GB 550 Financial Management Unit 1 Assignment

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West Los Angeles College *

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FINANCIAL

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Finance

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Feb 20, 2024

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Purdue Global University GB 550 Financial Management Unit 1 Assignment Krystal Mays

I recently obtained my master's degree in finance from Purdue Global University. I recently began working at the investment firm Harvey, Pearson & Litt. Sofia Matias is a new customer that we recently signed. Spanish tennis player Sofia Matias has moved to the United States from her native Chile. After a highly successful tennis career, Sofia hopes to launch her own clothing company in the future. Sofia wants to sell the clothing that she creates. Sofia wants to use Harvey, Pearson & Litt to make financial investments as well. I'll respond to some of Sofia's inquiries so she can learn more about the US financial system. 1. Why is corporate finance important to all managers? "Corporate finance" refers to the area of finance that studies a company's capital structure and funding sources. Understanding "corporate finance" is essential for managers since it helps with funding, investment, and profit-sharing decisions. Corporate finance knowledge, for example, will help a manager make decisions that maximize the organization's return on investment. Understanding "corporate finance" can also help management spot profitable prospects and areas where the company is willing to take chances. 2. 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. The three main forms of business organization are as follows: 1. Sole Proprietorship 2. Partnership 3. Corporations A sole proprietorship is a business that has a single owner who also acts as its operator. A sole proprietorship has several benefits, one of which being that it's the simplest form of business formation. You have complete managerial control and there aren't many laws or regulations from the government. Finally, since you have complete control, the business and the owner are one and the same legally, so you keep all the earnings. The disadvantage of a sole proprietorship is that you assume full legal liability and there is a limitation to the capital available as your using your own resources. Owners are unable to raise money by selling interests in or shares of their company. Lastly, Sole proprietorships are unable to easily transfer any intangible assets from one owner to another without the need for a distinct legal identity. The owner has an intrinsic stake in the business, aside from fixed assets and equipment.

A partnership is a business when two or more parties come together for business ownership. When it comes to a partnership there are many advantages such as there is no business taxes. Partnerships are exempt from business income tax, but they are required to report to the IRS information on their yearly financial performance, including revenue, profits, losses, gains, etc. There is less financial burden with a partnership. Because the risk is shared among partners, the company's ability to borrow money is increased when it has numerous partners. Credit is more likely to be extended to partnerships by banks and other financial institutions than to single proprietorships. Lastly there are increased business opportunities when it comes to a business partnership. You will have access to more funding and cash flow for your business with a partnership. While there are positives there are some negatives such as increased liability, less autonomy and also complications with future sales. 3. A corporation is a business that is acknowledged by the state as existing independently of its owners, or shareholders. The buying and selling of shares by individuals, organizations, or both makes it simple to transfer a firm. One of the numerous benefits of becoming a business is the protection it offers from personal liability. Almost limitless funds are at your disposal. There are significant tax advantages as well as corporate security. The long application process, double taxation, high costs, and finally, following rules and regulations are the drawbacks. How do corporations go public and continue to grow? a. What are agency problems? b. What is corporate governance? When a business goes public, it sells its first batch of shares to the general public. As the business expands, it may also issue more debt or stock. When a company's managers act against the interests of the shareholders in favor of their own, it can lead to an agency problem. The set of guidelines that governs how an organization acts toward its directors, managers, workers, creditors, shareholders, clients, rivals, and the community is known as corporate governance. 4. What should be the primary objective of managers? A manager's main goal is to add value to the organization, add value to the stakeholders, and take excellent care of it. 1. Do firms have any responsibilities to society at large? It is the ethical duty of all businesses to create a safe and healthy work environment free from hazards and things that might harm employees. Additionally, organizations must protect the community's natural resources from contaminants as well as other hazardous byproducts.

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2. Is stock price maximization good or bad for society? Maximizing stock prices has both positive and negative social effects. To optimize its stock price, the corporation needs to provide consumers with a dependable, affordable product. However, this can also result in a business making compromises on quality control in favor of profits and cost savings. 3. Should firms behave ethically? Businesses should unquestionably act with moral principles in mind. The company's most valuable community, its shareholders, and its employees should be considered in every decision. 5. What three aspects of cash flows affect the value of any investment? The three aspects of cash flows that affect the value of any investment are the following: 1. Amount of expected cash flows 2. Timing of the cash flow stream and lastly the riskiness of the cash flows. 6. What are free cash flows? Free cash flows are the cash flows that remain after expenses (including taxes) are paid and the investments required to maintain growth are made, and they are distributed to all investors (stockholders and creditors). 7. What is the weighted average cost of capital? All of the company's investors (stockholders and creditors) require an average rate of return, which is known as "the weighted average cost of capital" (WACC). It is influenced by the capital structure of the company, interest rates, the company's risk, and the general risk sentiment of the market. 8. How do free cash flows and the weighted average cost of capital interact to determine a firm’s value? A business's operations are valued at the current value of its anticipated free cash flows, discounted by the weighted average cost of capital. 9. Who are the providers (savers) and users (borrowers) of capital?

1. Families are the ones that save and provide. Governmental organizations, financial institutions, and non-financial enterprises are the users/borrowers. How is capital transferred between savers and borrowers? Securities and cash are immediately exchanged to transfer capital between savers and borrowers. 10. What do we call the cost that a borrower must pay to use debt capital? The cost that a borrower must pay to use debit capital is called interest. 1. What two components make up the cost of using equity capital? Retained earnings and common stock. What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy? Production opportunities, scheduling preferences for consumption, risk, and inflation. 11. What are some economic conditions that affect the cost of money? Some economic conditions that affect the cost of money are the following the federal reserve policy, the federal budget deficit, international factor and the level of business activity. 12. What are financial securities? Describe some financial instruments. Bonds and stocks are financial securities. A financial instrument is a formal agreement in which the donor of funds is entitled to repayment from the user. U.S. Treasury bills, commercial paper, money market mutual funds, municipal bonds, and preferred stocks are a few examples of financial instruments. 13. List some financial institutions. Banks, insurance companies, credit unions, and investment firms are a few financial intuitions. 14. What are some different types of markets? Among the several types of markets are spot, money, mortgage, private, and physical asset markets.

15. Along what two dimensions can we classify trading procedures? You are able to classify trading procedures both physical, on-site sites and phone and computer networks 16. What are the differences between market orders and limit orders? In a market order, the customer wants to make a transaction at the going rate for the stock. Buying or selling stock at a specific price or under specific restricted conditions is known as a limit order. 17. Explain the differences among broker-dealer networks, alternative trading systems, and registered stock exchanges. "Broker-dealer networks" are SEC-registered businesses with the ability to purchase and sell on their own while serving as market makers. "Alternative trading systems" are a subset of Electronic Communications Networks (ECNs) that do not hold stock exchange registration. They do not hold shares because "registered stock exchanges" are only a marketplace connecting buyers and sellers of stocks. 18. Briefly explain mortgage securitization and how it contributed to the global economic crisis. A method known as "mortgage securitization" involves grouping several mortgages together and offering bonds for sale that represent shares of that pool. The combination of low interest rates, government policies encouraging home ownership, and loosening lending requirements generated a "bubble" that exacerbated the worldwide economic crisis. Securitization produced many benefits for the banks, but it also made it easier for them to engage in numerous shadow banking activities that the regulation could not control.

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References Lip, G. (2023, October 16). Sole proprietorship . Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/management/sole-proprietorship/ Moric, M., & Davis, B. (2023, December 14). Advantages and disadvantages of a partnership . Legal Templates. https://legaltemplates.net/resources/business/advantages-and- disadvantages-of-partnership/ Bringham, E.F., Ehrhardt, M.C. (2023). Financial Management: Theory & Practice (17th ed.). Cengage.

GB 550 Financial Management Unit 1 Assignment

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