are as follows: * Alternative 1: Invest in corporate bonds * Alternative2: Invest in preferred stock * Alternative 3: Invest in common stock * Alternative 4: Do not invest in any of the three previously mentioned alternatives 3 Identification of Possible Outcomes & State of Nature Based on the alternatives presented in chapter 2, the following outcomes can be defined: * Alternative 1: Invest in corporate bonds and get at least $20,000 back at the end of five years. * Alternative 2: Invest in preferred stock and see an increase of the investment by factor 5 or 50% decrease depending on the state of nature (good vs. unfavorable). * Alternative 3: Invest in common stock and see an increase of the investment by factor 8 or lose everything depending on the state of nature (good vs. unfavorable). * Alternative 4: Do not invest in any of the three previously mentioned alternatives. 4 Calculation of Payoff The payoff table is developed by using Microsoft Excel as well as QM for Windows (see attachments to this...
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