Explore BrainMass

Explore BrainMass


    Although many business students see finance as it is portrayed in the movie Wall Street, the study of finance is much more than learning to be a young high-power stock trader or greedy corporate raider. For one, finance impacts everyone on a day-to-day basis. Whether you are getting your first mortgage or credit card, buying life insurance, or planning for retirement, most people are faced with financial decisions that play a very important role in their lives. Furthermore, the majority of careers in finance are not in financial markets; rather, business students who study finance are in high demand in financial services and corporate finance. While the study of finance helps prepare business students for a career in one of these three fields, financial information is often relevant in personal and business decision-making, and understanding how to prepare and use financial information is important for both individuals and all business students a like. 

    1. Financial Markets: The goal of efficient financial markets is to ensure that capital goes where it is needed. Imagine a company needed to borrow one million dollars for a new project. Before, owners of the company would use personal networks to either secure government loans or grants or to procure new investors. Today, while many companies still raise money this way, they now have another option: financial markets. Financial markets are simply a platform which savers and investors are connected with borrowers - individuals and companies who need capital. Borrowers can raise money by appealing to a larger selection of investors, and savers have a wide range of investments to choose from. Financial markets are supported by financial institutions, intermediaries such as banks, who take individual, government and corporate savings and then trade or lend these funds out in exchange for financial securities such as stocks or bonds (which represent ownership or a promise to repay). 

    2. Financial Services: Financial services institutions include banks, trust companies, investment dealers and brokers, financial planners, mutual fund companies, life and property insurance companies, mortgage brokers and real estate companies. These institutions are overseen by regulators such as the Securities and Exchange Commission and involve the participation of professional bodies such as Chartered Accountants, Chartered Financial Analysts and Lawyers. This branch of finance looks at how financial products are designed and delivered to individuals, businesses and governments. For example, a bank may take personal savings in the form of deposits from its over-the-counter bankers and use these savings to provide you a mortgage for your house. 

    3. Corporate Finance: Finance plays an important role in both the day to day and long-term decision-making in a business. Daily financial activities include ensuring enough cash is on hand to maintain operations. This includes decisions such as extending credit, collecting receivables, buying inventory and paying suppliers. Long-term financial activities include capital budgeting as well as planning and forecasting the business's need for cash and financing. Preparing and using this financial information is the job of a financial manager. Financial managers look to make decisions that maximize the value of the firm to its shareholders. This distinction is important. While there exist many financial goals in organizations (such as maximizing sales or profits) maximizing the firm's value to shareholders should be the overarching goal of any successful financial manager. Today, because of the paramount role that financial managers play in decision-making, we see many CEOs and top executives in corporation coming from careers in financial management. 

    Photo by Sharon McCutcheon on Unsplash


    © BrainMass Inc. brainmass.com May 25, 2020, 3:58 am ad1c9bdddf


    BrainMass Categories within Finance

    The Time Value of Money

    Solutions: 1,024

    The general concept of time value of money relies on the fact that the value of a dollar today is worth more than the value of a dollar in the future. We use time value of money concepts to compare the value of cash flows received at different times.


    Solutions: 725

    Annuities are periodic, fixed payments over a period of time. Present and future values are used in annuity calculations.

    The Discounted Cash Flows Model

    Solutions: 474

    Investors will buy shares in a company when they believe they will receive a return on their investment, either in the form of dividends (that is, regular cash distributions of a corporation's profits) or an appreciation in the value of the stock (that is, they can sell the stock for more tomorrow than they would today). We use the dividend discount model and comparative models to value securities. See also: Financial Statement Analysis.

    Arbitrage Pricing Theory (APT)

    Solutions: 77

    The arbitrage pricing theory looks at how a security’s return is related to its risk. However, the arbitrage pricing theory looks at different factors that contribute to a securities risk. These factors may be systematic, such as interest rates, or unsystematic, such as the success or failure of a company’s research and development.


    Capital Structure and Firm Value

    Solutions: 374

    We look at theories such as Modigliani and Miller (M&M) Proposition I and II to explain how a firm's capital structure and tax shield from debt affect firm value; and how leverage affects the risk and return of a firm's stock.


    Dividends, Stock Repurchase and Policy

    Solutions: 424

    A corporation's earnings may be paid out as dividends to shareholders instead of kept as retained earnings. Corporations may also use extra cash on hand to repurchase its own stock. Paying dividends, unlike repurchasing stock, reduces the value of a share by the amount of the dividend on the ex-dividend date.

    Issuing Equity

    Solutions: 464

    As a company grows, its growth prospects will likely require additional financing. For many companies, raising new capital can be done by issuing more common stock. A company's first issue of common stock to the public is called an Initial Public Offering. Afterword, a corporation may issue new equity at any time in order to finance its growth. When new common shares are offered to existing shareholders first, this is called a rights offering.

    Bond Valuation

    Solutions: 1,643

    Bonds are a type of security; in essence, bonds are a corporation's promise to pay a specified amount at a future date. Investors buy bonds at an amount equal to the present value of this future payment (or the sum of the discounted future payments expected from the bond). They do this in order to earn interest from the purchase of the bond. By knowing the interest rate investors expect to return on the purchase of a corporate bond, we can calculate the price they would be willing to pay.


    Solutions: 648

    Many assets such as buildings, machinery and other equipment, may be leased or purchased outright. Lease vs. buy decisions are important financing decisions for businesses looking to acquire a new asset.


    Solutions: 1,382

    Derivatives are contracts that involve underlying assets and can be used for hedging the risk associated with the prices of these assets. Hedging risk plays an important role in driving the popularity of financial derivatives. As well, derivatives play a key role in supporting standardized and transparent trading of commodities in financial markets.


    Credit Management: Credit Policy, Analysis and Risk

    Solutions: 174

    Accounts receivables make up somewhere over 15 percent of all assets held by firms. As a result, decisions that affect how a company extends credit to consumers (consumer credit) and other firms (trade credit) have a significant impact on the financing activities of the firm.

    Mergers and Acquisitions

    Solutions: 468

    There are three different legal variations of a merger and acquisition: merger/consolidation, acquisition of stock and acquisition of assets. Mergers often occur because of the synergy that can be created when two companies integrate their operations. Company takeovers can also occur as a result of proxy battles and leveraged buyouts.

    Financial Distress and Bankruptcy

    Solutions: 185

    Although debt provides a tax shield that increases the value of a firm, the use of debt is limited by what we call financial distress costs. Financial distress occurs when a firm has difficulty meeting its financial obligations. A firm may default on its interest payments, become insolvent, stop investing, restructure, and/or file for bankruptcy.

    Valuing Securities using Accounting Information

    Solutions: 198

    The fundamental value of a firm is based on its earnings. As analysts and financial managers, we use accounting concepts to better understand a firm’s earnings to evaluate where a company is doing well, where it can focus on improving, and how much growth and future earnings we can expect. Growth rates determined through a comprehensive analysis of a firm’s financial statements can be used to value the firm’s securities.


    BrainMass Solutions Available for Instant Download

    Buy a Note or Money in Bank?

    Suppose someone offered to sell you a note that calls for a $1,000 payment three years from today. The person offers to sell the note for $850. You have $850 in a bank time deposit (savings instrument) that pays a 6.77%APR with daily compounding; and you plan to leave this money in the bank unless you buy the note. The note is n

    Finding the future values

    (a) Will the future value be larger or smaller if we compound an initial amount more often than annually—for example, every 6 months, or semiannually—holding the stated interest rate constant? Explain your answer. (b-1) What is the future value of $200 after three years under 12% semiannual compounding? (b-2) What is th

    Annuities: Future and Present Values

    (a) What is the future value of a 3-year ordinary annuity (recall that ordinary annuities have end of year cash flows) of $200 if the appropriate interest rate is 12%? (b) What is the present value of the annuity? (c) What would the future and present values be if the annuity were an annuity due (beginning of year cash flows

    All About Annuities

    (a) What is the difference between an ordinary annuity and an annuity due? (b) What type of annuity is shown in the following cash flow timeline? (c) How would you change it to the other type of annuity?

    How long for a sum of money to grow, how to double an investment

    We sometimes need to find how long it will take a sum of money (or anything else) to grow to some specified amount. (a) For example, if a company's sales are growing at a rate of 18%per year, approximately how long will it take sales to triple? (b) If you want an investment to double in 3 years, what interest rate must it ea

    Future and Present Values

    (a) If you deposit $200 in the bank today, what is its future value at the end of three years if it is invested in an account paying 12% annual interest, assuming annual compounding? (b) What is the present value of $200 to be received in three years if the appropriate interest rate is 12% (annual compounding)?

    Savings Rates

    When it comes to saving disposable income, Americans have a remarkably low savings rate. Find sources that compare the savings rates of Asian and European countries to that of the U.S.A. Discuss your observations and put the savings habits of someone you know on the scale.

    Risk & Portfolio Choice

    Assume that it is possible to borrow and lend risklessly at a rate of 4%. Also assume that the expected return on the tangency (i.e., the optimal) portfolio composed only of risky assets is 13% with a standard deviation of 18%. Below we list 6 pairs of expected return and standard deviation combinations. For each pair determine


    In this problem, you will create an amortization schedule for a car loan for 5 years with a fixed APR given. Steps to Perform: 2 In cell B10, enter the balance at the beginning of month 1. Format cell B10 as Currency with 2 decimal places. 3 In cell B11, enter the balance at the beginning of month 2. Fill cell B11 down

    Acme Stock Options Problem

    Acme stock is trading at $120 per share, and the company will not pay any dividends over the next year. Consider an Acme European call option and a European put option, both having an exercise price of $124 and both maturing in exactly one year. The simple (annualized) interest rate for borrowing and lending between now and one

    Shares of Novotel: Options example

    Shares of Novotel will sell for either $150 or $80 three months later, with probabilities 0.60 and 0.40, respectively. A European call with an exercise price of $100 sells for $25 today, and an identical put sells for $8. Both options mature in three months. What is a price of a three-month zero-coupon bond with a face of $100?

    Applying Financial Analysis Tools

    How to analyze a company financial performance, using the following tools: Profitability Analysis Profit Margin Analysis Asset Turnover Fixed Asset Turnover Rate of Return on Common Shareholders' Equity Earning Per Common Share

    Business Math: Percentages, Original Price, Value of Investments

    1. Of the 45 U.S. presidents, 4 have been assassinated in office. What percent have been assassinated? Round the percentage to two decimal places. 2. The total expenses for Claire's recent business trip were $1040. She put $884 on her charge card and paid the balance in cash. What percentage did she place on her charge c

    Forward and Futures

    During the summer you had to spend some time with your uncle, who is a wheat farmer. Your uncle, knowing you are studying for an MBA at Harvard, asked your help. He is afraid that the price of wheat will fall, which will have a severe impact on his profits. Thus he asks you to compute the 1yr forward price of wheat. He tells you

    Financial Project: Quantitative Reasoning

    As an Ivy Tech student, you are making an investment in your education. This project will look at how that investment will pay off if you graduate and get a job in your desired field. The median annual income for a high school graduate is $25,000. This is the value that you will be comparing your expected salary and lifestyl

    Credit Card Calculations

    1. Create an Excel spreadsheet that can do the calculations for the credit card below. Using formulas and the drag function of Excel (see the notes), find the values for 1 year of charges. With a beginning balance of $1950 and no additional charges, you will just pay the minimum payment each month for the next year. The APR

    Share price and investment decisions of Zeus Solutions

    Zeus Solutions (ZS), an online advertising company, expects next year's after tax earnings to be $20 per share. Its business is still expanding. It plows back 80% of its earnings. The ROE on its new investments is 15%. Its cost of capital is 12.5%. (a) What is the share price of Zeus Solutions? What is its PVGO (Present Value

    Finance: Cost of capital calculations

    1) You are an analyst in a major investment bank and have been assigned the task of determining the share price of Foodmart, a national supermarket chain. The stock beta is 1.286, Rf=3%, Rm=10%. The cost of debt is 6.82%. The tax rate is 34% and the firm is 40% debt financed. Calculate the WACC for Foodmart. The firm's expected

    Amortization Schedule Computations

    John Gunho wants to purchase a condominium, he will be taking out a mortgage for the condo. The purchase price for the condo is $42,000 at an annual rate of 7.2%. He reviewed his options for the term, and he knows the effects of compounding interest, so he plans to take a one year term mortgage. (1) Create an amortization sch

    Orange County Health: Expected Dividend, Stock Price, P/E Ratio

    Orange County Health, a health service company, is expected to generate $1 in earnings per share next year and in the years to follow, from its existing assets. It plans to announce a new program to expand its business. This new program will increase its plow back ratio from zero to 50% next year. The return on equity for the ne

    TVM, Share Price, CAPM Questions

    1) What is the holding period return (percentage return on this investment) to an investor who bought 100 shares of Charter Oil nine months ago for $36 a share, received two $50 dividend checks, and sold the stock today at $38 a share? 2) What is the market price of a share of stock for a firm that pays dividends of $1.20 per

    Stocks and Averages in Excel

    Hi I'm having some issues with the numbers below. I'm using Excel to complete all problems 1-15 however I only need help on the ones below. 1. You buy a stock for $20. After a year the price rises to $25 but falls back to $20 at the end of the second year. What was the average percentage return and what was the true annualiz

    Capital Structure and Dividends: Bed, Bath and Beyond Stock

    Please take a look at Bed Bath and Beyond's stock prices here and help me answer the following questions: https://finance.yahoo.com/quote/BBBY?p=BBBY Please review the company's dividends over the past three years. Then, answer the following questions in Word (except for the Excel portion specifically noted): What has oc

    Steel mill production planning

    A steel mill produces two types of steel alloy: boral and chromal. Production of each alloy requires three processes: Box anneal, Cold Roll, and Strand anneal. Production capacities are: Box anneal: 4,000 hours/month Cold Roll: 500 hours/month Strand anneal: 1,000 hours/month Production rates in tons per hour are: Box anne

    Revenue Maximizing Hotel Booking

    A hotel has 500 rooms. During a typical week in the holiday season, the hotel is busy on Monday, Tuesday, Wednesday, and Thursday nights, primarily with business people, but there is generally space available on Friday, Saturday, and Sunday nights. Hotel management provided the following demand estimates, as shown in Table 8.

    Point and Interval Estimates

    The chief cashier of a bank must manage the cash holding to gain interest by investing excess cash where possible, but at the same time keep sufficient cash on hand to meet the bank's needs. A major issue for the chief cashier is the uncertainty that results from the Federal Reserve Board's (the Fed's) clearing balance. The clea