1. What goal should always motivate the actions of a firm’ s financial manager?
The main goal of any firm’s financial manager is to maximize the value per share of existing stock. Other goals of the manager include minimizing costs, and to manage risks the company may face.
2. Give an example of an action that might increase profits but at the same time reduce stock price.
An example would be to lower the stock price in order to attract new customers, thus increasing the firm’s market share. Since the prices of stock would be low, the firm selling the stock may look desirable to another company looking to invest and make money on the return investment. Therefore, even though the company is experiencing losses it is still attracting other investors and getting more money.
3. You may own shares of Apple, but you still can’t enter corporate headquarters whenever you feel like it. In what sense then are you an owner of the firm?
When an individual buys stock, they are buying a percentage of ownership of the company. When you invest in a company you are putting trust and faith into that company to make right decisions to maximize your return profits. If a person is not happy with the company, they have the right to sell their shares and invest in a new company. If a stock that an individual invests in has voting rights, then the investor can vote for the personnel on the board of directors to make the decisions for the company on behalf of the shareholders. People who invest get some sort of control, just not direct control of the company.
4. What is a major reason for the accounting scandals in the early 2000s? How do firms sometimes attempt to meet Wall Street analysts’ earnings projections?
The general public, or those who do not work for Wall Street, have a mindset of companies and managers to not report the correct numbers the companies are producing. Many people believe that managers would change the numbers to exceed the expectations of the market. Therefore, results companies report will meet the Wall Street analysts’ earning projections, but they will not accurately depict the companies revenues earned.
5. What do we mean when we say that corporate income tax is subject to double taxation?
It means that the corporate companies must pay the income taxes twice on the same source of income. The first taxation will be on the corporate income and the second taxation will occur when dividends are given to the shareholders. It can also occur with international purchases/business.
6. Give two examples of capital budgeting decisions and financing decisions.
When it comes to capital budgeting decisions it deals with investment opportunities, the expected return and how finances can be allocated to other business opportunities. Within capital budgeting decisions a multitude of criteria is considered such as NPV, IRR, MIRR, etc. An example is an individual living in Brooklyn Heights, Brooklyn NY. This person is planning on buying a new building in order to expand the business or even renovating the current building with upgrades.
When it comes to financing decisions the main goal is to maximize shareholder value. It will usually revolve around expenses and investment, and how to pay for them. An example would be a firm getting a bank loan in order to further the business.
7. Why are taxes and the tax code important for managerial decision making?
It is important because the managerial decision making are made on an ‘after-tax’ basis. The taxes will also determine the company figures which are concerns of the managers and the firm’s shareholders.
8. What is working capital and why is it important to a firm’ s financial health?
What working capital means for companies is the ability to pay off short-term debts and/or expenses. However, if a company has too much working capital it means that the company itself may look to outsiders as if they aren’t using their assets to invest in long-term things thus they are not helping the company grow nor being put to good use.
9. Differentiate between FIFO and LIFO accounting by explaining how the choice of FIFO versus LIFO can affect a firm’s balance sheet and income statement.
FIFO stands for ‘first in, first out’. Meaning that the oldest inventory a company has will be recorded on paper as being sold first; however, it does not mean that the oldest item has been sold first.
LIFO stands for ‘last-in, first-out’. Meaning that the last products a company brings in are the first goods to be removed from the inventory.
Using FIFO during the time of rising prices allows the companies to phase out lower priced inventory first. Thus, allowing the high priced inventory to remain on the balance sheet. In contrast, if the company were to use LIFO instead, they would see a much lower profit margin than if they were using FIFO.
10. Why aren’ t retained earnings considered an asset of the firm?
Retained earnings are not considered an asset because they are considered a liability to a company. This is due to a company deciding to set aside a certain amount of money to pay their shareholders in the event of a buy out or sale out of a firm.
11. How does a firm’s cash flow to investors from operating activities differ from net income? Why?
Net income is the amount that is left over from subtracting cost of sales, depreciation, interest, taxes, etc. All of these reduce the total net income, but have no effect on the cash flow. Cash flow represents the amount used for operating the business, financing and investments the company will engage in.
12. What is the statement of cash flows and what is its role?
Cash flow statement shows the money that comes into the business and out of the business. A cash flow is highly important for companies to have due to potential investors. The cash flow statement can be used in many ways, one way being that outside investors may look at it before the invest or lend you money to see if they will be able to get their return investment. Another way is for internal use. This use allows the accountants to look at how the business is doing, to make sure there is enough money to pay employees and if there is an issue with the cash flow statement (expenditures > net income), the company will be able to investigate what is going on.
13. Why is too much liquidity not a good thing?
A company having too much liquidity could mean that the managers are not using the company money in ways the shareholders would want. This could mean that the company doesn’t have opportunities to invest in other firms which results in the company holding onto its current cash. It could also show that the managers aren’t taking risks, they are investing in low risk opportunities.
14. How does financial leverage help stockholders?
As a firms’ revenue grows, the shareholders will gain from it and increasing their return investment. The shareholders investment into a firm helps the firm to gain assets that will benefit them in return as the company’s revenue grows.
15. Why is it not enough for an analyst to look at just the short – term and long – term debt on a firm’s balance sheet when assessing the firm’s fixed obligations?
It is not enough because the liabilities do not show nor include other obligations the company may have. In order to get the full picture of the company, one must look into the financial statements. With the financial statements possible investors and analysts will be able to see the company’s financial obligations within any period.