Order 1247404: Final Project Part 3!

Corporate finance is a management area that deals with assessing how a firm has used its resources. In doing so, financial managers ensure a firm has prepared its accounting report in a manner that is consistent with accounting standard and federal laws. For instance, the financial manager has to ensure that a firm has prepared its accounting report in accordance with General Acceptable Accounting standards. Before analyzing the role of the financial manager in confirming compliance with shareholders and federal requirement, it is essential to look at the role of financial managers. Financial managers have a responsibility of ensuring that the firm has prepared the accurate financial report, the annual report conforms with laid down federal rules, investment portfolio, financial analysis and accounting tasks (Gitman, Juchau& Flanagan, 2015). From this definition, then it can be summarized to mean that the role of the financial manager in confirming the firm has observed federal requirement related to compliance with accounting standards, security exchange Act and all applicable laws in relations to taxation.

Question I: Analyze the role and responsibility for compliance

The responsibility of the financial manager in relation to federal requirement relates mostly to compliance with professional and statutory framework requirements. For instance, the financial manager ensures that a firm has prepared financial statements that are accurate and consistent with GAAP. The General Acceptable Accounting Standard stipulates how companies should prepare their financial statements. It also deals with presentation, accuracy and disclosure requirement. For instance, the Security Exchange Act requires all listed companies to present annual report (10-k), quarterly report (10-9) and proxy statement(14-A). It is the duty of the financial manager to ensure the firm has complied with these federal requirements.

The financial manager is also responsible for identifying the capital requirement of the firm and its sources. The finance manager determines the capital requirement of a firm. For instance, the finance manager will determine the amount of capital required to purchase assets and run the business. Apart from this, the finance manager will go ahead to determine when and where the capital will come from and when it will be required. This responsibility is consistent with the role of finance manager of ensuring there is adequate capital for running the business both in the short and long run (Gitman, Juchau& Flanagan, 2015).

The finance manager also has a responsibility of managing cash and other current assets. It is the duty of the finance manager to adequately manage cash flow by analyzing the income statement, balance sheet and statement of cash flow. Managing cash flow is part of the responsibility of the finance manager. He/she ensure there is an efficient financial strategy that clarifies financial aspects while maximizing profit and reducing expenses.

Question b: Ethical issues faced by the finance manager

There are many ethical issues that are likely to affect finance managers. The most common challenge is that of accuracy. The first ethical issue relates to accuracy. Finance manager might be tempted to present inaccurate information in the annual report to appease senior manager or directors. In most companies, directors have a performance-based remuneration. These directors might try to influence the finance manager to present inaccurate information by inflating revenues or net profit. The finance manager can handle this challenge by disclosing it to the auditor and requesting the auditor to present those matters in the audit report under the Key Audit Matters. Moreover, the auditor will conduct more audit procedure to determine whether there is material misstatement in financial statements. If this challenge is not resolved, the finance manager should report to the chairman of the board of directors (Weiss, 2014).

Lastly, financial managers might not hide, omit or render relevant financial information impossible to access by ordinary shareholders. It is the duty of a financial manager to ensure transparency in the accounting data presented in the financial statement. The finance manager must ensure that all relevant information critical to external and internal users have been disclosed. The finance manager can handle this problem by disclosing all the information in the financial statement for users.

Question C

There are many federal safeguards put in place to ensure that the finance manager does not exploit shareholders when reporting. For instance, the introduction of Chief Financial Officers Act of 1990 was introduced to ensure there is consistent reform. Although this safeguard is not considered adequate, it ensures there is the clear guideline on how finance officers should behave.

Another federal safeguard is the Accountability of Tax Dollars Act of 2002 was introduced to expand on the reporting requirement of chief financial officers. However, unlike the Chief Financial officer Act which focuses on the behavior of financial managers, the Accountability of Tax Dollars Act deals with the presentation of an audited financial statement. Nonetheless, both federal Acts are intended to ensure there are accountability, transparency, and integrity in financial decision making. These federal safeguards cannot be considered adequate since they cannot prevent finance managers from manipulating financial statement or omitting relevant information for decision making.

Question II: Investment option

Question A

The term going public is a common term in the corporate world. It refers to the act of a company issuing shares to the members of the public to raise capital. When a company goes public, it has to issue shares. It is important to note that only public listed companies can issue shares to the public. Issuing shares requires a company to pass a resolution in an AGM and then issue a prospectors. There are many advantages of issuing shares or going public. The major benefit of going public is the ability to raise capital. Going public offers a company a significant source of capital that can be used to finance new acquisition or research and development. Another benefit of going public is increased awareness. When a company goes public, its IPO generates a significant amount of media and public interest which makes it know to the public together with its products.

Question B

In the US, there are two big stock market including New York stock exchange and NASDAQ. There are significant differences between NYSE and NASDAQ mainly in terms of size, how trade occurs, number of listing and investors perception. The first difference is related to size. The NASDAQ has more listed companies and spectrum of size of companies (Jeff, 2017). For instance, NASDAQ is known for having the largest tech companies such as Facebook, Apple, Google and Amazon. NASDAQ has 3800 listed companies with a total value of $11 trillion in market capitalization while NYSE has 2400 listed companies with a total value of $21.3 trillion. In terms of operational differences, the NYSE is considered an auction market while NASDAQ is a dealer market. In the New York Stock exchange the highest bid is matched with lowest asking price while in NASDAQ, buying and selling happens in split seconds electronically (Jeff, 2017).

In my opinion, the smartest private investment would be NASDAQ because it is perceived as a market for high growthcompanies. This means that the return from this investment will be higher compared to those in the New York stock exchange. High growth companies pay higher dividends because they are generating high return from their investment. Moreover, they focus on creating a good reputation through consistent dividends.

Question C

There are two type of investment products including stocks and bonds. Public limited companies can issue shares and bonds. However, bonds are mainly issued by governments. Investors who buy shares earn their return through dividends while bond holders earn interest. Bonds have a fixed repayment period while shares are infinite.

Part II

Question I: Preparing the workbook

In this assignment, I selected Apple Inc. and its competitor Microsoft Corporation for analysis. All the data is presented in the excel file named Part two excel.

Question II: Three year return

(All data in excel)

Question A

Note: The negative signs in excel sheet is ignored since share prices start from 2015 to 2017 instead of vice versa.

Apple has a three year stock return of 1% and a variance of 0.00423. This can be interpreted to mean that Apple stock had a monthly volatility of 0.00423. The three year dairy return measures the monthly return of the stock on the last three years.

Question B

Microsoft Corporation had a monthly return of 2% and a variance of 0.0035. This can be interpreted to mean that Microsoft shares prices were less volatile compared to those of Apple Inc.

Question C

Both companies had a positive monthly stock return in the last three years. This means that the stock prices of both companies have continued to rise in the last three years. It can also be interpreted to mean that both companies have reported continuous rise in revenues over the last three years since stock reflect all the information in the market.

Question III: financial calculation

All the calculations are included in the excel file

Question IV: industrial average

According to the data calculated in excel and compared with industrial average, Apple financial health indicate that it is highly geared. The debt to equity ratio measures the proportion of debt to equity. A ratio above 0.5 is considered to be high risk. Apple has a debt to equity ratio above 1.5 above industrial average of 0.53.

V: Performance over time

Apple has maintained a relatively high debt to equity ratio above 1.5. For instance, in 2017, Apple reported a debt to equity ratio of 1.59 and 1.69 in 2015. A debt to equity ratio above 1 is considered risky since it means that the firm has financed its assets by debt than shareholders’ funds. The return on equity has continued to deteriorate over the last three years by declining from 0.078 to -0.068. Similarly, the profit margin has continued to deteriorate over the last three years.

Microsoft corporation profit margin has continued to rise over the last three years. This is a positive indicator of a growing company.The return on equity shows that Microsoft return from shareholders’ funds has continued to rise over the last three years. However, the company has a high debt to equity ratio above 1.5 in 2016 and 2017. Microsoft has an industrial debt to equity ratio of 0.67. Therefore, it is correct to conclude that Microsoft is highly geared.

The data calculated between Microsoft and Apple has some noticeable differences. The major differences is the free cash flow. Apple has reported negative free cash flow in 2016 and 2017 while Microsoft has positive free cash flow. The main reason for the differences is that Apple has invested heavily in acquisition in the last three years as it expands while Microsoft has not acquire another firm in the last three years. Consequently, Apple has high capital expenditure than Microsoft.

Question VI

A critical analysis of the financial statement shows that both are growth company. Their revenue have continued to rise significantly while its pays a low earnings per share to its shareholders.

In my opinion, Microsoft is the best investment firm mainly because of its exceptional performance and a high earnings per share. Investors are interested in investing in companies that will pay high return for their investment. Therefore, Microsoft meet this criteria.

References

Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.

Jeff, D. (2017). Here's the difference between the NASDAQ and NYSE. Retrieved from https://www.businessinsider.com/heres-the-difference-between-the-nasdaq-and-nyse-2017-7?IR=T

Weiss, J. W. (2014). Business ethics: A stakeholder and issues management approach. Berrett-Koehler Publishers.