FIN307 TU Financial Systems Worksheet
All answers must be 75-150 words. No sources needed.
2A. A financial system consists of both financial institutions and financial markets. Financial markets bring the “key players” together and their funds. For this discussion, choose one of the functions of the financial markets and discuss how financial institutions play a role in this process.
2B. The financial crisis was caused by several factors related to investments in real estate. This week, we have discussed a variety of reasons why the financial crisis occurred. For this discussion, choose one of these reasons and discuss why you believe this reason was at the root of 2008 financial crisis and recession. In addition, discuss what legislation has been enacted to prevent this event from taking place in the future and causing another financial crisis.
3A. The more debt a firm uses, the greater its financial leverage, which magnifies both risk and return. Discuss the relationship between debt and financial leverage and the ratios used to analyze a firm’s debt. Your responses should include at least two peer-reviewed sources for support of your findings.
3B. Ratio analysis enables stockholders, lenders, and the firm’s managers to evaluate the firm’s financial performance. Compare and contrast who uses financial ratios and for what purposes they use the ratios.
4A. Discuss the simplified procedures used to prepare and evaluate the pro forma income statement and the pro forma balance sheet. What ethical issues do you believe are present in these procedures and how does the SOX Act address these concerns? In your response, you should also discuss the judgmental approach.
4B. Simplified approaches for preparing pro forma statements assume that the firm’s past financial condition is an accurate indicator of the future. There are several examples from the past where organizations were not accurately reporting their financial information. Discuss the relationship between the external auditor and the organization. What steps have been taken to ensure that the relationship is truly neutral and no bias is shown by the external auditing firm?
5A. The firm’s self-supporting growth rate is influenced by the firm’s capital intensity ratio. The more assets the firm requires to achieve a certain sales level, the lower its sustainable growth rate will be. Many experts argue that it is better for an organization to grow organically or by putting the money back into the business and not taking on debt. Consider your own organization that you currently work for or have worked for in the past. What is their approach to growing the business? How would you advise your company based on what you have learned this week in terms of self-supporting growth?
5B. Managerial entrenchment occurs when managers gain so much power that they can use the firm to further their own interests rather than the interests of shareholders. The shareholders are essential to the organization. For this discussion, consider that you are the CEO of a large public-traded organization. What steps would you take to ensure that your management team makes decisions for the better of the stakeholders and not their own interests? Provide specific steps based on your research of organizations that have faced this issue in the past.
6A. Interest rate risk is the risk that changes in interest rates (in the U.S. or other world markets) may reduce (or increase) the market value of an investment that you might hold. As an investor now or in the future, what are steps that you would take to mitigate the risk of interest rate risk? Do you believe age and current economic status play a role in how much interest rate risk investors can tolerate? Discuss your reasoning.
6B. Compare and contrast the decisions that are consistent with the firm’s share price maximization goals. In your response, provide at least two peer-reviewed sources to support your answers. As we have discussed, one of the main goals of the organization is to maximize the profits in the organization to increase the firm’s share price. Consider your own organization or a previous organization, what goals were set to maximize the profits? Did these goals come at the “cost” of other important goals for the organization? Discuss your experiences.
7A. Holders of equity capital (common and preferred stock) are owners of the firm. There are those that argue that having equity capital benefits the organization versus debt. With the variety of debt structures available, such as angel investors, fund-raising, etc., do you believe that it is better for the organization to give up part of the ownership in the company or to seek straight debt outside the company?
7B. Technology has advanced how organizations raise money or seek debt to finance their operations. Today, social media and the Internet have influenced these processes. For this discussion, provide an example of a venture capital strategy that you would use to start your own business. Discuss how this strategy is different than traditional debt structures.
8A. For a market to be efficient, a market must be large and liquid. Accessibility and cost information must be widely available and released to investors at the same time. In the age of information technology (IT), however, markets all over the world are gaining greater efficiency. For this discussion, discuss specific ways that IT has helped to make markets more efficient. As an investor, what information would you be most interested in before making investment decisions?
8B. Financial decisions, return, risk, and the firm’s value are all related. The world of finance is intertwined in the daily decisions that are made by the organization. For this discussion, consider a key event that is being considered at your company. This could be the launch of a new product, opening another location, etc. In your response, provide specific examples how these areas are related to the decision that the organization must make when deciding whether to move forward with this project.