Financial: Interest Rate and Financial Statements Essay

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Financial management midterm
Ruby (sihan,zhou)
Chapter 1
Business Analysis# 2 The CFO should present the budget meeting. The executive in charge of the finance department is called the chief financial officer (CFO). The title Vice President of Finance is sometimes used instead of CFO. The CFO’s work involves looking over everyone else’s shoulder to make sure they’re using money effectively. So I think the CFO should represent and be in charge of the whole budget financial part.
Chapter 2 Question 2 An accounting system consists of the personnel, procedures, technology, and records used by an organization (1) to develop accounting information and (2) to communicate this information to decision makers. The design and capabilities of these systems vary greatly from one organization to another. In small businesses, accounting systems may consist of little more than a cash register, a checkbook, and an annual trip to an income tax preparer. In large businesses, accounting systems include computers, highly trained personnel, and accounting reports that affect the daily operations of every department. But in every case, the basic purpose of the accounting system remains the same: to meet the organization’s needs for information as efficiently as possible. Financial statements are formal presentations of the flow of money into, through and out of a business. Financial statements are comprised of four main areas---balance sheets, income statements, cash flow statements and retained earnings. Each statement is part of the framework for financial statements.
Each area of a financial statement has a purpose and provides specific information about a company's financial stability.
Question 8 A business that is financed with debt is said to be leveraged. The word implies that when things are going well, using borrowed money can enhance the return on an entrepreneur’s own investment. In general, a business is able to produce a higher return on the owner’s invested funds by using borrowed money if the return on the total amount of invested money exceeds the after-tax interest rate being paid on the loan. Otherwise, the effect is in the opposite direction and the return is worse when the business is financed with borrowed money.
Chapter 3
Question 13 In financial analysis, we’re primarily concerned that a company doesn’t use so much of these funds that it assumes excessive risk. This is an important point. The problem with using other people’s money is that it requires future cash outflows for interest and/or repayment. If a firm’s operations don’t supply enough cash for those payments, it can get in big problem. I use the debt ratio and debt to equity ratio to measure it. Two-thirds debt to one-third equity would generally be considered quite risky.
Chapter 4
Question 4 Planning a new company is harder because you need to plan from starting. It includes the company description, the financial part, the marketing. If planning an existing company, we just need to solve the profit, I think it is the reason. With an existing business, anything you don't make an assumption about is implicitly assumed to remain the same as last year. That "shortcut" option doesn't exist for a new business.
Question 5 A forecast of profit requires an estimate of interest expense, which depends on a projection of debt (because interest is debt times the interest rate). The amount of debt required, however, is dependent on the year's profit. The more profit a firm earns, the less debt it needs to support its assets. Hence we need debt to forecast interest but we need interest (and hence profit) to forecast debt. This situation results in a computational impasse.
Chapter 5
Question 2: Sam will buy his stock at the option price of $45 paying a total of $45 x 30,000 = $1,350,000 He will then sell his shares for…