Question 1
Finance management is significant in the making of critical decisions such as investments, capital budgeting and dividend policy decisions. The finance manager uses the financial statements provided by the accountants to make decisions that may positively influence the performance of a corporation. Based on knowledge and information provided to the finance management, the finance manager can be able to select assets, which the firm can invest. Additionally, with the finance knowledge the, finance manager can be able to conduct capital budgeting effectively. Capital budgeting relates to selection of assets that will provide long term benefits to firm. In the selection of an asset, the manager needs to consider the risk and uncertainties that may be expected from the selection of an asset. Thus, in the evaluation of the expected returns from an asset, the risk should be considered. The finance manager will conduct financial analysis and planning by transforming the financial data into a form that can be used to monitor the financial condition and evaluate the need to have additional or reduced financing.
The various aspects of finance that a management needs to understand include cash flow, opportunity cost, risk, and time. Managers operate in an environment of finance markets, which is significant in their process of making decisions (Besley, and Brigham, 2008). Thus, managers need to have a good understating of the financial markets in which they operate. In the markets, risk and efficiency are important. Efficient markets translate relevant information into prices. The prices indicate a more accurate economic value of an asset. The markets provide a viable source of funds for a corporation. The manager needs to understand how bonds can be used to raise capital. In the market, corporations can issue new securities and bonds, which will provide an avenue for the buying and selling of existing securities. The manager needs to have an understanding of the regulations that are followed when conducting business in the financial markets. Risk in the financial markets is normally linked to a high return. The manager needs to know that high returns are associated with high risk. Once manager grasps these concepts, he or she may be in a better position to increase the value of the corporation by making sound decisions (Mayo, 2011). However, in the stock market there are a lot of uncertainties and cases where stock crashes are a common reality.
Cash flow is more important than sales since it provides a clearer state of economic value. Net income is normally lowered by differentiation but the cash flow increases with deprecation since it protects funds from taxation. Cash flow also allows a business to meets its daily needs such as paying bills (Megginson and Smart, 2009). Without a positive cash flow, a business or a corporation may be unable to carry out its day-to-day operation.
Failure to fulfill responsibilities related to finance may result in the corporation being unable to pay its debt and in the process may accumulate more. Additionally, there could be increase misappropriation of funds and the corporation may be declared bankrupt in the process.
Question 2
An income statement is a statement of the comprehensive income of the firm. This means that it entails a comparison of the expenses vis-à-vis the sources of income of the firm. Since it is comprehensive as far as its contents are concerned, the income statement can be used in financial analysis of the business. The income statement can be easily utilized in carrying out financial analysis via comparisons. This may be through trend analysis whereby the performance of the firm (in terms of gross or net profit) is compared across different financial years within the same firm. This very common analysis tool is especially crucial in determining if the changes in policies instituted by the management are relevant. This means that this form of analysis sets a stage for a kind of internal audit of the controls and policies of the firm in attaining its goals.
` The income statement also gives specific values for various expenses such as interest and tax. Such expenses may be utilized in calculating financial ratios such as interest cover ratio. This helps in making financial decisions especially in deciding if the company should increase or decrease its borrowing as a source of finance. This may lead to firms having IPOs in search of an increase of shareholders’ equity. The income statement can also be used in cross-sectional analysis whereby various firms within the same industry are compared in terms of the net profit earned. This may help to fish out inefficiencies in operation or instituting of changes in the mode of operation of a firm to remain relevant in the industry. Managers may even decide to merge with competitors in instances where they are serious underperforming.
This financial statement may also be used in risk assessment from analysis of the bad debts and the changes over time (Brigham, and Ehrhardt, 2011). If most of the sales are on credit and the bad debts expenses are high, then the firm should change its sales policy to cash based policy. This would minimize the risk of non-payment of debts by trade receivables. Therefore, the income statement can aid in risk management. The management may also use the income statement to determine which areas of the business require increased reinvestment. This is through a simple comparison of the various sources of income, especially for a firm that deals with several products. This aids in profit maximization. The same thing can be done for cost minimization.
Question 3
Type of car selected is a BMW and it cost $32,750. The interest rate of the bank is 9 percent per annum.
10% down payment=$3275
remanining present value of car to be paid=32750-3275=$29475
FV=PV 1+rn
FV=29475(1+0.09)4=$41606+3275=$44881
Payment to dealership (3 years)
FV=PV 1+rn
r=annual nominal rateno of period per year=1012=0.83% per month
n=3*12=36 months
FV=29475(1+0.112)36=39737+3275=$43012
Payment with the dealership is better as it reduces the total cost of purchasing the car.
Question 4
Factors that influence the value of a bond
The value of a bond is determined by its maturity or term. This means that it is affected by the time the issuing company has to repay what is due in its entirety. If payments are made before the term expires then the value of the bond declines. The coupon rate also affects the value of the bond. This is so since this is the interest rate that must be paid against the bond’s face value. The discount rate, a measure of the opportunity cost (the possible returns of the money in other alternatives), also affects the value of a bond. A higher discount rate (hence a higher interest rate) leads to an increase in the value of a bond.
References
Besley, S., & Brigham, E. F. (2008). Essentials of managerial finance. Mason, OH: Thomson/South-western.
Brigham, E. F., & Ehrhardt, M. C. (2011). Financial management: Theory and practice. Mason, OH: South-Western Cengage Learning.
Mayo, H. B. (2011). Investments: An introduction. Mason, OH: South-Western, Cengage Learning.
Megginson, W. L., & Smart, S. B. (2009). Introduction to corporate finance. Mason, Ohio: South-Western Cengage Learning.
