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1-1. Briefly discuss the purpose and role that each type of financial institutions (depositary, contractual, and investment) play in the U.S. economy. How do each of these institutions intersect with the various types of markets, i.e., capital, money, spot (cash), derivatives, Forex and Interbank, primary, and secondary (inclusive of OTC)?
1-2. Select a publicly traded firm of your choice that enjoys a large shareholder base. What challenges may this firm have encountered (or is likely to encounter) in terms of (a) incorporating ethics into financial management practices, and (b) maintaining/sustaining ethical practices in the face of internal or external (market) pressures? Frame your response relative to the financial manager's fiduciary duty to maximize shareholder's wealth.
2-1. To live comfortably in retirement, you decide you will need to save $2 million by the time you are 65 (you are 30 years old today). You will start a new retirement savings account today and contribute the same amount of money on every birthday up to and including your 65th birthday. Using TVM principles, how much must you set aside each year to make sure that you hit your target goal if the interest rate is 5%? What flaws might exist in your calculations, and what variables could lead to different outcomes? What actions could you take ensure you reach your target goal?
2-2. Financial ratios are essential to provide an accurate valuation of a firm. Select a publicly traded firm of your choice. You may use the firm you have elected to profile for the course-long Financial Analysis and Proposal assignment or a completely different organization altogether. Select one ratio each in the areas of (a) performance, (b) activity, (c) financing, and (d) liquidity warnings. Provide an evaluation of the selected firm's strengths and weaknesses. Based on the ratios you selected, how well does your chosen firm perform? Explain.
3-1. You have been asked to perform a stock valuation prior to the annual shareholders meeting next week. The two models you have selected to value the firm are the dividend discount model and the discounted cash flow model. Explain why the estimates from the two valuation methods differ. Address the assumptions implicit in the models themselves as well as those you made during the valuation process.
3-2. In a rising interest rate environment, how would bond values change over time? As a bond investor, what measures would you take to manage rate risk?
4-1. Explain how the decision of the Federal Reserve Bank (Fed) to raise interest rates would be expected to affect each component of the weighted average cost of capital (WACC). What mistakes are commonly made when estimating the WACC, and how do these mistakes arise?
4-2. In what types of situations would capital budgeting decisions be made solely on the basis of project's net present value (NPV)? Identify potential reasons that might drive higher NPV for a given project. Substantiate your response by providing an example to explain your thought process.
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➢ Identified and discussed three main types of financial institutions that exist in the
economy of the US including depository, contractual, and investment institutions.
➢ Selected one ratio each in the areas of (a) performance, (b) activity, (c) financing, and (d)
liquidity warnings for analysis.
➢ Reviewed the functioning of NPV and its effects.
Running head: ACCOUNTING AND FINANCE RESPONSES
Accounting and Finance Responses
Professor
Name of Student
Institution affiliation
Date
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ACCOUNTING AND FINANCE RESPONSES
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Question 1-1
Three main types of financial institutions exist in the economy of the US including
depository, contractual, and investment institutions. Depository institutions are also referred to as
banks and they entail savings and loans, credit unions, and commercial banks. Funds collected from
depositors are lent to borrowers (Hayes, 2020). Depositories serve the US economy through the
consolidation of funds and lending out to businesses and individuals, investing in securities,
providing a payment system of electronic and checks fund transfer, and safekeeping liquidity and
service.
Contractual institutions include pension funds and saving insurance companies.
Individuals buy insurance policies to receive protection. Funds collected from policyholders are
then presented to the financial market. Pension funds serve individuals seeking a savings scheme
for retirement. Managers invest the pension fund savings in financial markets (Hayes, 2020).
Investment institutions are composed of brokerage firms, finance companies, mutual funds, and
investment banks. Consolidated funds from different investors are invested in different stocks by
mutual fund managers. Finance companies earn profits from sales of commercial paper, bonds,
and stock.
Capital markets is a platform where sellers and buyers trade securities like stocks and
bonds. Capital markets are vital in the consolidation of surplus funds that are used for investment
to accrue profit. In the money markets, the trade of financial instruments with short maturity and
high liquidity takes place. The spot market facilitates instant settlement of trade involving
securities and commodities. Moreover, the trade of financial instruments like options and
contracts takes place in the derivatives market. Financial instruments that are traded in the
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derivatives market are obtained from different forms of assets. Forex markets are involved in the
trade of currency globally. Interbank markets are the platform for trading currency between
banks. The primary market is involved in the issuance of securities while the secondary market
involves the trade of assets and securities between investors.
Question 1-2
Lululemon Athletica is a Canadian athletic apparel company established in 1998. Lululemon
Athletica deals in the retail of yoga-inspired merchandise. Since going public in 2007 the company
champions active and healthy living supported by a capitalist mantra. Chip Wilson, Lululemon's
founder, has developed a successful business based on hard work, self-responsibility, and
capitalistic proposals. However, a company’s focus should go beyond hard work, profit-making,
and growth. Lululemon is among the publicly traded companies (PTC) in Canada. The company
practices public presentation of its stock prices and annual reports, therefore, ensuring transparency.
Lululemon’s shareholder details are easily accessible. However, the company was on the spot in
2007 following an incident involving inaccurate and false labeling of clothes. Lululemon
acknowledged the mistake as inhouse since the company trusted the manufacturer and failed to test
the clothes.
Despite the concealment of the truth from its loyal customers at first instance, the company
deliberated on the customers’ concerns and provided solutions to the problem. It is therefore evident
that Lululemon practices ethical financial management represented in the company’s transparency.
Nonetheless, the fiduciary responsibilities of a financial manager are ladened with heavy ethical
pressures. A company may incorrectly classify cash flows or intentionally alter financial figures
from operation logs and allocate expenses to investments or finances to cover up a poorly
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performing cash flow (Jamnik, 2011). The latter may develop an incorrect outlook on the financial
profile of the company (Jamnik, 2011). Investors risk losing profits from investing in a falsely high
performing company. It is, therefore, advisable for Lululemon to continue ethical financial practices
in times of external and internal pressure to retain loyal customers.
Question 2-1
TVM (Time value of money) illustrates that money at hand is of greater value than a similar
amount in the future based on its earning capacity. The principle elaborates that since money can
accrue interests, finances are more valuable when received sooner (Muda & Hasibuan, 2017). TVM
explains that the preference of rational investors is to receive funds as soon as possible owing to the
capacity of the value of the money to grow over a given period. For instance, funds in a savings
account are considered compounding since they increase in value at a particular interest rate (Muda
& Hasibuan, 2017). Given the conditions provided, the TVMformula slightly changes such that in
the case of annuity payments the formula will have fewer factors. Generally, the TVM formula
accommodates the following variables:
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n=Compounding periods per annum
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i=Interest rate
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t=Number of years
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FV=Future Value (Money)
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PV=Present value (Money)
Considering the variables, the formula of calculating TVM
FV=PVx[1+(i/n)](n x t)
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In this context, the future value (FV) is $2 million compounded at a 5% annuity basis.
Following the formula FV=PVx[1+(i/n)](n x t)
2000000=A (1.05^32-1)/0.05
2000000=A*90.3203074
A=2000000/90.3203074=22,143.41
A = $22,143-Yearly savings
The assumption that there will be a fixed interest rate in the 35 years of saving, as used in this
calculation is considered a flaw. If the interest rate falls rates at any point in the future before completion of
the saving period the expected results will not be obtained.
Question 2-2
Activity Ratio
Asset Turnover
Asset turnover is a measure that determines how fast a business turns over the assets it holds
via sales (Dickinson, 2011). To find the asset turnover ratio, revenues of the business are divided by
total assets. According to CSIMarket (2020), the retail industry asset turnover as ...
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