Please read the initial questions and initial posts, then write a short response only to each post (initial question does not need to be answered). This should add to the original post. This is not a critique of the post.
Initial Question (You do not have to answer these):
This week contains multiple discussion questions that you are required to answer.
You should make original posts discussing any three of the following statements. You are also required to post at least three responses to other student’s posts. Please note that this is a minimum requirement. Your grade will be a function of your effort.
1. What is the rational for wealth maximization as a goal for a firm?
2. What are the key financial statements and why they are important?
3. What is the purpose of ratio analysis?
4. What is the concept of time value of money?
5. Why understanding of time value of money is important?
Post 1 Ely:
What is the rational for wealth maximization as a goal for a firm?
For public corporations, maximizing profits is an obligation to the stockholders who ‘own’ the company. As discussed in this week’s Zoom course, an interesting and relevant case was Dodge v. Ford Motor Co. from 1919. Henry Ford lowered the price of automobiles sold from $900 to $360, and admitted this affected short term profits, which he said was at the expense of providing “spread the benefits of the industrialized society with as many people as possible” (Bloomberg Law, n.d.). He was sued by Dodge et al., who stated the purpose of a corporation was to make profits for the shareholders. This case was taken to the Supreme Court of Michigan, where Dodge et al. won, thereby cementing the task and purpose of Ford as to maximize shareholder profits.
What are the key financial statements and why they are important?
According to Ehrhardt et al. (2019), the four key financial statements and corresponding importance are as follows:
• The balance sheet.
o This shows the financial position and an overview of assets and liabilities.
• The income statement.
o The income statement is important as it shows the profitability of the corporation over the applicable period shown, therefore demonstrating the financial trajectory.
• The statement of stockholders’ equity.
o Stockholder’s equity is important as it outlies the changes in stockholder’s equity. As mentioned, stockholders are the ‘owners’, and therefore critically important to the financial stability of the corporation.
• The statement of cash flows.
o The statement of cash flows can be contrasted against previous periods of performance, thereby further demonstrating the year-over-year performance or direction of the firm.
What is the purpose of ratio analysis?
Ehrhardt et al. (2019) describe the ratio analysis as a display of a firm’s operations and financial condition, which can therefore show trends which can be used for further analysis and projections.
What is the concept of time value of money?
In brief, money in hand today is more valuable than money in the future. The rational for this disparity is that money currently held has potential value for earning (though interest or investment), therefore growing itself, while future money does not carry this potential. In addition, obligations which must be paid-out in the future will be more expensive than to pay them now, as the same growth potential for the money is implied.
Why understanding of time value of money is important?
The understanding of time value of money is important because business must make decisions based on both current as well as future predictions; analyzing risk versus opportunity of having cash-on-hand to invest in a myriad of ways can help firms stay relevant in changing markets, or hold out during periods of competitive decline. By understanding the time value, companies can leverage the earning potential of the funds in a different manager based upon appropriate business strategies.
References
Bloomberg Law. (n.d.). Dodge v. Ford Motor Co. Retrieved from: https://www.casebriefs.com/blog/law/corporations/corporations-keyed-to-klein/the-nature-of-the-corporation/dodge-v-ford-motor-co/
Ehrhardt, M. C., & Brigham, E. F. (2019). Corporate Finance: A Focused Approach (7th Edition). Cengage Learning US.
Post 2 Maureen:
What is the rationale for wealth maximization as a goal for a firm?
The rationale for wealth maximization as a goal for a firm is that the financial investment decision is made based on business revenues for a long period. It considers risk factors that would help to minimize errors in the business on a long-term basis. It involves the flow of cash and risk to take decisions in increasing the wealth of the owner.
What are the key financial statements and why they are important?
The first one is the Balance sheet which works on the financial position. The transaction of funds taking place in the organization is reported in terms of assets and liabilities on the balance sheet. It gives detailed information about the transaction at that instant. The format of the balance sheet inputs the assets and liabilities with equity equal.
The second one is the Income statement which shows the profit over income earned during a particular financial year. It gives the value of the operational result of a particular object or entity.
The third one is the Statement of cash flows which tends to show cash coming in and going out for a particular financial year. It helps to compare the income statement of the year with that of the previous year.
The fourth one is the Statement of retained earnings which shows changes made in the reports. It shows the repurchase of stock, changes made in reported profits, and dividend payments. It plays the role in the audited financial statement.
What is the purpose of ratio analysis?
The purpose of ratio analysis is that conducts a proper analysis of financial statements. Financial institutes, banks, etc can make a decision based on the financial situation of the company. The efficiency of the company works upon the management and operations shown by profits and assets earned by the same. The performance of the company is evaluated and compared for the past years and the present period.
References:
Ehrhardt, M. C., & Brigham, E. F. (2019). Corporate Finance: A Focused Approach (7th ed.). Cengage Learning US. https://online.vitalsource.com/books/9781337910231
https://www.facebook.com/boradsanjay. (2011, January 6). Wealth Maximization – Definition, Calculate, Advantages, How to Create it. EFinanceManagement.com. https://efinancemanagement.com/financial-management/wealth-maximization
Four Basic Financial Statements | Income Statement, Cash Flow, & More. (2020, February 20). Patriot Software. https://www.patriotsoftware.com/blog/accounting/four-basic-financial-statements/
CFI. (2019). Ratio Analysis – Overview, Uses, Categories of Financial Ratios. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/finance/ratio-analysis/
Post 3 Brad:
1. What are the key financial statements and why they are important?
1. Income statement – the income statement reflects the companies performance during a specific period. An income statement helps business owners decide whether they can generate profit by increasing revenues, by decreasing costs, or both. It also shows the effectiveness of the strategies that the business set at the beginning of a financial period.
2. Balance Sheet – the balance sheet is a “snapshot” of where the company stands at any given time. Most companies show this on the last day of the year, but it can be taken at anytime to see exactly where the company stands at any time. The balance sheet is important because it can show interested parties where the company stands, what it owns and what it owes.
3. Statement of Cash Flows – Shows the companies “money” in three categories; operating, financing and investing. It then takes this information and summarizes the resulting cash balance. This is important because it shows happened to a business’s cash during a specified accounting period.
2. What is the purpose of the ration analysis?
1. Ratio analysis is a quantitative method of gaining insight into a company’s liquidity, operational efficiency, and profitability by studying its financial statements such as the balance sheet and income statement.
3. What is the concept of time value of money?
1. The time value of money is the concept that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the interim. In laymen’s terms, which is better one million today or 100K a month for 10 months? The one million today, because you can put that money to use for you know instead of having to wait and possibly lose some of it before reaching the one million total.
