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# How markets work, ethics, compliance, break even, PV, FV

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1. Explain how financial markets work in the U.S.

2. What is the role of ethics and compliance in finance?

3. Which financial ratios are most important to a retail business and how does that compare to a service business? Explain your answer.

4. Perform a break even analysis on the following problem
15-1B. (Break-even point) Roberto Martinez is the chief financial analyst at New Wave Pharmaceuticals (NWP), a company that produces a vitamin claimed to prevent the common cold. Roberto has been asked to determine the company's break-even point in units. He obtained the following information from the company's financial statements for the year just ended. In addition, he found out from NWP's production manager that the company produced 40 million units in that year.

What will Roberto determine the break-even point in units to be?

Information for the problem:
Sales \$20,000,000
Variable costs \$16,000,000
Revenue before fixed costs \$ 4,000,000
Fixed costs \$2,400,000
EBIT \$1,600,00

5. Calculate present value and future value of cash flows on the following 2 problems a) and b)

PART a)

5-4B. (Present value) What is the present value of the following future amounts?

a. \$800 to be received 10 years from now discounted back to the present at 10 percent ____________
b. \$400 to be received 6 years from now discounted back to the present at 6 percent ______________
c. \$1,000 to be received 8 years from now discounted back to the present at 5 percent_____________
d. \$900 to be received 9 years from now discounted back to the present at 20 percent______________

PART b)

5-6B. (Present value of an annuity) What is the present value of the following annuities?

a. \$3,000 a year for 10 years discounted back to the present at 8 percent______________
b. \$50 a year for 3 years discounted back to the present at 3 percent_________________
c. \$280 a year for 8 years discounted back to the present at 7 percent________________
d. \$600 a year for 10 years discounted back to the present at 10 percent______________

6. Name and discuss at least 3 risks associated with capital projects.

7. If you were a lease company, would you look at the market differently than a lending institution? Why or why not?

8. Using a valid currency exchange website, convert \$100 USD into

a. British Pounds _________
b. Euros _________
c. Japanese Yen ____________
d. Chinese Yuan ___________

9. Discuss how you can mitigate foreign exchange rate risk.

10. To what extent is every business impacted by globalization in making financial decisions?

#### Solution Preview

1. Explain how financial markets work in the U.S.
People and organizations wanting to borrow money are brought together with those having surplus funds in the financial markets. Financial markets also vary depending on the maturity of the securities being traded and the types of assets used to back the securities. The financial markets in the U.S. are classified into spot markets, futures markets, money markets, capital markets, primary markets, secondary markets, private markets, and public markets.
Spot markets are the markets in which assets are bought or sold for "on-the-spot" delivery.

Futures markets are the markets in which participants agree today to buy or sell an asset at some future date.
Money markets are the financial markets in which funds are borrowed or loaned for short periods (less than one year).
Capital markets are the financial markets for stocks and for intermediate- or long- term debt (one year or longer).
Primary markets are markets in which corporations raise capital by issuing new securities.
Secondary markets are markets in which securities and other financial assets are traded among investors after they have been issued by corporations.

Private markets are markets in which transactions are worked out directly between two parties.
Public markets are markets in which standardized contracts are traded on organized exchanges.

2. What is the role of ethics and compliance in finance?
Ethics and compliance are important topics in finance. The numbers in the financial statements must be reliable and relevant. The financial management team must avoid engineer financial results. Engineer financial results are the "financial restatements and class action securities fraud suits being played in the business world in which the corporate managers, auditors, and analysts participated in" (Tillman & Indergaard, 2007, p. 1). The challenge associated with the practice of engineering financial results is that, the deceptive financial reporting have a very significant impact on shareholders. The loss of firm's stock value increases, leading to decrease in shareholders' wealth. Thus, the market value of the companies in which shareholders invest in, declines. Not only that, but some firms suffer severe bankruptcy due to engineering financial results (Tillman & Indergaard, 2007). This is because accounting scandals caused reduces investor confidence, leading to increase losses in immediate investment. The Enron's case illustrates this situation. Enron's action not only affect its inside corporation, but it also blindly affect those that were helping them, such as Enron's auditor and some of Wall Street analysts.
Due to these roles of business ethics, the Enron collapse left all other investors in the world feel uncomfortable in investing in any other company in the U.S. as they are unclear of the way of business in the finance world due to the Enron and WorldCom actions. Because of this, the stock prices in the U.S. declined.
Thus, living within the ethical standards and compliance in finance is crucial.

3. Which financial ratios are most important to a retail business and how does that compare to a service business? Explain your answer.
The major category of financial ratio that most suited for a retail business is the asset management ratios. Asset management ratios include inventory turnover ratio, days sales outstanding, fixed assets turnover ratio, and total assets turnover ratio. Asset management ratios are set of ratios that measure how effectively a firm is managing its assets, and a retail business consists of a lot of physical assets. Inventory turnover ...

#### Solution Summary

This solution is comprised of detailed explanation to the following questions:

1. Explain how financial markets work in the U.S.

2. What is the role of ethics and compliance in finance?

3. Which financial ratios are most important to a retail business and how does that compare to a service business? Explain your answer.

4. Perform a break even analysis on the following problem
15-1B. (Break-even point) Roberto Martinez is the chief financial analyst at New Wave Pharmaceuticals (NWP), a company that produces a vitamin claimed to prevent the common cold. Roberto has been asked to determine the company's break-even point in units. He obtained the following information from the company's financial statements for the year just ended. In addition, he found out from NWP's production manager that the company produced 40 million units in that year.

What will Roberto determine the break-even point in units to be?

Information for the problem:
Sales \$20,000,000
Variable costs \$16,000,000
Revenue before fixed costs \$ 4,000,000
Fixed costs \$2,400,000
EBIT \$1,600,00

5. Calculate present value and future value of cash flows on the following 2 problems a) and b)

PART a)

5-4B. (Present value) What is the present value of the following future amounts?

a. \$800 to be received 10 years from now discounted back to the present at 10 percent ____________
b. \$400 to be received 6 years from now discounted back to the present at 6 percent ______________
c. \$1,000 to be received 8 years from now discounted back to the present at 5 percent_____________
d. \$900 to be received 9 years from now discounted back to the present at 20 percent______________

PART b)

5-6B. (Present value of an annuity) What is the present value of the following annuities?

a. \$3,000 a year for 10 years discounted back to the present at 8 percent______________
b. \$50 a year for 3 years discounted back to the present at 3 percent_________________
c. \$280 a year for 8 years discounted back to the present at 7 percent________________
d. \$600 a year for 10 years discounted back to the present at 10 percent______________

6. Name and discuss at least 3 risks associated with capital projects.

7. If you were a lease company, would you look at the market differently than a lending institution? Why or why not?

8. Using a valid currency exchange website, convert \$100 USD into

a. British Pounds _________
b. Euros _________
c. Japanese Yen ____________
d. Chinese Yuan ___________

9. Discuss how you can mitigate foreign exchange rate risk.

10. To what extent is every business impacted by globalization in making financial decisions?

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