GB550-M1 Financial Management Practices Case StudyPurdue Uni, Lecture notes of Accounting

Download GB550-M1 Financial Management Practices Case StudyPurdue Uni and more Lecture notes Accounting in PDF only on Docsity! GB550-M1 Financial Management Practices Case Study Purdue University Global a. Why is corporate finance important to all managers? Corporate finance is important because it shows managers how to identify and select strategies to add value to businesses and helps forecast funding requirements and strategies to acquire the funds. Corporate finance refers to how businesses earn and spend money, therefore any decision that requires the use of money directly or indirectly relates to all managers (Merritt, 2019). b. Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form. When an entrepreneur begins the journey of owning a business there are three forms they can explore- a sole proprietorship, assuming all the liability but reaping all the rewards, a partnership, sharing the liabilities and the rewards with another, and a corporation, sharing the liabilities and rewards with many. There are advantages and disadvantages to each (Merritt, 2017). 1. Sole Proprietorship- Advantages of a sole proprietorship are that it’s easy to form, there are few regulations and no corporate income taxes. The disadvantages of a sole proprietorship is the unlimited liability on your own assets and the difficulty in raising capital to support the business. 2. Partnership- The advantages and disadvantages of a partnership are almost identical as a sole proprietorship except the liabilities and responsibilities are shared with a partner. 3. Corporation- A corporation has an unlimited life span, option for easy transfer of ownership, limited liability and opportunities for capital investments. However, as a disadvantage, they are heavily taxed and typically have higher operating costs and expenses. c. How do corporations go public and continue to grow? What are agency problems? What is corporate governance? Corporations go public when they sell their stock to the public as the company grows and they may issue additional stocks and debts. When managers want to act for their own personal gains, there are agency problems that may neglect the interests of the shareholders within the company. Corporate governance is essentially a set of rules that control the company’s behavior towards their shareholders, employees and really anyone invested in the business. d. What should be the primary objective of managers? The primary objective of managers is to act in the company’s best interest that maximizes revenues and raises the company’s stock price. 1. Do firms have any responsibilities to society at large? Ultimately yes, firms do have responsibilities to society and a majority of company’s have corporate responsibility initiatives to ensure they maintain a level of transparency and good intentions for the community and environment in which they are affecting. 2. Is stock price maximization good or bad for society? k. What are some economic conditions that affect the cost of money? Economic conditions that affect the cost of money include Federal Reserve policies, federal budget deficit or surplus, trade activity, and foreign trade surpluses and deficits. All federal banks have the power to influence the economy through reduction in inflation rates which in turn creates more job opportunities and overall demand in the market. The federal budgets affect the cost of money depending on how high or low inflation is. Trade activity is affect through the economic booms and recessions but overall impact interest rates in the markets. Foreign trade surpluses and deficits create a need for trading with other countries that may affect the capital market and interest rates in other countries (Borad, 2018). l. What are financial securities? Describe some financial instruments. Financial securities are documents with certain monetary value. It shows that one owns part of a publicly traded corporation and is owed a part of a debt issue. Essentially they are stocks and bonds that are negotiable (Borad, 2018). A financial instrument is any asset which holds capital and can be traded in the market. An example of financial instruments are shares, stocks, and bonds. m. List some financial institutions. A financial institution exists to provide a variety of deposit, lending, and investment products to both individuals and businesses. There are 9 total types of financial institutions that provide services such as mortgage loans and investments, they include: central banks, internet banks, savings and loan associations, brokerage firms, mortgage companies, retail and commercial banks, credit unions, investment banks and companies, and insurance companies (Horton, 2020). n. What are some different types of markets? information. Some different types of markets include physical markets, virtual markets, auction markets, and black market. An example of a physical market would be shopping malls, grocery stores, department stores. An example of a virtual market would be Amazon or eBay. Auction markets exist for sellers to sell to the highest bidder and a black market is usually for illegal goods such as drugs, weapons, exotic pets. o. Along what two dimensions can we classify trading procedures? The two dimensions are categorized by location (physical location exchanges or computer/telephone networks) and by the way orders from buyers and sellers are matched and automated trading platforms. Open auctions have face to face trading where as dealers buy and sell to clients from an inventory of stocks. Orders are not always automatically matched by computers and automated trading platforms should match orders and execute trades automatically (Brigham & Ehrhardt & Fox, 2019). p. What are the differences between market orders and limit orders? Market orders are quick transactions at the current price. Limit orders are to transact only in certain specific situations (Brigham & Ehrhardt & Fox, 2019). q. Explain the differences among broker-dealer networks, alternative trading systems, and registered stock exchanges. Broker-dealer networks are registered with the SEC but are much less regulated than alternative trading systems and registered stock exchanges. In a typical broker-dealer network, a stock is purchased and then immediately sold to another client who wishes to buy the stock. The broker- dealer must report the transaction but no information prior to the trade is required. Trades in broker dealer networks are called “off exchange”. Trades can be with individuals or “upstairs” trades. An alternative trading system is a broker-dealer than registers with the SEC as an ATS. An ATS typically has an automated trading platform to match orders from clients, therefore the owner of the ATS is not always the counter-party, in contrast to a broker-dealer network. An ATS must report trades but not any pre-trade information. Stocks can only be listed at a registered stock exchange, although they may be traded elsewhere. A stock exchange must comply with more regulations than an ATS. In addition to reporting trades, a stock exchange must also report pre-trade information regarding bids and quotes (Brigham & Ehrhardt & Fox, 2019). The New York Stock Exchange is the oldest U.S. registered stock exchange. r. Briefly explain mortgage securitization and how it contributed to the global economic crisis. Securitization, specifically the packaging or mortgage debt into bond-like financial instruments were a key driver of the 2007-08 global financial crisis. Securitization fueled excessive risk-taking which affected many major financial institutions. Securitization is the packaging of assets into a financial product. The securitization of mortgage debt, specifically subprime mortgages, in mortgage back securities and collateralized debt obligations (CDOs), was a major cause that popped the U.S. real estate bubble. Banks and other lenders that issued mortgages to homebuyers then sold those to bigger banks for repackaging into mortgage backed securities and CDOs. Overtime the lenders issuing the loans passed them along to bigger banks meaning they were no longer at