Due 1/24/18 at the beginning of class
Show your work for full credit
1. (1pt) What are the three types of financial management decisions? For each type of decision, give an example of a business transaction that would be relevant.
a. The three types of financial management decisions are capital budgeting, capital structure, and working capital management. An example of capital budgeting would be a firm deciding what to they would like to invest their money in for a long-term investment. An example of capital structure would be the way a corporation purchases its assets through either equity, debt, or hybrid securities. An example of working capital management is a firm managing the money they have available to them for day-to-day operations.
2. (1pt) Compare and contrast the three primary forms of business organization. What is a limited liability company (LLC)?
a. The three forms of business organization are Sole Proprietorship, Partnership and a Corporation. Sole Proprietorship is a business owned by one person, they are only taxed once, and they have unlimited liability. Just like a Sole Proprietorship a Partnership also is taxed once and all partners have limited liability since a partnership is made up of 2 or more people; however, in a partnership non-active partners have limited liability. A corporation is very much different than a Sole-Proprietorship and a Partnership. A corporation is a legal “person” distinct from owners and a resident of a state; they have limited liability and they are taxed twice, once on the corporate rate and then dividends taxed at personal rate, while dividends paid are not tax deductible. A limited liability company is a business which combines the pass-through taxation of a sole proprietorship and a partnership with the limited liability of a corporation, however, a limited liability company is not a corporation.
3. (1pt) What is the primary goal of a financial manager? How does this goal differ between businesses with and without stock?
a. The primary goal of a financial manager is to maximize profit for the business. Although there are different goals for different business types such as a corporation, a financial managers goal for them is to maximize the current value per share of the companies existing stock. If the company does not have stock, then the goal would then again be to maximize profit.
4. (1pt) Who owns a corporation? Describe the process whereby the owner controls the firm’s management.
a. The owner of a corporation is the shareholders. The shareholders elect board of directors whom run the corporation and is over the employees and the ownership of the firm and the management of the firm is completely separated.
5. (1pt) What is a classic example of an agency problem in the corporate form of organization? Provide an additional example of an agency problem. Explain both examples.
a. A classic example of an agency problem in the corporate for of organization would be that a manager is doing its best to act in favor of the shareholders and try to do everything that pleases them because they are what makes up the corporation; sometimes things happen, and the manager does something that is not in the shareholders interest which causes an agency problem.
b. Another example of an agency problem would be a lawyer acting on behalf of their clients, every lawyer is going to try and do everything that they can to please the client and do everything the client wishes however, sometimes things do not always play out as planned and the lawyer may do something that is not pleasing to the client.
6. (1pt) What does it mean when we say the New York Stock Exchange is an auction market? How are auction markets different from dealer markets? What kind of market is NASDAQ?
a. The New York Stock Exchange is an auction market because it has brokers and agents match buyers and sellers, it also has a physical location. Auction Markets are different from dealer markets because dealer markets buy and sell for themselves and do not have a general location they do most of their work over the counter. Auction markets however have brokers and agents selling to buyers and sellers and they have a physical location. NASDAQ is a secondary market because, they take in securities bought and sold after the original sale.
7. (1pt) In response to the Sarbanes-Oxley Act, many firms in the United States have opted to “go dark” and delist their stock. Why might a company choose this route? What are the costs of “going dark?”
a. A company may choose this route because they wanted to avoid the cost of compliance, because of them “going dark” it illuminated public disclosure instead of improving it. A major cost to “going dark” would be the loss of major capital for the company.
8. (1pt) Prepare a balance sheet for Alaskan Orange Corp. as of December 31, 2014, based on the following information: cash = $197,000; patents and copyrights = $863,000; accounts payable = $288,000; accounts receivable = $265,000; tangible net fixed assets = $5,300,000; inventory = $563,000; notes payable = $164,000; accumulated retained earnings = $4,580,000; long-term debt = $1,450,000. Note that a required account is missing from this list.
a. The missing account in this balance sheet is Common Stock. To find the common stock you add Total Current Liabilities, Long-Term Debt, Notes Payable, and Accumulated Retained Earnings and then you subtract that total by the Total Current Assets or the Total Debt & Stockholders Equity which gives us $706,000.00.
Total Current Assets
Patents & Copy Rights
Tangible Net Fixed Assets
Total Fixed Assets
Total Current Liabilities:
Accumulated Retained Earnings
Common Stock (Balancing Figure)
Total Debt & Stockholders Equity
9. (1pt) Draiman, Inc., has sales of $795,000, costs of $345,000, depreciation expense of $79,000, interest expense of $41,000, and a tax rate of 30 percent. What is the net income for this firm?
a. (Sales-Costs-Depreciation Expense-Interest Expense) *(1-Tax Rate) =NET INCOME
(795,000+345,000+79,000+41,000=$1,260,000)*(1-0.30) = $882,000
Net Income = $882,000
10. (1pts) Can our goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects such as customer and employee safety, the environment, and the general good of society fit in this framework, or are they essentially ignored? Try to think of a specific scenario to illustrate your answer.
a. Maximizing the value of stock can conflict with other goals. Some companies focus so hard on maximizing the value of stock that they soon act unethical or illegal and put their company in danger. Companies such as Enron hid billions of dollars from their board of directors by using loopholes, special purpose entities, and because they poorly reported the financial reports. Because of Enron using these unethical behaviors many of the shareholders were affected and they soon filed a $40 billion lawsuit against Enron.