Finance Exam

Finance Assessment I

EJ LeJeune

Columbia Southern

Instructor’s Name

Date of Submission

Finance Assessment I

Firm’s Goal

It is the responsibility of the stakeholder to ensure the success of a business. For this goal to be achieved, the stakeholder needs to make sound decisions on ways of investments. This could be attained through making the right choices on the capital structure that would finance the investments, proper budget management and most importantly carefully choosing the product to invest into. The shareholders on the other hand are the investors of a company whose main goal is to increase their wealth, which is only attainable when the company is making profits.

Organizational Forms used in Business Formation

These forms include :( i) sole proprietorship which is easy and less expensive to form, has no corporate income tax charged and to talk of government regulations, it is only subject to a few. (ii)corporations which ensures that transferring of ownership interest is easy and ensures that the company has limited liability and unlimited life. (iii)Partnerships, which just like the proprietorships, are easy to form and inexpensive. They also have an advantage on tax treatment like that of proprietorships.

Importance of Cash Flows

A steady cash flow ensures that the company does not end up in debts as a result of taking loans. However, it is sometimes inevitable for companies to borrow money especially for building or when new (or additional) equipment and machinery are required. In such a case, cash flow assists the business in keeping up with the debts. A business is only capable of investing in growth if it is experiencing a steady cash flow. Lastly, a business company that experiences steady cash flow attracts investors (Lang, Stulz & Walkling, 1991).

Market Prices

Fluctuations in the demand and supply of commodities would directly affect the price of the same in the market. When the demand for a certain commodity or stock is high, its price will as well shoot but when supply is high, there will be a drop in the market price. Poor earnings and uncertainties in the economy of a country would lead to pressure of selling while good earnings and news of new products being available would increase demand (Jensen, 1986).

Generation of Value

The number one priority for any investor is cash flow. This implies that the value assigned to a business company by an investor is determined by its (the company’s) state of cash flow. It is important that all assets in the business produce cash that would pay back the invested capital. Through estimation of future cash flows an asset could generate and picking a discount rate that is appropriate to account for the assumed risk in investment on the asset, the value of the asset can be determined.

References

Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American economic review, 76(2), 323-329.

Lang, L. H., Stulz, R., & Walkling, R. A. (1991). A test of the free cash flow hypothesis: The case of bidder returns. Journal of Financial Economics, 29(2), 315-335.