Finance De La Torre

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De la Torre a) Why is corporate finance important to all managers? * It is important for the decisions taken in the company, investment decisions and financing decisions. * Every decision taken in the company has a financial impact. * Investment projects, how much to invest and what assets to invest. * To raise the necessary cash * To increase the shareholders’ stake in the firm. b) Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form. Sole Proprietorship. Sole owner of a business. The manager and the owner is the same person. The sole proprietorship has unlimited liability. You pay taxes as owner and for the business ones. The advantage is the ease with which it can be establish and the lack of regulation s governing it. Partnership. Business owned by two or more persons who are personal responsible for all its liabilities. The partners pay personal income tax on their share of these profits. Each partner has unlimited liabilities for all the business’s debts. Corporations. Business owned by stockholders who are not personally liable for the business‘s liabilities. A corporation is legally distinct from its owners. A corporation pays taxes on its own. It is owned by stockholders and it has limited liability. There is a separation between owners and managers; they are not the same person. c) How do corporations go public and continue to grow? What are agency problems? What is corporate governance? As a firm grows, it needs more capital. The firm finds out that it’s advantageous to raise funds directly from investors. This is when the firm is ready to sell new financial assets, such as share of stocks, to the public. Agency problems are the conflict of interest between the firm’s owner and the managers. Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. There is a separation between ownership and management in corporations, so corporate governance includes the relationships among the stakeholders and the goals for which the corporation is governed. d) What should be the primary objective of managers? a. Do firms have any responsibilities to society at large? b. Is stock price maximization good or bad for society at large? . Should firms behave ethically? The managers will act to maximize the value of the firm to its stockholders. The primary objective of managers is to maximize the current value of the investment of the shareholders. a) They have it at large. But they are not charity. b) It is good. There is a request for more resources. Maximizes the wealth, which is for everybody. It keeps equilibrium. And it is the way to maximize the wealth of the firm. c) Yes, it is profitable to be ethic. e) What three aspects of cash flow affect the value of any investment? * Risk * Timing of Cash Flow Amount of Cash Flow f) What are free cash flows? * Cash flows generated by the operation of the corporation on a defined period, after taxes, after changes in working capital and fixed assets. * Cash flows available to attend the stockholders. NOPAT = EBIT (1-Tx) = EBIT – Tx (Operative) Free Cash Flow = NOPAT + Depreciation & Amortization – ? Working Capital – ? Gross Fixed Assets Net Operative Working Capital = Activo Circulante (Assets) – Pasivo a Corto Plazo (short-term assets) ? Gross Fixed Assets = ? Net Fixed Assets + Depreciation Free Cash Flow = NOPAT + Dep – ? NOWC – ? Net Fixed Assets + Dep FCF = NOPAT – ? (NOWC + Net Fixed Assets) FCF = NOPAT – ? Operating Capital g) What is weighted average cost of capital? The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. Costo ponderado del total de recursos con costo explicito. El porcentaje de cada uno de ellos es el ponderador. Se ponderan los costos de cada componente a una tasa anualizada. WACC =XD (rD) (1-Tx) + XS(rS) XD: % de los pasivos del total de deuda de acreedores financieros representados del total de los recursos. D: Costo de los recursos de los acreedores (tasa de interes). Tx: Tasa de impuestos. XS: Proporcion de los recursos de los accionistas en el total de recursos con costo explicito. rS: Costo de oportunidad de los recursos aportados por el accionista. Tasa de retorno de los accionistas en funcion del riesgo que enfrenta. h) How do free cash flows and weighted average cost of capital interact to determine a firm’s value? Tiene que ver con valuacion. Firm value es el valor presente a precios del mercado. Valor intrinseco: valor presente de los flujos de efectivo. A firm’s fundamental, or intrinsic, value is defined by: Value= FCF11+WACC1+FCF21+WACC2+FCF31+WACC3+…+FCF? 1+WACC? i) Who are the providers (savers) and users (borrowers) of capital? How is capital transferred between savers and borrowers? Savers: Households are net savers. Persons, families, companies which their income is greater than their expenses. Governments are net savers when they run a surplus. Borrowers: Non-financial corporations are net borrowers. Governments are net borrowers when they run a deficit. Capital is transferred through: ) direct transfer (in example, corporation issues commercial paper to insurance company) b) an investment banking house (in example, seasoned equity offering, or debt placement) c) a financial intermediary (in example, individual deposits money in bank, bank makes commercial loan to a company). j) How do we call the price that a borrower must pay for debt capital? What is the price for equity capital? What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy? * The price that a borrower must pay for debt capital is called interest rate. Equity capital: Return rate required by the stockholders. Opportunity cost. Expected Return Rate: rs=D1P0+Pf-PiPi Required Return Rate: rs=rrf+? rm-rrf * Factors: a) Expected inflation b) Risk Level (Risk perception) c) Consumer preferences d) Production opportunities (Growth expectations) k) What are some economic conditions that affect cost of money? The cost of money will be influenced by: * Federal policy * Fiscal deficits * Business activity * Foreign trade deficits The cost of money for an international investment is also affected by: * Fisher Effect. Country risk, which is the risk that arises from investing in a particular country. It depends on the country’s economic, political, and social environment. * Exchange rate risk. When investing in other country, the security usually will be denominated in a currency, so the value of the investment will depend on what happens to exchange rates. Changes in relative inflation or interest rates will lead to changes in exchange rates. International trade deficits/surpluses affect exchange rates. An increase in country risk will also cause the country’s currency to fall. l) What are financial securities? Describe some financial instruments. A security is a negotiable instrument representing financial value. Securities are categorized into debt securities like banknotes and bonds; and equity securities. Securities may be represented by a certificate or an electronic form. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, and stock options. m) List some financial institutions. * Institutions where you can make deposits and make loans. Banks, building societies, credit unions, mortage loan companies. Institutions where you can make deposits and make loans. Insurances companies, pension funds. * Brokers, investment funds. n) What are some different types of markets? Financial market is a mechanism for people to trade financial securities, commodities and other items of value. * Capital Markets. Markets for long term financing. * Money Markets. Markets for short term financing. * Foreign Exchange Market. Markets for trading foreign exchange * Insurance Markets. Markets for distribution of risk. * Commodity Markets. Market for trading commodities * Primary Market. Market for the sale of new securities by corporations. * Secondary Market. Market in which already issued securities are traded among investors. o) How are secondary Markets organized? The secondary market is the financial market where previously issued securities and financial instruments such as stock, bonds, options are bought and sold. After the initial issuance, investors can purchase from other investors in the secondary market. * New York Stock Exchange at Wall Street, New York. * NASDAQ, the largest electronic screen-based equity securities trading market in the USA. * American Stock Exchange (AMEX) in New York. * Bolsa Mexicana de Valores, con su principal indice el IPC Open outcry auctions. A public auction in which trading is conducted by calling out bids and offers. Some traders contend that open outcry offers better liquidity with the chance to obtain a better price. Dealer market. A market in which securities are bought and sold through a network of dealers who buy, sell, and take positions in various security issues. Electronic communication network (ECN). Market which computer system facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies. Bibliography Fundamentals of Corporate Finance, Brealey, 5th Edition

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