finance

1- Financial leverage provides opportunities for companies to grow financially as well as provide support in cash flow however firms shouldn’t keep leveraging especially those companies with high Return on Asset (ROA) because ROA also includes the leverage of the company debt is included in the total assets. One might argue that when there is financial leverage is higher ROA and ROE becomes high, but we must consider other crucial factors such as risk, market volatility, and uncertainty

Financial Leverage is great for companies to use as a support in working capital and cash flow, but it is highly risky to use it as an opportunity to invest in assets to earn because there is no certainty that the invested asset will generate more return, and this can put the company in a very difficult position. Let’s take an example of Lehman Brothers bankruptcies’, there were a lot of factors to make that happen but shouldn’t ignore the fact that “In 2007, Lehman’s high degree of leverage was 31” collapse of Lehman Brothers: A case study. High leverage makes a firm vulnerable to various problems and although there is a saying that “High risk has higher returns”, companies must balance the leverage intake and not get too greedy and use it as a shortcut to make more profits. We must remember, profit is important but there are also various functions such as cash flow, economy, operations, competition, etc. which are also important, and if firms only focus on profit and try using leverage for short-term gain, a business won’t survive for long.

Even if ROA is high, firms shouldn’t use leverage to invest in assets that generate more return as it is risky, uncertain, and can lead to big problems. Leverage is wonderful to use for short-term operations and to increase the cash flow when necessary but using it as an investment on asset isn’t a healthy investment as it is after all borrowed money and uncertainty is high.

2- Facebook which recently changed its main name to Meta has been in news for a lot of scandals such as data theft from Cambridge Analytics and privacy issue for its users, therefore I wasn’t surprised by a lot of the risks they have mentioned in their 10-k. I am surprised however to know that they think of those issues as a risk instead of their lack of proper and needed action. Here are the major risks:

· Risks Related to Product Offerings

Their main risk with product offering is the ability to maintain user engagement as well as get more new users. Reducing is spending by marketers is a big risk for them as a lot of their revenue is generated from ads. They should try to make the user experience smooth and keep making necessary changes to engage the existing customers and attract new customers. Different social media platforms such as Tik-Tok are a big threat to the future of Facebook.

· Risks Related to Business Operations and Financial Results

Major operations and financial risks include COVID-19 and ads revenue, unfavorable media coverage, slow revenue growth, maintenance of tech infrastructure, and litigations. I am surprised about COVID-19 as a risk because due to the pandemic people had a lot of leisure time to use Facebook and Instagram more.

· Risks Related to Government Regulation and Enforcement

Government restrictions, different data privacy policies, and consumer policy are major risks related to government regulation and enforcement. This is a necessary risk to protect the privacy of users and to make sure they are held liable in case they are careless about the sensitivity of privacy.

· Risks Related to Data, Security, and Intellectual Property

There has been a lot of lawsuits against Facebook for data security and they were fined 5 billion by FTC over the Cambridge Analytics scandal. They must put enough infrastructure to make sure their user’s information is safe and secure. This risk can bring a lot of problems in the future for Facebook if they don’t take proper action now.

There is a big privacy and security issue in the world today as social media is flourishing and the mentality and culture to put all the events of life in our social media accounts. These data are being various ways to feed us the ads and news which can make a big impact on our decisions. One of the big ethical issues Facebook, which is a big risk, is that it has failed to protect consumers' data safely and provide more security. As Facebook has always emphasized profit over the protection of its consumer, it is becoming a dangerous platform and there are many ways companies and people can use the data from Facebook to cause various harmful activities. Facebook has the financial capacity to provide more security and make sure that the news is correct and isn’t providing misinformation, but the only apparent thing Facebook is doing is “saying sorry” which is not enough. Consumers will have more trust in a product like this when they know that the company is doing everything it can to protect them, but if Facebook is unable to gain that trust back, they will start losing consumers.

3-

This is a very tricky question as it looks like a unique financial transaction, and this requires a unique way of recording. Before working on the solution and recording it is very important to understand the question clearly. Few key points about the scenario are as follow:

o Airline entered a revolving accounts receivables facility (it used the $489 million AR and exchanged it with a trust for senior certificate)

o $300 million was in the form of Senior Certificate and $189 Subordinate Certificate.

o Sold Senior Certificate and received $300 million in cash.

o It isn’t mentioned clearly about how much the company made with the sale of subordinate certificate, but it did say is more than senior certificate and therefore it is more than $300 million

o Company needs to pay fees and administrative costs to the facility. (amount not provided)

This whole transaction needs to be recorded separately and not in the regular balance sheet.

Suggestions for Transactions recording are as follow:

Particular	Debit	Credit
Senior Certificate	$300 million
Subordinate Certificate	$189 million
Sold defined pool of AR		$489 million

cash	$300 Million
Senior Certificate		$300 million

Subsidiary	$189 million
Receivables (Subordinate Certificate		$189 million

Since the exact amount received is not mentioned therefore, we used $189 million for now but company should use the exact amount they made.

They can record the fees and cost after this and clearly write the notes about what happened.

This is clearly a special case, and I did my best to find a solution for this. Although question itself is very confusing which made it hard to figure out exact issue and perfect solution. Some of the crucial information is missing as well as the cost associated with it. In real world, I would ask for more detail information and costs to give most reasonable solution.

4-

1- Explore and Discuss the challenges of understanding and reporting taxes and cash flows in the context of this week’s learning on valuation. Build from your discussion posts and create a one to two-page document that draws upon information and analysis from this week’s readings, the two discussion board posts (and any student follow up posts/replies). Show your understanding material. Feel free to reference/incorporate this week’s discussion posts (yours and other students). Be sure to properly reference any material used from outside sources and/or discussion posts giving proper attribution to the publication and authors.