Business Finance Assignment
Question 1.
Finance is applied economics that deals with the creation of wealth. It has various areas, which include personal banking, corporate finance, and public finance. Secret finance deals with the creation of wealth by individuals. It contains individual development cycles with phases such as consumption, income, savings, and career planning. Business finance deals with the creation of wealth by various business enterprises. It has main decisions, which include financing, investment, dividend, and liquidity decisions. Public finance deals with creating a nation’s wealth, and it involves things such as revenue, debt, budget, and expenditure of the public. The three areas are interrelated because they all deal with wealth creation.
Question 2
The primary goal of a publicly-traded firm is to make sure it generates much profit to maximize shareholder value. However, many firms have started to balance this primary goal with other environmental and social goals that help in producing profits and conciliating stakeholders. Social responsibility is a concept used in the management of a firm to make sure there is responsible behavior within the firm, its competence, values and objectives, and the stakeholders’ main interest (Meffert & Munstermann,2005). Ethics guides the firm, and this is codes of principles and values that govern the action of a person or people regarding what is right and wrong ( Levine, 2011). Therefore ethics helps to set standards in a firm as to what is good or bad in decision making and organizational conduct.
Question 3.
A sole proprietorship is an organization that is owned by a single person. It is common for small businesses. It has merits such as simplicity to start, easy to make decisions, and low operational and organizational costs. However, it has some demerits such as unlimited liability to the owner, which means that in a case of settlement of debt, the owner can lose business capital and personal assets. It also has limitations of access to abundant sources of funds. A partnership is a business organization that is owned by two individuals or more. It is formed under an agreement called articles of association, unlike in sole proprietorship. It has advantages such as more access to significant capital from the owners, and there is also sharing of losses. The decisions made are quality due to consulting from partners. Tasks and responsibilities in the business are shared, making work more accessible. However, it has some drawbacks such as unlimited liability, sharing of profits, and slow decision making.
The corporation is another business organization that is owned by shareholders. A board of directors governs it, and the shareholders choose a chairperson. It is most preferred due to the revenue and profits generated. It is a legal entity with limited liability. It has access to a massive source of funds and a continual life. It has the issuance of shares that makes the interest of shareholders easily divisible. However, there is slow decision making in a corporation and double taxation by the government.
Question 4
Prices of stock continuously vary due to a variety of factors, so it is difficult to predict stock prices. When one knows the factors that affect the stock market value, one can prepare a better strategy of buying and selling. The significant factors that affect stock include economic conditions, market perception, and news. The financial state of a given industry can affect the entire industry. For example, a company dealing with pay roles may be profitable unto itself. Still, if the payroll company is down entirely, it can cause a drop in the company’s market value due to investors’ concern about the payroll industry’s health.
Market perception, the method at which the stock market perceives the information can have an impact on the stock value of a company or the entire firm. It is evident that an investor is more likely to dwell on negative things than him or her searching for functional aspects of a firm. It means that an investor will look at the most current information concerning a firm when he or she is deciding on whether to invest. The market value of a firm will go up if it has a popular positive notion. If the perception is negative, then the market value can quickly drop.
The news of events happening around the world can impact the stock value. If a firm announces that it will layoff workers or close a division of the firm, this may cause a drop in the stock price. On the other hand, the stock value of the competition may go up due to bad news.
Question 5.
For a wealthy individual, a corporation type of organization would be the right investment choice. It is because it generates enormous profits and revenues. It is also preferred because one can choose a board of directors and a chairperson to manage his interests and still benefit from its returns. It has the advantage of limited liabilities. Its a legal entity, and it can have as many shareholders as possible. It also has extensive access to a comprehensive source of funds, and also, in the long run, all businesses aim at becoming corporations.
Question 6
Market value is driven by external, or public, expectations and opinions, whereas the intrinsic value is driven by internal, or private, aspirations, and ideas. Whether a company is public or private, its chief financial goal is always to maximize shareholders’ wealth. This wealth is recognized as an intrinsic value because a firm’s value may, at no given time, reflect. Inherent value is much higher than the market value in a private company because only a few people hold the shares. A firm can use a public relations or investment bank to counter this when seeking additional investors by actively publicizing th company and its achievements.
Question 7.
Managers should estimate intrinsic values to know if stocks are undervalued or overvalued before making any decision, especially in the issuance of new shares in the market. They also need to understand how various actions can affect stock prices in the market
Question 8
A balance sheet is a statement that tells the position a business is financially and also lists the assets, liabilities, and equity of the owner at a particular time. A balance sheet purpose is to show the financial status of a business at a specific time. The statement shows w the company owns and shares how much it owes and the amount invested in the industry. The information is more valuable when several balance sheets are combined, whereby it enables trends to be viewable.
Question 9.
The liquidity of those items determines the order in which things are displayed in a balance sheet. That is how easy the details can be converted to cash. The most liquid items come first. For instance, money needs no conversion; therefore, it is listed first, and other things such as inventory come before receivables since they can quickly be sold and be converted to cash, unlike debtors.
Question 10
A statement of cash flow is a financial statement that shows how balance sheet changes happen, and then the income affects cash and equivalents. The cash flow statement helps in making a firm to know its liquidity and solvency. It allows firms to improve the comparability of operating performance. It also indicates the timing, amount, and future cash flow probability.
References
Gore, R., & Zimmerman, D. (2007). Building the foundations of financial reporting: The conceptual framework. The CPA Journal, 77(8), 30.
Mathis, R. L., & Jackson, J. H. (2011). Human resource management (13th Ed.). Mason, OH: South-Western Cengage Learning.
Meffert, H. & Münstermann, M. (2005). Corporate Social Responsibility in Wissenschaft und Praxis – eine Bestandsaufnahme. In H. Meffert, K. Backhaus & J. Becker (Eds.), Corporate Social Responsibility – gesellschaftliche Verantwortung von Unternehmen.