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11 Dec 2018

What are the objectives of financial planning?

Define interest rate risk and investment risk.

Define intermediation.

Compare and contrast the potential liability of owners of proprietorships, partnerships (general partners), and
corporations

List and explain the three financial factors that influence the value of a business.

What is meant by Working capital? How is it calculated? Explain the determinants of working capital
requirements.

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Trinidad Tremblay
Trinidad TremblayLv2
13 Dec 2018

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Answer the follow questions

1. Explain the percent of sales method to forecast financing requirements. Provide the three steps involved in predicting those financing needs.

2. What does the cash budget represent and what four elements comprise the cash budget?

3. What is spontaneous financing? Provide an example.

4. Define and contrast the terms working capital and net working capital

5. What advantages and disadvantages are generally associated with the use of short-term debt? Discuss.

6. Explain what is meant by the statement “The use of current liabilities as opposed to long-term debt subjects the firm to a greater risk of illiquidity.”

You will give an example of a hypothetical small businessstartup situation and recommend the particular business form youfeel is most appropriate based on the characteristics of thebusiness in your example and the benefits of your chosen entity,and you will justify your choice.

Insight gained from this discussion will be useful in choosing theappropriate business form for the clients from the final projectscenario as you complete Milestone One.

Sole proprietorships, partnerships, limited liability corporations,C corporations, and S corporations all have distinct potentialadvantages and disadvantages for tax purposes. However, potentialtax implications must be considered in tandem with thecharacteristics of a business and the expectations and goals of thebusiness owners to ensure the best choice is made. When working asa financial advisor, one issue that often arises is the need toassist a new business owner in identifying the correct form abusiness should take, mainly for tax purposes.

Choose one of the five taxable entities and present an exampleof a specific hypothetical startup business situation for whichyour chosen entity might be appropriate, given the businesscharacteristics of the example you provide and the potentialbenefits a particular form of entity offers. For example, if yougave the example of opening a chain of gas stations with threeother investors, you would suggest what type of entity suits thesituation and explain your reasoning. Assume that one of the ownersof your hypothetical business is a Canadian citizen who is not aU.S. resident alien.

Position A: Financial Institutions' role as specialists in risk measurement and management is reduced.

Position B: Financial Institutions' role as specialists in risk measurement and management is increased.

Required:

Read the “background” below. After reading, select the position you agree with and write a position paragraph supporting either Position A or Position B.

Background: A major event that changed and reshaped the financial services industry was the financial crisis of the late 2000s. As Financial Institutions adjusted to regulatory changes brought about in the 1980s and 1990s, one result was a dramatic increase in systemic risk of the financial system, caused in large part by a shift in the banking model from that of “originate and hold” to “originate to distribute.” In the traditional model, banks take short-term deposits and other sources of funds and use them to fund longer term loans to businesses and consumers. Banks typically hold these loans to maturity, and thus have an incentive to screen and monitor borrower activities even after a loan is made. However, the traditional banking model exposes the institution to potential liquidity, interest rate, and credit risk. In attempts to avoid these risk exposures and generate improved return-risk trade-offs, banks shifted to an underwriting model in which they originated or warehoused loans, and then quickly sold them. Indeed, most large banks organized as financial services holding companies to facilitate these new activities. More recently activities of shadow banks, nonfinancial service firms that perform banking services, have facilitated the change from the originate-and-hold model of commercial banking to the originate-and-distribute banking model. In the shadow banking system, savers place their funds with money market mutuals and similar funds, which invest these funds in the liabilities of other shadow banks. Like the traditional banking system, the shadow banking system intermediates the flow of funds between net savers and borrowers. However, instead of the bank serving as the middleman, it is the non-bank financial service firm, or shadow bank, that intermediates. Further, unlike the traditional banking system where the complete credit intermediation is performed by a single bank, in the shadow banking system, it is performed through a series of steps involving many non-bank financial service firms. These innovations remove risk from the balance sheet of financial institutions and shift risk off the balance sheet and to other parts of the financial system. Thus, the financial institutions, acting as underwriters, are not exposed to the credit, liquidity, and interest rate risks of traditional banking.

In your own words, explain what is meant by business and financial risk. Suppose Firm A has greater business risk than Firm B. Is it true that Firm A also has a higher cost of equity capital? Why or Why not? Explain.

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