Financial Principles and Concepts
Nicole Ruthig
FIN/571
December 10, 2012
Gurpreet Atwal
Financial Principles and Concepts Financial concepts can be used when a company is considering various options. Which options cost more and which options will result in higher gains are two of the financial factors that affect decisions. In the University of Phoenix (n.d.) scenario, Guillermo’s Furniture Store has several options to consider which can help bring the revenues back to the company. This paper explains and relates three basic principles and concepts to the scenario.
Financial Principles When it comes to corporate finance, there are many principles that are important. These include the principles of
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Financial Concepts Financial concepts are just as easily related to the furniture store scenario as the principles. The following concepts are only a few of the many financial concepts that are important when making business decisions. Guillermo’s furniture store provides many ways to look at these concepts. An important financial concept, that can be applied in almost any situation, financial or not, is the concept of the opportunity cost, or “the difference between the value of one action and the value of the best alternative,” (Emery, Finnerty, & Stowe, 2007, p. 20). Options are very valuable and Guillermo had both the call option, the right to buy another company, and the put option, the right to sell his company (Emery, Finnerty, & Stowe, 2007). Guillermo’s opportunity cost would be the cost of not choosing one option, to buy or sell, over the other. Another cost concept that can be applied involve sunk costs, costs that have already been incurred and subsequent decisions cannot change them (Emery, Finnerty, & Stowe, 2007). A sunk cost for Guillermo would be the materials used in his special stain that he had already purchased before he chose the broker option where his special stain was no longer needed. The zero-sum game concept is when a transaction occurs where one party gains at the expense of the other (Emery, Finnerty, & Stowe, 2007). In this scenario, if
During the years of 1969 and 1973, the company created majority of its 600 new stores in an effort to outpace its competitors; however, this period of rapid growth happened just prior to the company’s final year and was clearly a major factor that led to the company’s bankruptcy. On the company’s financial statements, it indicated that the fixed assets grew, on average, almost 15% a year during that time period between 1969 and 1973. This was substantially higher than the previous years’ fixed asset growth rates and should have been seen as a red flag by company executives and analysts. The executives and analysts at Grant should have questioned how the rapid growth rate in fixed assets was being financed, as well as figured out if the company truly could finance the growth. The company’s plan to finance the rapid growth will be discussed below.
The ______ provides a financial summary of the firm 's operating results during a specified period.
Cartwright is a retail distributor of lumber products. It built its competitive edge based on pricing and having a careful control over its operations. The company reported an operating income of $86,000 and $111,000 in 2003 and 2004, respectively. This is a 29% increase in operating income in one year, which shows the firm’s strong ability to generate cash. The firm’s account receivables and inventory are increasing from year to year which is a good sign of a growing business. Cartwright is not an asset intensive company. It does not have to have huge fixed assets; most of its assets are cash, accounts receivable and inventory which all depend on future sales. Sourcing of materials is managed very well, purchased at discounts most of the time and contribute to having lower prices.
Comparing these numbers to the selected industry ratios of the same fiscal years it shows that in the year of 200X the Return on Assets (ROA) for the industry was 7.94% whereas Lamar Swimwear’s ratio was 0.08% higher at 8.02%. This is above industry standards so it shows that the company is thriving in the industry, but that is only one year. In the next two years the ratios show that Lamar Swimwear made a drastic decline of 1.22% in 200Y and another decline of 1.10% to 5.70% in 200Z. With the decline of 2.32% in ROA in two years these numbers tell us that the cost of goods (COG) has increased considerably and that Lamar Swimwear has not adjusted to these changes well. If Lamar Swimwear does not adjust and offset the increase of COG by selling more products then it will continue to decline and not be able to thrive in its industry. While the profitability ratios give a great insight into a company’s ability to maintain, there are other ratios, such as asset utilization ratios that let one know if resources are being used in the best way.
As Triantis (2000) suggests, real options can reduce risks if the firm can delay the decision making while not losing the competitive advantage in the same process, or if it is feasible for the firm to abandon the investment when it becomes unprofitable. For instance, a manager in Acrux can use option valuation to assess if it is profitable to exercise a R&D project. The payoff of putting off commercialization and performance distribution is uncertain. The company can limit the downside loss and take actions, creating the asymmetric distribution of potential returns through abandonment of the projects before the costs become unrecoverable.
Debt according to investorword is an amount owed to a person or organization for funds borrowed. The role that debt plays in finance is when you do not have all the funds you need to get something done you borrow it. ("Investorword", 2012).
Debt according to investorword is an amount owed to a person or organization for funds borrowed. The role that debt plays in finance is when you do not have all the funds you need to get something done you borrow it. ("Investorword", 2012).
In this article “The Value of Information Structure in Zero-sum Games with lack of Information on One Side” is study showing the probability of two –players in a zero-sum game, which, one lack information, and the other side is well informed about the information in hand. However, it is within each player hand to identify what their choices are, and chose a direction that they would like to take action. Next, it is recommend that the player understand the value of the corresponding zero-sum game, determine person’s game is equivalent to the other individual loss, as well an ensuring their benefit is zero ( Shmaya, 2006, p., 155).
CHAPTER 5 The Information Approach to Decision Usefulness 5.1 5.2 Overview Outline of the Research Problem 5.2.1 Reasons for Market Response 5.2.2 Finding the Market Response 5.2.3 Separating Market-Wide and Firm-Specific Factors 5.2.4 Comparing Returns and Income 5.3 The Ball and Brown Study 5.3.1 Methodology and Findings 5.3.2 Causation Versus Association 5.3.3 Outcomes of the BB Study 5.4 Earnings Response Coefficients 5.4.1 Reasons for Differential Market Response 5.4.2 Implications of ERC Research 5.4.3 Measuring Investors’ Earnings Expectations 5.4.4 Summary 5.5 5.6 Unusual, Non-recurring and Extraordinary Items A Caveat About the “Best” Accounting Policy
A sunk cost is a cost that an entity has incurred, and which it can no longer recover by any means. Sunk costs should not be considered when making the decision to continue investing in an ongoing project, since you cannot recover the cost. However, many managers continue investing in projects because of the sheer size of the amounts already invested in the past. They do not want to "lose the investment" by curtailing a project that is proving to not be profitable, so they continue pouring more cash into it. Rationally, they should consider earlier investments to be sunk costs, and therefore exclude them from consideration when deciding whether to continue with further investments. Like in this project, which the marketing consultants were hired to assess the demand for the product, that 250,000 should be ignored and it is a sunk cost in the fact that it has already been incurred and in the Net present value, we only consider the future incremental cash flow.
The next three terms have a correlation. The terms are security, stock, and bond. Security in finance is the relationship and representation of stocks and bonds. Some securities are interest and dividend based. Common and preferred stock, bonds, notes, debenture, and option are some examples of securities. A stock represents ownership in a business, has face value, and may not carry a maturity date. A stock’s role in finance is as follows. Common stock has no fixed rate of dividend and has voting rights. Preferred stock has a fixed rate of dividend and no voting rights and preferred are the two types of stock. A bond is the last term of correlation. A bond is a fixed income security. A
THIS CASE DEALS WITH ONE OF THE CLASSIC MANAGERIAL DECISIONS—MAKE VERSUS BUY. MOST COURSES IN MANAGERIAL ACCOUNTING INCLUDE AT LEAST ONE “MAKE/BUY” PROBLEM TO ILLUSTRATE THE APPLICABILITY OF “RELEVANT COST ANALYSIS” IN THINKING ABOUT SUCH DECISIONS.
In the past five the company’s retail gearing levels were high (over 50%) with exception of 2003 when it was 44.7%. (See appendix 1)
Some clothing, shoes, and handbags made in Mexico cost less to make than those in the United States.
Stockholders' equity cannot be withdrawn from the company in a way that is intended to be detrimental to the company's creditors