Today during lecture we watched the first twenty minutes of the documentary, “In Debt We Trust” [https://www.youtube.com/watch?v=Cltc4Og6HKo]. For decades, people all across the globe have relied upon credit cards to make their financial ends meet. Most people in our Soc 1 class have credit cards. These pieces of plastic allow consumers to buy goods and services now and pay for them later. The documentary we watched looked at the dark side of credit cards. What can happen when people don’t pay their credit card balances off each month?
This week we also talked about values. I asked the question, should values be taught in school? We debated this point. Some people argued that values should not be taught in the classroom, but a majority of you believed that values can and should be taught in school.
To connect this week’s lecture material on values with the documentary “In Debt We Trust,” I am going to create a hypothetical situation. Here it goes…
Pretend that you and I are having lunch at In-N-Out Burger. Because you are such a nice person, you buy me lunch. I order a 3×3 (with chopped chiles) with animal style fries and a diet coke (of course). You order a number two, protein style, with a chocolate milk shake. You whip out your MasterCard and charge the lunch. We wait for our food to cook and for our number to be called. Eventually, the nice lady behind the counter loudly calls out our ticket number. We pick up our food and sit down in a booth.
After the two of us sit down, I say to you, “Listen, [Insert Your Name], I appreciate you buying me lunch. But don’t you know credit cards are poison. If you can’t pay for something in cash, you don’t need it. Plain and simple.”
You take a moment to contemplate what I just said. Then you respond by saying, “Listen, Professor Avery, I appreciate your viewpoint. But like usual, you are oversimplifying things. You are not looking at the issue objectively. You are biased.”
“Biased, huh?”
“Yes, biased. You sound ridiculous when you talk. Credit cards are not poison. Some people need credit cards to survive.”
“No, they don’t.”
“Yes, they do.”
“Nope.”
“Yep.”
“Nope.”
“Yep.”
“Okay, fine, [Insert Your Name], explain to me why some people need credit cards, why credit cards are not poison, and why I am biased.”
“Gladly, let me educate you on those three points, Professor Avery.”
[Avery takes a bite of the 3×3 cheeseburger]
“Nice elbow patches.”
“Huh? What’d you say?”
“Oh, nothing. So some people need credit cards because…”
While responding to this hypothetical, write 800-1000 words
SAMPLE ANSWER
Credit Cards
Some people need credit cards because they offer numerous benefits not provided by other methods of payment. I don’t deny the fact that these cards are prone to overspending (Baker, 2007), and also that they attract undesirable interest charges, but the credit card users who use them wisely experience more benefits than harm. This applies to even credit cards which have no offers for frequent flier miles, cash back, or other rewards programs (Simon, nd).
The greatest advantage that I find in credit cards is their convenience. If a person has a MasterCard, American Express, Discover Card, or visa in the wallet, it implies that he/she will not waste time and resources to run to the bank for cash, count change or go through the tedious process of writing a check for purposes of making a purchase. In fact credit cards are more convenient that debit cards, since debit cards often have 24-hour charging limits, which could, for example, prevent me from buying the meal that I had set to buy (Simon, nd).
Credit cards help people in budgeting their monthly expenses, as long as the bills are paid in full every time. The bill serves as a master receipt by displaying the list of the items on which money was spent. Some credit cards like the one from American Express, which I use, categorizes all purchases and sends periodical statements summarizing the cardholder’s spending, with percentage breakdowns with regards to the amount spent on entertainment, fees, dining, retail and so on and so forth. In fact, if the cardholder opens an online account with his/her credit card company, a personal finance tracking software can import the data (Simon, nd).
Credit cards are also important tools for building one’s credit history. The borrowers’ report card contains all information with regards to the manner in which the client uses his/her card. The credit history records the responsible manner in which one handles his card, for purposes of reviewing by potential lenders. A cardholder with high scores in the credit history demonstrates creditworthiness. Other lenders thus may be interested to make transactions with such a creditworthy cardholder due to the fact that he has demonstrated his ability to pay debts on time and make conservative spending. Nevertheless, the converse holds true for an irresponsible credit card user. If a user is irresponsible, he should expect the card to produce low scores, which diminish his creditworthiness and may lead to either denial for future credit or payments with much higher rates of interest.
Although in some cases the cardholder can be charged for failure to pay the entire bill on a monthly basis (Munro & Hirt, 1998), the credit card company often offers a break in the form of the float. This refers to a grace period in which the cardholder can avoid interests on purchases if at the time of the purchase, the card does not have a balance. This implies that the cardholder enjoys a break of 20-30 days during which there are no interest charges levied on the purchase. Thus, a wise cardholder can avoid interest charges on unexpected expenditures by utilizing the float.
The card users can sometimes make the credit card companies to lessen the pain related with such provisions like annual fees and annual percentage rate. The good thing with credit card companies is that they provide room for negotiation on any issue, including the waiver of annual fee, lowering the annual percentage rate, or excusing a late payment. All the cardholder needs to do is to ask (Simon, nd).
It is also important to note that credit card purchases give a client a significant degree of protection from theft. Although everybody usually hopes that the theft of the card does not happen, it is wise for a cardholder who loses his card to inform the respective credit card company. Most credit card companies guarantee their clients their efforts to help in resolving theft issues, due to the fact that fraud is one of the greatest concerns in the industry. In general, the client is only expected to assume responsibility for $50 to pay back the total spending of the thief. This is very beneficial to the client as it saves him a lot of cash in circumstances where the thief had expensive tastes. Some companies also provide zero liability policies for cardholders who report the issue immediately. Meanwhile, those cardholders who have online accounts are in a position to take note of the fraudulent activity with the credit card before the arrival of the next statement in the mail.
Credit cards can also be used to get awards. For cardholders who do not maintain a credit card balance, it is possible to make use of other rewards cards. For example, when one uses a gas credit card, he stands a chance of receiving cash points, bonuses, or additional benefits just by doing the ordinary task of filling fuel on a weekly basis (Simon, nd).
Therefore, credit cards are very beneficial to people and we cannot live without them. They only require the cardholder to be wise and to maintain a positive relationship with their card companies in order to maximize on the benefits and do away with their “poisonous” effect.
Cash Flows at Warf Computers, Inc. Mini-Case Study
Cash Flows at Warf Computers, Inc. Mini-Case Study
Order Instructions:
This paper is the repetition of 111878 and because the paper was poorly written the student did not pass and now have to repeat the class so make sure you get a different writer to handle this paper. hear below are the instructions please he should carefully read the instructions before completing this paper.
• Cash Flows at Warf Computers, Inc. Mini-Case Study.
This case study, found on page 42 of your course text, deals with a small computing firm that has developed a new, unique product and has decided to seek outside funding. You have been asked to help prepare the necessary financial statements. After reading the case study:
• Complete the financial statement of cash flows and the accounting statement of cash flows on the excel template provided and the respond to the questions mentioned.
• Briefly answer the three additional questions referencing cash flows and expansion plans found on page 43 (5-6 sentences each minimum).
Remember to include proper APA citations in all Mini-Case Study assignments.
I have attached a documents containing information that will be use in completing this paper. It is critical that the writer pay attention to details for this paper and all calculations must be clearly shown where require. The writer must respond to the 3 questions asked in the mini case as indicated in the assignment requirement. The questions are in the document of the mini-case study. I have also included an excel template that will be use for the calculations, the writer will just complete all calculations in the template.
Remember to include proper APA citations in all Mini-Case Study assignments.
Resources
• Adams, S. (2008, February). Fundamentals of business economics. Financial Management (UK), 46–48. Retrieved from Business Source Premier database.
This article provides an analysis of the principal-agent problem and discusses some of the ways that many companies address the issue.
• Rappaport, A. (2006, September). Ten ways to create shareholder value. Harvard Business Review, 66–77. Retrieved from Business Source Premier database.
In this article, the author states his belief that there are certain principles that when followed will result in increased shareholder value for a company. He provides a review of the 10 steps he has found to be most important and provides a brief description of each.
• Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737–783. Retrieved from Business Source Premier database.
The authors use a survey instrument to study how financial suppliers use corporate governance to assure that they receive a return on their investment.
• Almazan, A., Banerji, S., & DeMotta, A. (2008). Attracting attention: Cheap managerial talk and costly market monitoring. Journal of Finance, 63(3), 1399–1436. Retrieved from Business Source Premier database.
This article presents a new theory as to the best way to increase shareholder value by seeking market attention while the firm is undervalued
Readings
•Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate finance (10th ed.). New York: McGraw-Hill Irwin.
-Chapter 1, “Introduction to Corporate Finance”
This chapter introduces some of the basic ideas in corporate finance; namely, capital budgeting, capital structure, and cash flows. In addition, there is a discussion on maximizing the value of stock, one of the most important concepts in finance.
-Chapter 2, “Financial Statements and Cash Flow”
This chapter introduces and discusses basic corporate accounting procedures, as well as devices used to calculate a corporation’s cash flow from operations, changes in fixed assets, and changes in working capital.
SAMPLE ANSWER
Cash Flows at Warf Computers, Inc. Mini-Case Study
Question 1
The Warf Computers’ cash flows are undoubtedly satisfactory considering that the company has not been in operation for long. This is attributable to the fact that the company debt and equity is not considerable compared to many small companies which oftentimes tend to be highly indebted. Moreover, the company assets both current and fixed seem significant to drive the company operations for long. Ross, Westerfield & Jaffe (2013) note that a company is considered stable when there is considerable positive difference income and expenses as the case with Warf Computers’ cash flows.
Question 2
Accounting cash flow is the cash flow statement which accurately describes Warf Computers cash flows because it represents a detailed statement of each aspect of the company’s cash flows. As a result, accounting cash flow statement provided information which accounts for each activity undertaken by the company irrespective of whether it involves generation of income or spending.
Question3
From the answers provided in the above questions, it is evidently clear that Nick’s expansion plans can be achieved irrespective of them being relatively aggressive. This is due to the fact that the company can outsource funding from debts as well as other sources of income (Almazan, Banerji & DeMotta, 2008).
Cash Flow From Operations
$ 2,011
$ 1,292
$ 719
Investing
Fixed purchased
$ 140,000
$ (140,000)
Fixed sold
$ 330,000
$ –
$ 330,000
Intangible
$ 610
$ (610)
Totals
$ 330,000
$ 140,610
$ 189,390
Financing
Retire debt
$ 151,000
$ (151,000)
Proceeds from debt
$ 175,000
$ 175,000
Notes
$ 85
$ 85
Dividends
$ 225
$ (225)
Treasury Stock
$ 145
$ (145)
Proceeds from stock
$ 12,000
$ 12,000
Total Financing
$ 187,085
$ 151,370
$ 35,715
Change in Cash
$ 519,096
$ 293,272
$ 225,824
References
Adams, S. (2008). Fundamentals of business economics. Financial Management, 46–48.
Understanding Financial Decision Making: Tools for Evaluation
Order Instructions:
Investment Analysis and Recommendation Paper
Understanding Financial Decision Making: Tools for Evaluation
Overview: During the next 7 weeks, you will examine theoretical and empirical points of view and apply the knowledge you have gained from your study and research in order to understand how financial decisions are made within a large publicly traded company that you choose as an exemplar. You will utilize financial tools to evaluate current financial data and use your calculations to justify those decisions. Approach this exercise as though you were a financial consultant who has been asked to analyze the value of the company as a potential investment. This assignment will require access to in-depth financial information, so selecting a company for which this information is easily obtainable will be most beneficial.
You will conduct a detailed analysis of the financial dealings of your selected organization. Each week you will focus on a different aspect of the company’s financial information. You will explore the monitoring capabilities of the Board of Directors and use financial tools to compare ratios with one of the firm’s competitors. You will establish an estimated growth rate and predict future dividends. In addition, you will use annual reports as a tool in capital budgeting to determine potential real options, establish a market risk premium, calculate the weighted average cost of capital, and compare the mix of debt and equity that the firm uses to an industry average. Finally, you will prepare an executive summary of the company, complete with current stock prices and a recommendation on investing in the business you select. Your paper will contain topics unique to the company chosen, but will incorporate the themes covered each week. You will strictly use the sample paper and maintain the format of the sample paper. APA is critical and the writer will continue to build the paper as the weeks go by adding each section. Each week you are required to submit sections of the paper to your Instructor. Each section will then be used as a part of your final analysis and will be included in the complete paper.
• This week, select a publicly traded company that you wish to analyze for this paper. Submit the name to your Instructor for approval. Obtain the company’s financial statements (annual report) and the most recent proxy statement.
Using the information on the proxy statement:
• Evaluate the monitoring potential of the firm’s Board of Directors.
• Identify the strengths and weaknesses of how the board is structured, as well as any ethical concerns.
Write a 1-page summary of your findings.
SAMPLE ANSWER
Understanding Financial Decision Making
Investment Analysis Paper on Chesapeake Energy Corporation
Chesapeake Energy Corporation is U.S based utility company dealing in natural gas exploration and production. The company is headquartered in Oklahoma City, OK and employs approximately 10,800 people (as of December 31, 2013). The company was incorporated in 1947 and has evolved to be a leader in the energy sector worldwide with over $7.4 billion in total assets (as of December 31, 2014).
Board of Directors
The board of directors is very important to the organization since they determine the direction to be taken by the business. The board of directors is composed of a ten member team; nine of the ten are independent members. Each of the nine sits in a charter committee namely; audit committee, compensation committee, nominating committee and finance committee. The Chair to the Board is a member of nominating committee and finance committee.
Monitoring Potential of the Firm’s Board of Director
The strategic monitoring potential of the board is derived from the fact that 90% of the members have complete autonomy and sits on committees (MarketLine, 2014). The charter is also governed by constituency statutes that permit them to make decisions in favor of the company rather than the shareholders’ interests (Brian et al, 2013).
Strengths and Weaknesses of Board Structure
Intense market competition and structuring of the board might either erode or increase the company’s market share. This board strength and weaknesses include:
Strengths
Weaknesses
Mainstream on vertical integration
Strong market position based on personnel
High debt resulting from heavy borrowing
Opportunities
Threats
Increasing demand for natural gas in the world and key employees
Increasing competition
Legal compliance and changing gas prices
Ethical Concerns
The company lacks appropriate responsiveness to the shareholders concerns. This is because the directors have full autonomy over decision making. Despite the fact that their position is backed up by the constituency statutes, it amounts to lack of transparency in the overall organization (Bundy & Ann, 2013).
References
Brian, J. H, Sandra, M. T. & Jennifer, C. H. (2013). Benefit Corporation Concerns for Financial Service Professionals. Journal of Financial Service Professionals. 74-82.
Bundy, J & Ann, K. B. (2013). Strategic Cognition and Issue Salience: Toward an Explanation of Firm Responsiveness to Stakeholder Concerns. Academy of Management Review. 38 (3) 352-376.
Chesapeake Corp. (2015). Company Profile: Chesapeake Energy Corporation. MarketLine
DuPont Analysis for the companies for the past three years
Return on Investment (ROE) is the is one of the most important company analysis tools that is used to measure how well a company manages and creates value to their shareholders. However, the values on the ROE can sometimes be misleading in terms of real value and risks associated with a particular investment. The numbers in the ROE can easily be misleading to financial analysis if the individual components of the ROE have not been broken down to their individual components. In this regard, DuPont can bridge the gap created by the ROE and provide a reliable measure of how the company creates value for its shareholders (Mitchell, Mitchell, & Cai, 2013). DuPont is the financial analysis tool that enables the breakdown of the ROE into its various individual components such as financial leverage, asset turnover, and profit margin (Haskins, 2013). The following is the financial calculation of DuPont of Chesapeake Energy Corporation, together with their competitor, Anadarko Petroleum Corporation (APC) (Cheasapeake Corp, 2015).
DuPont takes utilizes the basis of the individual component of ROE which is given by;
Profit Margin X Asset Turnover X Leverage Factor
Chesapeake Energy Corporation (CEC) Financials for the past three years
2014
2013
2012
Total Assets
$40,751,000
41,782,000
41,611,000
Shareholders’ Equity
$16,903,000
15,995,000
15,569,000
Revenue
$20,951,000
17,506,000
12,316,000
Net Income
$1,917,000
724,000
769,000
Anadarko Petroleum Corporation (APC) Financials for the past three years
2014
2013
2012
Total Assets
61,689,000
55,781,000
52,589,000
Shareholders’ Equity
19,725,000
21,857,000
20,629,000
Revenue
18,470,000
14,581,000
13,411,000
Net Income
(1,750,000)
801,000
2,391,000
In the year 2012;
The DuPont for Chesapeake Energy Corporation is given by
Net Profit x Asset Turnover x Leverage Factor
(769,000/12,316,000) x (12,316,000/41,611,000) x (41,611,000/12,316,000)
= 0.0624 x 0.256 x 3.379 = 0.054
The DuPont for Anadarko Petroleum Corporation (APC) is given by
(2,391,000/13,411,000) x (13,411,000/52,589,000) x (52,589,000/20,629,000) =
=0.1783 x 0.255 x 2.541 = 0.116
In the year 2013;
The DuPont for Chesapeake Energy Corporation is given by
(724,000/17,506,000) x (17,506,000 / 41,782,000) x (41,782,000/15,995,000) =
0.041 x 0.419 x 2.612 = 0.045
The DuPont for Anadarko Petroleum Corporation (APC) is given by
(801,000/14,581,000) x (14,581,000/55,781,000) x (55,781,000/21,857,000) =
0.055 x 0.21 x 2.55 = 0.029
In the year 2014;
The DuPont for Chesapeake Energy Corporation is given by
(1,917,000/20,951,000) x (20,951,000/40,751,000) x (40,751,000/16,903,000) =
0.091 x 0.514 x 2.411 = 0.113
The DuPont for Anadarko Petroleum Corporation (APC) is given by
(1,750,000/18,470,000) x (18,470,000/61,689,000) x (61,689,000/19,725,000) =
0.095 x 0.299 x 3.127 = 0.089
Differences and trend that emerge
In the year 2012, the operating efficiency of APC (0.18) was higher than that of CEC (0.06) as can be seen in their profit margins. In the same year, it can be deduced that the asset use efficiency of between the two companies are almost the same since they stood at 0.255 for APC and 0.256 for CEC. On the other hand, the financial leverage for CEC was higher (3.4) than the financial leverage for APC (2.5).
In the year 2013, the operating efficiency of APC (0.05) was still higher than that of CEC (0.04). In the same year, the asset use efficiency of CEC was higher than the asset use efficiency of APC. Similarly, CEC had a higher financial leverage in the year 2013 than APC. Overall, it can be deduced that CEC performed better than APC in the year 2013.
In the year 2014, the operating efficiency of APC (0.095) was higher than that of CEC (0.091). However, the asset use efficiency of CEC stood higher (0.5) than that of APC (0.3). On the other hand, APC had a higher financial leverage (3.1) than CEC (2.4) as can be deduced from the financial calculations. The higher the financial leverage, the better a company is placed to provide good value for its shareholders (Brian, Sandra, & Jennifer, 2013).
References
Brian, J. H, Sandra, M. T. & Jennifer, C. H. (2013). Benefit Corporation Concerns for Cheasapeake Corp. (2015). Company Profile: Chesapeake Energy Corporation. MarketLine
Financial Service Professionals. Journal of Financial Service Professionals. 74-82.
Haskins, M. E.(2013). A decade of DuPont ratio performance. Management Accounting Quarterly, 14(2), 24-33.
Amazon Business Combinations and Financial Analysis Assignment 1: Amazon.com Business Combinations and Financial Results Analysis
Amazon Business Combinations and Financial Analysis
Search the Internet for acquisitions and equity investments made by Amazon.com during the last five (5) years. Review the 10-K of Amazon.com located at http://www.sec.gov/cgi-bin/browse-edgar?company=&match=&CIK=AMZN&filenum=&State=&Country=&SIC=&owner=exclude&Find=Find+Companies & action=get company.
Amazon Business Combinations and Financial Analysis Essay Guidelines
Write a three to four (3-4) page paper in which you:
1. Examine how at least three (3) growth strategy alternatives utilized by Amazon.com in the global and domestic retail markets influenced profitability, and indicate if the strategies were successful.
2. Assess the financial value of the acquisitions and investments made by Amazon.com, and the influence of the acquisitions and investments on profitability during the accounting period.
3. Analyze the effect of the equity investments and impairments resulting from the acquisitions and investments by Amazon.com on the financial statements, and indicate whether or not the strategy was a creatable one. Provide support for your rationale.
4. Create an argument that growth in the European market can have a significant impact on current earnings and profit for Amazon.com. Provide support for your rationale.
5. Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources.
Amazon Business Combinations and Financial Analysis Assignment Formatting Requirements
Your assignment must follow these formatting requirements:
• Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
• Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
The specific course learning outcomes associated with this assignment are:
• Analyze accounting situations to apply the proper accounting rules and make recommendations to ensure compliance with generally accepted accounting principles.
• Use technology and information resources to research issues in accounting.
• Write clearly and concisely about accounting using proper writing mechanics.
SAMPLE ANSWER
Amazon.com Business Combinations and Financial Results Analysis
Several firms often fail to attain their set targets relating to growth and profitability. This is attributable to lack of a strong execution of infrastructure and a clear and precise growth strategy. The probability of success is impaired if either or both of these strategies are lacking. As a result, growth becomes obscure. Amazon.com has, however, attained massive growth due to its effective growth strategies and it is at present ranked as the prevalent online retailer globally (Schepp & Schepp, 2009).
This is notwithstanding the projection that the online retail industry in the United States will grow at a steady rate of 10% for the next half a decade (Schepp & Schepp, 2009). Despite attaining this feat, the company also aims to become the overriding force in distributing digital media. Amazon’s sales and profitability have been at an all time high, and this is due to three growth strategies utilized in both the global and domestic retail markets. These strategies include; increase in infrastructure, digital growth, and acquisition and of other business concerns (Schepp & Schepp, 2009). Each of these strategies has been successful, and each has contributed to profitability by certain degrees as outlined below.
In increasing its infrastructure, Amazon has not ceased constructing warehouses for its products as the company is continuously enhancing its product line and services offered to its clients (Spector, 2000). The warehouses have been placed in certain target locations, to enable clients access products that they purchase online after a short turnaround time. One of the products that the company opted to venture in was groceries. The grocery business segment has been tested for a few years, notably in Seattle and this was further expanded to target the potential market in Los Angeles (Spector, 2000).
The grocery segment, dubbed the AmazonFresh enabled customers access grocery products for a whole year at a rate of 299 dollars (Spector, 2000). The expanded warehouses facilitated quality products and same-day delivery of the grocery products. Estimated income emanating from the online groceries market is 65 billion dollars and Amazon endeavours to garner a large proportion of the market (Spector, 2000).
Another strategy adopted by Amazon is the expansion of its digital services apart from the retail solely. Amazon launched its cloud offering and the Amazon Web Services since the online retail giant had anticipated massive growth in the digital services segment (Spector, 2000). Revenue generated from its digital services stood at 2 billion and is estimated to rise up to 24 billion by the year 2022 (Spector, 2000). The firm is presently seeking to expand its cloud offering internationally to boost revenue.
The third strategy applied by Amazon was venturing in mergers and acquisitions. Over the years, Amazon opted to make investments in other companies and have agreements with other marketing companies to reach a wider customer range and expand the existing market share. Some of the companies entailed in the merger and acquisition agreements include Bookpages, Internet Movie Database, Telebook, Junglee Corporation, Sage Enterprises, Geoworks,Ashford.com, Homogrocer.com and Drugstore.com (Spector, 2000). These acquisitions resulted to Amazon’s stock prices rising by a massive 234 percent, consequently according the company a 120 billion dollar valuation (Spector, 2000).
The aforementioned acquisitions have on the contrary had a negative impact on the profitability as a result of their financial value that was appended into Amazon.com. Sales have been growing steadily succeeding the acquisitions, but not profitability. Some acquisitions, such as Junglee Corporation had equity values in the range of 280 million dollars and the deal was for Amazon to take up the entire 100 percent of the outstanding shares (Saunders, 1999). A merger like that with HomoGrocer.com saw Amazon purchase 35 percent stake of the online grocer, in a bid of strengthening its grocery segment. This was worth 42.5 million dollars (Saunders, 1999). In Ashford.com, Amazon acquired a 16.6 percent stake in the retailer of luxury products by investing 10 million dollars in the online retailer (Saunders, 1999).
Majority of the mergers and acquisitions occurred between the years 1998 and 2000, and financial statements subsequent to those spells reflect an improvement in profitability as evidenced by the financial statements (Saunders, 1999). Total assets by the end of the year 2000 were totalling to 2,135,169 dollars in the consolidated balance sheet. These assets, six months later, dropped to 1,345,036 dollars (Saunders, 1999). The company, however, had a reduction in the net loss from 625,609 dollars in June 2000 to 168,359 dollars in June 2001 (Saunders, 1999). Cash flows for Amazon after considering the operating, investing and financing activities also declined, from 720,377 to 462,949 over the same period (Saunders, 1999).
Growth in the European market is capable of having a large impact on the current earnings and profits by Amazon and the United States online retail industry in entirety. Growth in the US online retail industry is projected to have an annual growth of 10 percent to hit the 370 billion dollar mark, whereas that of their counterparts in Europe is expected to grow by 10.5 percent to reach the 253.6 billion dollar mark (Saunders, 1999). This rapid growth in the European market is likely to affect the present earnings of Amazon due to the induced competition in the online retail market sphere. The company hence needs to effect its outlined growth strategies to embrace itself for this growth and consequently maintain profitability and market share (Saunders, 1999).
Amazon Business Combinations and Financial Analysis References
Saunders, R. (1999). Business the Amazon.com way: Secrets of the world’s most astonishing Web business. Dover, NH: Capstone US.
Schepp, B., & Schepp, D. (2009). Amazon top seller secrets: Insider tips from Amazon’s most successful sellers. New York: AMACOM.
Spector, R. (2000). Amazon.com: Get big fast. New York: Harper Business.
Describe the types of corporate shares and compare the use of shares to bonds and debentures in financing a corporation
Order Instructions:
describe the types of corporates shares and compare the use of shares to bonds and debentures in financing a corporation
SAMPLE ANSWER
Types of corporate shares
Introduction
Shares represent ownership rights to a company while debentures and bonds refer to long term debt instruments that are used by a company to borrow money from the public or private firms mostly at a certain interest rate which is fixed. There are two main types of shares, ordinary shares and preferential shares. Ordinary shares have voting rights and they participate on the sharing of profits in a company. However, they have no guarantee on the profits of the company. Preferred stock has a guarantee on profits and the shares are redeemable at the option of the holder. They have the first right to the assets of the company in case the company goes bankrupt before the ordinary shareholders are paid however they have no voting rights (Chandra, 2007)
Debentures and bonds have no voting rights in the company’s general meetings and they are freely transferable. They are entitled to a fixed rate of interest that is guaranteed.
There are certain types of bonds that can be converted to equity shares. Convertible bonds or debentures can be converted to equity shares at the option of the holders after the lapsed of a stated period of time. The feature of Convertibility in bonds is a way that’s meant to attract the customers to the product by promising ownership rights to the company in future. The other ordinary bonds or debentures are non-convertible debentures or bonds and they cannot be converted to equity shares but they mostly carry higher rates of interest than the convertible ones.
Ordinary shares can be issued according to different classes. Some classes can have different number of voting rights per share. For example class A ordinary shares can have one vote per share while class B have two votes per share.
References
Chandra, G. (2007) Company Law, 3rd Edition; McGraw-Hill Education
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Stetson Company has so far had a lot of financial challenges in some of its wings of operation such as the Fly Airways, Technology, and the Banking sectors. The occurrences of the issues such as the currency exchange rates, bidding process, risk management and the hedging options (Clark and Buffett, 2014). In this case, they prompted the finance department through the Directorate the department to come up with a report that comprehensively evaluates on these sectors as presented below.
Stetson Air
Free Cash Flow Methodology in Stetson Group Fly-Up Airways (FA)
Free Cash Flow, FCF is the available cash to the stakeholders when all the expenses, interests, taxes, capital expenditures and the present portion of the long-term debt have gone through the deduction from the revenues. FCF will be of value to the organization since it enhances the provision of an accurate financial picture of the company than the net income. Net income, in this case, is the accounting adjustments that at some may not have an impact on the Stetson’s health. For instance, Fly-up Airways may have a negative Free Cash Flow. The company may find it hard to continue doing business operations without borrowing from other financial institutions to sustain it. In addition, when the company experiences a downward trend in the cash flows, then it signifies that there will be stagnation in its growth (Wilson and Adler, 2013).
On the hand, the other value of the free cash flow to the Stetson Company is in the evaluation of the company’s financial ability in realizing its stated goals and then objectives to the stakeholders. In this case, the company that has positive cash flow, as in the case of Fly-up Airways of the Stetson Company, will attain the full financial strength in meeting its financial obligations.
The Revenues of FA = $325m
EBIT = 85m
The total working capital= $20m
Corporation tax is 30%
Debt to equity ratio = 70%/30%
In this scenario
Free Cash flow will be given by:
FCF=Sales Revenue – Operating Costs and Taxes – Required Investments in Operating Capital
=325 – 20
$305
Since FA has good free working capital, Stetson should continue with their plans of acquiring the company.
Evaluation on the Possible Defence Tactics That Might Be Adopted By Fly-Up Airways
Fly-Up Airways in the case of its failure in bidding process may adopt the below options to sustain the situation; Fly-Up Airways may go for the option of selling itself to the bigger companies through trade sales. As a result, the company, in this case, will act as a subsidiary buyer. Failure in the bidding process may also prompt the management of the Stetson Company to sell its assets, rather than the shares, to save the situation. As a result, a potential buyer may have the choice to choose from the most useful assets so as to save the company from further troubles (Wilson and Adler, 2013).
In the case, the Fly-Up Airways fails to find an appropriate buyer then it will go for the auction method of selling itself. In such situation, the company will strive itself so as to get the potential buyer with the highest bidding amount. All these processes, however, will have to take place through the stock exchange, as it is only the best way or place that a company can perform or initiate its acquisition well. In addition, many potential buyers are also available in the stock exchange market that, in this case, should provide for the options for the Fly-Up Airways in auctioning itself within the shortest time available.
In some cases, the Fly-Up Airways bidding process may receive the rejection. The company will, in this case, withdraw their offer further to reduce the chances of the bid becoming more and more hostile to the public. Cases of hostile bids have the tendency of generating conflicts of interests between the directors and the shareholders. For instance, in such bidding process, the directors may lose their jobs while the shareholders end up selling more shares than the previously announced figure for sale from the company.
The other option that the Fly-up Airways has in the case of the hostile reception of their bidding process is to avoid the use of the poison pills. Poison pills entail the schemes and the strategies involved in the issuance of more stock to the present holders, resulting in the dilution of the bidders share in the company. Such circumstances that may lead to the frustration of the bidding process should be avoided at all costs by the Fly-up Airways to evade the hostility in the bidding process (Wilson and Adler, 2013). Another option that the Fly-up Airways may adopt in the case of hostile bidding process is to look for friendlier potential purchasing companies. In addition, Fly-up Airways may also look for the white knight that together with the friendlier company may provide the option for quotation of higher prices of shares than the hostile bidder in the stock market (Wilson and Adler, 2013).
Advantages of Cash Offer or Mixed Mode Financial
Cash offers have the advantages of providing the option minimal and closing costs that can take place within the period of implementing the contract. However, the contract should be acceptable to both involved parties in such situations. On the other hand, the seller enjoys the benefit of not waiting for the approval of the mortgage In this case, the agent will have no fear of the issue of the properly not earning its appraisal. The instance is that it is the banks that mostly do need the appraisals while not either the seller or the buyer. In addition, the agents from the Fly-up Airways will enjoy the benefit of the few contingencies that, in this case, enhance their closeness to earning their commissions (Beattie, Fearnley, and Hines, 2011).
Disadvantages of Cash Offer or Mixed Mode Financial Offer
Buyers need to be more cautious in their contracts the engage in so as to enable their protection from having the contingencies in the contract. In this situation work with their agents who will guide them on the suggestions relating to the appraisal issues and also how to carry out such appraisal issues effectively. For instance, the elements that the agent may address, in this case, are the; Termite Inspection, Well and Septic, Building Permits, School Districts, Wetlands and Lot size. The agent, in this case, has, to ensure further, that the buyer makes all the verifications on the contents of the contract. As a result, it enables him or her get familiarized with the requirements and the legalities of the contract at large (Beattie, Fearnley, and Hines, 2011). The seller, on the other hand, may find it also hard to do his or her verifications on the funds involved in the transaction process that entails the third parties. The agent may sometimes have too much pride in handling the transaction process. For instance, he or she (agent) may end up ignoring some contents of the contract, especially when handling his or her client during the transaction process (Lee, 2006).
Stetson Technology
The Significance of Exchange Controls for the Investment Decision
The decisions on the exchange control investments come with some laws or regulations that the government uses to regulate the foreign exchange of the country’s currency. For instance, the government may initiate the exchange controls on a single currency such as allowing for the convertibility of the currency into the country’s currency.
In addition, the control of the exchange rates helps the citizens of the country in making the right choices on the investment decisions or choices. For instance, the individual may be able to evaluate the inflation trends of different countries. As a result, he or she will choose the best nation with favorable inflation trends so as to avoid failure in his or her business (Lee, 2006).
Strategies of Dealing with Restricted Remittance
Remittances are the monies that migrants from home send to their mother countries. The funds are also of importance towards the growth and the development of these nations. Countries, however, have to come up with the strategies for ensuring that this money gets back home despite their citizens staying abroad (Beattie, Fearnley, and Hines, 2011). For instance, the two governments in place of the countries where these citizens stay should cooperate with each for the realization of its success. The governments may work together towards their tax and their foreign affairs departments in revealing the information details concerning the citizen’s earnings. Consequentially, the tax departments may use such information calculation the expected or the amount that these migrants should send back home. In this instance, it will also be possible to track the individuals who never subject themselves at all for taxation purposes.
Viability of Investment in Cambodia
Cash Flow Statements will assist the investment in Cambodia in expressing how the Stetson Company raised the cash or money and the expenses of the money during a given period. As a result, Cash Flow Statements, in this case, will measure the Stetson Company’s to manage its incoming expenses in the coming days or periods (Palepu, 2007). In most of the occasions, Stetson Company will be in a good shape when it will be able continuously to generate more cash than its expenditure. As a result, the Cash Flow Statements just as was identified before, will serve as a tool for evaluating the company’s financial health status. In addition, it will also determine the abilities of the company to meet the incoming bill and liabilities during its normal operations or transactions (Palepu, 2007). A business that has more cash runs their operations better. However, cases of low negative cash flow for a year may come from the poor financial strategies that the company may have towards its growth and development. As a result, the real issue here of positive development does not get its required attention. With regards the financial analysis, there is a need for the Stetson Company continues to evaluate on its cash flow tends to avoid meeting such bad omens in the financial sector of the company (Alexander, Britton and Jorissen, 2007).
Potential Risk Exposures to a Company In Future
Potential Future Exposure is the expected maximum credit exposure for a given period with the consideration of the calculation of the level of confidence. As a result, PFE determines the counter party risks or the credit risks. The calculation of the Potential Future Exposure (PFE) entails the evaluation of the trades carried out with the possible market prices in the future, especially at the times of lifetime transactions (Beattie, Fearnley, and Hines, 2011). As a result, PFE may also assume the name sensitivity analysis of the risk with respect to the market prices. However, the expected maximum exposure is not the same as the maximum credit h exposure possible. As such, the maximum credit exposure defines the upper bound on the confidence interval for the possible future exposures (Alexander, Britton and Jorissen, 2007).
In most of the occasions, the credit managers remain focused on the present exposure evaluations such as the current market exposures and the outstanding receivables that, in this case, form part of the collateral management. However, the incoming problem here is that it emphasizes on the current but does not create the opportunity for the indication of the credit risks in the coming future (Clark and Buffett, 2014). Due to the losses that accrue from the credit risk, the instance, in this case, takes a bit long time to prosper into a more viable method of evaluating the potential exposure. In addition, the potential exposure is not the same as the present exposure since its existence is in the future. As a result, it gives a wide choice of the outcomes instead of the single point estimation case (Palepu, 2007).
Management of Risks
As much as the term goes with risk management, the objective of the Stetson Company is to eliminate the risk entirely from the company rather than just its management. However, risks are uncertainties that an individual or a company cannot do away with completely. Risks continue to occur and in most of the occasions they may prove hard to predict their time of occurrence (Kwok, 2005). However, Stetson Company may use the below strategies to manage the potential risks that may occur in the company; ensure that good risks and opportunities are identified, assessed, managed and reported. A
Aligning risk appetite and strategy enhance the embedding of risk management in decision-making, allocating resources to effectively and efficiently manage risks and ensuring efficient management of risks with the use of the best practices.
Stetson Bank
Stetson on Banking
Stetson’s Increased Exposure to Credit Risk As A Result Of the Borrowing Requirement
Stetson Company stands at high risks of exposure to the below categories of risk exposures; corporate, sovereign, Bank, Retail and Equity exposures.
Corporate Exposures
Corporate exposure defines the type of exposure that the Stetson Company will find itself in, in relation to the partnerships or the proprietorships that it will be doing business operations within the market structure. For instance, there is a need for a special guidance on the small or medium entity for the purpose of the avoidance of occurrence of this type of exposure (Clark and Buffett, 2014). As a result, corporate exposure exists in other further sub-classifications as given below that facilitate in the lending of the assets during the normal business operational activities (Smith, 2010). Object Finance that involves the funding of the physical assets in relevance to the expected cash flows from the rentals or leases on some of the identified assets in the company. Commodity Finance is the funding of the reserves, receivables or the inventories of the exchange traded commodities instead of the borrowings from the independent sources of finances (Beattie, Fearnley, and Hines, 2011). The income producing real estate that entails the financing of the real estate that is either rented or leased out by the debtor for the purposes of generating cash flow used to repay the exposure. High volatility commercial real estate that involves the funding of the commercial real estate so that to how a higher level of volatility of loss rates in comparison to some other forms carrying out lending (Elliott and Elliott, 2008)
Sovereign Exposures and Bank Exposures
Sovereign exposures define the loan given to a given country. Elements of this forms of the exposure are the central banks from different countries, public sector enterprises, multilateral developments that meet the threshold for the 0% mark for the risk weight through the standard guidelines approach (Hussey, 2011). Bank Exposures are the loans to banks or security firms through the regulatory capital requirement. Some domestic PSEs or MDBs fail to meet the threshold for the 0% mark of the risk weight through the standardized approach is also in the class of Bank Exposure of risks (Kirk, 2009).
Retail Exposures
Retail exposures include the loans that the Stetson Company makes to the individuals. For instance, the credit cards, overdrafts or the residential mortgages from some of the products for lending in the retail exposure categories. With the consideration of the maximum one million Euros, the exposures to small businesses that are under the management of the retail exposures are also in this category as well (Gibson, 2013). The management of the risk exposures due to retail business may not as such take place due to the influence of banks or on the individual basis for the purposes of evaluation of the potential risks to the business. However, it takes care of the exposures due to groupings that share the same characteristics (Fridson and Alvarez, 2011). As a result, retail exposures may further fall in; Residential mortgage, qualifying revolving exposure, other retail and equity Exposures.
Equity exposures are the direct interests in the assets and the incomes of a financial institution such as the case of the Stetson Company. In addition, it also entails the indirect interests such as the derivatives. An exposure will fall under the category of the Equity Exposure types (Lee, 2006). The return funds invested in the equities may only be attained by the sale or the liquidation of the person or who is responsible for the issuance of the equity
The Hedging Options Available To Stetson
In relation to the financial issues and management, hedgehog is the investment that the company undertakes with the primary objective of reducing or eliminating the risks in another possible investment for the company (Kirk, 2009). Stetson Company may use the below available options of hedging in its operations;
Perfect Hedge
The position that the Stetson Company will take to eliminate the risks of anther available option is the perfect hedge. However, the position will require full 100% negative correlation to the investment for hedging purpose that also in some instances is not easily available. Consequentially, there are either the imperfect or the near perfect hedges that, in this case, do occur at their best to the company (Palepu, 2007).
Equity Hedging
In this case, Stetson may go for its individual hedging of the long stock positions through the option of buying the protective options as long as there is the availability of options for trading the stock available. On the same note, hedging of the entire portfolios against the systematic market risks through the use of the index options may also take place (Ittelson, 2009).
Future Hedging
In this option, the trader has the choice of hedging the positions against the synthetic futures position. Stetson, in this case, may hedge the long futures position with the synthetic short future positions. On the same note, hedging of the short future positions may also take place against the synthetic long futures positions (Palepu, 2007).
Hedging Commodity Price Risk
In the case where the Company may be involved in the production of consumable raw materials, the company may remove the commodity price risk through hedging in the commodity’s future market. However, cases of the short hedges do lock the selling price of a commodity in plan for sale in the future (Ittelson, 2009).
Solution from the Data Given
Sometimes, parties may subject themselves to an agreement of making periodic payments mostly at the maturity of the swap
In the case of the above problem;
Swapped value=$2, 000, 0000
Libor+3 basis points=Libor+0.03%
FTSE=(100-92.75)=7.25%
In this case payment=a floating interest rate=libor+0.03% on 2,000,000
With a libor value of 6%p.a and a swap tenor of 180 days, the floating leg payer/equity receiver would owe:
(6%+0.03)*$2,000,000*180/360=6,030,000
As a result, this is the equity payer/floating leg receiver
At the same date, that is after 180 days, following the appreciation of FTSE by 7.25% from its level at trade commencement, Stetson would owe Harry 7.25%*$2,000,000=$145, 000. However, the FTSE at six month mark fell at 7.25% from the level of trade commencement. In this case, Stetson would owe hurry an additional 7.25%*$2,000,000=$145,000 because there is a negativity in the flow.
Assessment and Evaluation of the Specific Points Raised By Simon In Relation To Developments in the World Financial Markets.
The primary centre of focus of Simon in relation to the development of finance in the world financial markets is the issue of financial capitalism. For instance, financialization usually enhances the talks that primarily dwells on the financial capitalism that occurred at some time ago. During such times, the financial leverage tended to outdo the capital or the equity while the financial markets strived to outwit the dominance of the industrial economy the economics related to agriculture (Previts, Walton and Wolnizer, 2012).
According Simon, financialization is the economic systems that seek to aid in the reduction of all the values exchanged. The values may either be tangible, intangible, future or present promises of a financial instrument. Simon further postulates that the origin of the intent of financialization is to foster the reduction of any activity related to work product or service into an exchangeable financial tool such as the currency. As result, it would make it affordable for individuals in trading with the financial instruments in place (Smith, 2010).
Simon further added that workers through the financial tools such as mortgage may find it possible trade theses premises for future work, wages or homes. As a result, financialization takes care of all the insurance demands from such occasions (Wilson and Adler, 2013).
In the case of the above problem;
Swapped value=$2, 000, 0000
Libor+3 basis points=Libor+0.03%
FTSE=(100-92.75)=7.25%
In this case payment=a floating interest rate=libor+0.03% on 2,000,000
With a libor value of 6%p.a and a swap tenor of 180 days, the floating leg payer/equity receiver would owe:
(6%+0.03)*$2,000,000*180/360=6,030,000
As a result, this is the equity payer/floating leg receiver
At the same date, that is after 180 days, following the appreciation of FTSE by 7.25% from its level at trade commencement, Stetson would owe Harry 7.25%*$2,000,000=$145, 000. However, the FTSE at six month mark fell at 7.25% from the level of trade commencement. In this case, Stetson would owe hurry an additional 7.25%*$2,000,000=$145,000 because there is a negativity in the flow.
Conclusion
The report covers the Stetson Company financial issues. As a result, it gives the true picture of what the company needs to implement in collaborating with the department of finance. Consequentially, the effect of the findings if implemented will become a success to the operation of the company. For instance, the evaluation of the issues touching the currency exchange gives the preview to the company on what place or country to make a choice on for investments purposes. In addition, the issue of risks exposures presents a clear picture of what the threats the company is at during its operation and how to detect them in their occurrences. In so doing, the report further presents the way the manager or the company may manage such risks in the event of their occurrences. Last but not least, the paper also gives the way the Stetson Company react on the issue of hostile bidding process or scenarios. The paper reports majorly on the financial condition of the Stetson Company. As a result, the report, in this case, will serve as a valuable material to both the finance department and the company at large in the assessment of financial issues they face.
Bibliographies
Alexander, D., Britton, A. and Jorissen, A. 2007. International Financial Reporting and Analysis. London: Thomson Learning.
Beattie, V., Fearnley, S. and Hines, T. 2011. Reaching Key Financial Reporting decisions. Chichester, U.K.: John Wiley & Sons.
Clark, D. and Buffett, M. 2014. Warren Buffett and The Interpretation Of Financial Statements. New York: Scribner.
Elliott, B. and Elliott, J. 2008. Financial Accounting and Reporting. Harlow: Financial Times Prentice Hall.
Fridson, M. and Alvarez, F. 2011. Financial Statement Analysis. Hoboken, N.J.: John Wiley & Sons.
Gibson, C. 2013. Financial Reporting & Analysis. Mason, Ohio: South-Western.
Hussey, R. 2011. Fundamentals of International Financial Accounting And Reporting. Singapore: World Scientific.
The bonds are bought by the US market because they aid in ensuring the market has the right funds that are needed for use in carrying out developments and the creation of the right infrastructure.The projects that create job opportunities are started by the bonds acquired by the United States government thus, it implies bonds are of great use in the emerging governmental projects(Hillier et al, 2014).The bonds are of high use as they are well useful in maintaining of quality life to the US citizens, their well-being and in turn leading to increase in the US competitiveness with other markets.The US government issues bonds as they an approximation of a theoretical risk-free currency that has to be maintained at the right standards. The cost of infrastructure renovation is lowered by the purchase bond issued by the government,and this also happens in case of new business.Bridges, transportation systems and roads are built by the use of bonds that is collected by the US government. There are power plants that are used to heat the homes of the citizens and are known to be constructed by the use of the bonds.The company that has acquired the use of debenture and mortgage bonds, will have high bond rating in the side of debentures. This is because debenture bond in a business are more risker than any other type of bond and their maturities are short following that debenture bonds are not secured debts.First mortgage bonds will be of high interest as it is secured despite it having long term returns on investment(Hillier et al, 2014).I would prefer to use the mortgage bond because it is a secured bond with long maturities and do away with unsecured debts like in the case of debentures, which only benefit from shorter maturities,which do not last.
References
Hillier, D., Clacher, I., Ross, S., Westerfield, R., Jordan, B., (2014). Fundamentals of Corporate Finance.McGraw-Hill Higher Education; 2 edition
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Q1. I would rather have a savings account that paid interest compounded on an annual basis (Cornett, Adair, & Nofsinger, 2013). The reason for this is because for the monthly basis the interest is more likely to be higher than that of an annual basis.
Q 2. An amortization schedule is a detailed table showing regular payments that an individual pays over time for a mortgage. It is used in determining the amount of an outstanding loan at different times and adjusting the amount of loans so as to be in line with the expected monthly payments.
Q3. The early years are more use full in reducing taxes than the late years since in settling the loan during early years, and then it means that the time of the compounding factor is minimized. Therefore the overall interest will be low as compared to when you could have paid it in the later years.
Q4. The difference between an ordinary annuity and annuity due is in the difference between their payment periods and time in relation to the period that is being covered by the payment. In ordinary annuity, payments are made at the end of the covered period unlike in annuity where payments are made at some regular intervals of time.
Summing them up, ($594.1 + $705.8 + $838.53 + $995.9 + $1183.34 ), we will have $4317
Finding the average for the five years, ($4317/5) we get 863.537, and this is the future value of a $500 annuity payment for the period of five years at an interest rate of nine percent.
At eight percent interest:
A=P( 1 + 1/r)^n
Where;
P = $500
r = 8%
n = 5
1st year= $500(1+0.08)^1= $540*1.08 = $583.2
2nd year=$500(1+0.08)^2= $583.2*1.664 = $970.45
3rd year=$500(1+0.08)^3= $629.9*1.25971 = $793.43
4th year=$500(1+0.08)^4= $680.2*1.36049 = $925.5
5th year=$500(1+0.08)^5= $734.66*1.46933= $1079.5
Summing them, ($583.2 + $970.45 +$793.43 + $925.5 + $1079.5) we will have $4352.04
Finding the average for the five years, ($4352.04/5), we get 870.41, and this is the future value of a $500 annuity payment for the period of five years at an interest rate of eight percent.
Summing them up, ( $605 + $ 732.05 + 885.115 + $1,071.79 + $1296.54 ) we get $4590.50.
Finding the average for the five years, ( $4590.50/5), we get $918.099, and this is the future value of a $500 annuity payment for the period of five years at an interest rate of ten percent.
Summing them up, ($931.61 +$769.58 + $636.097 + $525.91) we will have $2863.197
Finding the average for the four years, ($2863.197/4) we get 715.8, and this is the present value of a $700 annuity payment for the period of four years at an interest rate of ten percent.
At nine percent interest:
A=P( 1 + 1/r)^n
P = $700
r = 9%
n = 4 years
1st year= $700(1+0.09)^4=$988.12*0.917=906.12
2nd year=$700(1+0.09)^3=$906.52*0.842=763.3
3rd year=$700(1+0.09)^2=$831.67=0.772=642.05
4th year=$700(1+0.09)^1=763*0.7508=540.204
Summing them we will have, ( $906.12 + $763.3 + 642.05 + $540.204 ) = $2851.67
Finding the average for the four years ( $2851.67/4), we get 712.92, and this is the present value of a $700 annuity payment for the period of four years at an interest rate of nine percent.
At eleven percent interest;
A=P( 1 + 1/r)^n
P = $700
r = 11%
n = 4 years
1st year = $700(1+0.11)^4 = $1062.65, $1062.65*0.901= $957.45
2nd year = $700(1+0.11)^3 = $957.34, $957.34*0.812 = $777.36
3rd year = $700(1+0.11)^2 = $862.47, $862.47*0.731 = $630.47
4th year = $700(1+0.11)^1 = $777, $777*0.659 = $512.04
Summing them up we get, ( $957.45 + $777.36 + $630.47 + $512.04) = $2,877.323
Finding their average for the four years, ($2,877.323/4), we get $719.33075, and this is the present value of a $700 annuity payment for the period of four years at an interest rate of eleven percent
Reference
Cornett, M., Adair, T., & Nofsinger, J. (2013).M:Finance.McGraw-Hill/Irwin; 2 edition
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Answer the following questions:
1. Would you prefer to have $100 today or $100 one year from now? Why?
2. How can compounding build wealth over time?
3. How can compounding increase debt over time?
4. Based on your responses to Questions 2 and 3, how can compounding both build wealth and increase debt? Is compounding a power or a curse?
SAMPLE ANSWER
Q1. Would you prefer to have $100 today or $100 one year from now? Why?
Based on the two offers above, I would prefer $100 from now and not $100 a year from now. The reason for me choosing the $100 today is based on the concept of time value of money. Within the one year period, the $100 taken today can be invested to earn interest and the potential of earning power. On the other hand, the $100 given one year from now has no potential to earn interest over time and it can never be invested (Cornett, Adair & Nofsinger, 2013). In addition, the $100 given one year from now may have a reduced value that makes it less worth with its true value when the same amount is taken. Taking $100 today eliminates the possible risks involved in taking the same amount of money in one year time.
Q2. How can compounding build wealth over time?
Compounding has the potential of building wealth over time since it affects the time value of money, such as the interest rates over time and these interest rates are added to the principal amount to increase its value. For example, if the $100 invested such that the order receives 110% per year, the value of the $100 will be $110 in one year period. When the same amount of money is invested for several years to come, the income will grow as explained in the chart below.
Q3. How can compounding increase debt over time?
Apart from increasing the value of wealth, increases the value of debts over time since it constantly increases the value of the principal amount. This means that the value of debt will continue to grow on the yearly basis at a faster rate in the same magnitude it grows in wealth creation.
Q4. Based on your responses to Questions 2 and 3, how can compounding both build wealth and increase debt? Is compounding a power or a curse?
Based on the above responses, compounding is not a curse, but a power by which companies can increase their wealth by issuing more shares. In addition, compounding will make more lenders have more loans from the company that when paid in full will increase their wealth tremendously (Cornett, Adair & Nofsinger, 2013).
Cornett, M., Adair, T., & Nofsinger, J. (2013). M:Finance. McGraw-Hill/Irwin; 2 edition
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Describe bankruptcy and describe insolvency, including the roles of difference parties, the steps in the process, the sales and distribution of the assets, and any wrongdoings of the debtor.
SAMPLE ANSWER
Introduction
Bankruptcy refers to the legal status of an entity or a person who cannot repay all the debts owed to a creditor. Bankruptcy is mostly declared by the courts or initiated by the debtor himself. Insolvency mostly occurs in a situation where a company or an individual cannot honor his entire financial obligation mostly due to inadequate financial resources. In the financial world it relates to situation where all the company’s total liabilities have exceeded its total assets and the net worth of the business is negative.
The major goal of the bankruptcy laws as enacted the US congress was is to provide the debtors with a clean and fresh financial start from the burdensome debts as in the case of Local Loan Co. v Hunt, 292 U.S. 234, 244 (1934). There are six types bankruptcy in the US that are provided under the Bankruptcy code and which are named as per the chapter that describes their nature. These are chapter 7, 9, 11, 12, 13 among others. The different forms of bankruptcy, allows the debtors opportunities to arrange for different settlements including loans rescheduling, and asset financing.
The processes of bankruptcy are different depending on the two main types of bankruptcies. Where the bankruptcy has been instituted by the debtor by petitioning the courts, then the court will appoint a receiver manager to be in charge of the debtor’s estate and evaluate all the options available before deciding on the best settlement. However, if the creditors have petitioned the court to have the company or an individual declared bankrupt then the court will set a hearing date and all the parties in the bankruptcy case would be given equal opportunity to present their cases in court (Debt.org, n.d).
The parties to a bankruptcy case are mostly made up of the estate’s receiver manager, the debtor and the creditors. The major role of the receiver manager is to exploit all ways of reviving the company and pay off all the creditors or to dispose of the assets and pay the creditors in a predetermined way and as provided for under the bankruptcy act. The first to be paid off are the secured creditors, then the preferential stock holder and debenture holders the finally the ordinary stock holders. The role of the creditors is to agree on a suitable system that can resolve the bankruptcy situation amicably where all the parties have consented. The role of the debtor is to cooperate and provide all the details of the assets. In the event that the debtor is dishonest and tries to hide or exclude other assets from the receiver manager then the courts can impose heavy fines or impose an imprison term on the debtor.
Bankruptcy leads to the discharge of all debts owed but the bankruptcy remains in the debtor’s debtor’s credit report for almost ten years as in the case of chapter 7 while in chapter 13 is seven years. However, one is entitled to $16500 for equity payments one’s house and $2575 for the car as well as some job related tools and equipment. The debtor is also allowed some pension, social security, welfare, unemployment and other veteran benefits.
