Question
Debt is the main reason large companies have significant differences between the 25% and 75% quartiles, specifically focusing on the Asset Turnover, Net Profit Margin, and Equity Multiplier. Significantly, a debt increment gives the firm extra cash that it can utilize the cash for business expansion. Consequently, this increases the firms returns without sharing its earnings with the creditors. Debt is deemed a cheap option by the firm because after making payment of the principal and the interest, the interests are shared between the firms owners. However, it can also adversely impact small firms especially concerning payments to creditors (Berk and DeMarzo, 2016).
Consider two major firms in the United States, Amazon, and Walmart. Concerning the asset turnover, it is conceivable to determine whether the firms total assets are efficaciously converted into sales. A firms total assets, as well as sales, are influenced by debt. The outcome of the ratio will solely be determined in terms of the quickest rate of change. For instance, if Walmarts total assets increase by 5 percent whereas the sales increase by 10 percent, it implies that there will be an increment in the asset turnover. It implies that debt acquired facilitates sales growth (Graham et al., 2020).
When considering the net profit margin for Amazon, debt usually substantially influences the firms sales. This is for the reason that if the firm opts to expand the business using debt, its operational capability at a larger scale will increase, consequently resulting in greater sales. The debt increment will also increase the interest expenses of the firm, which provides a tax shield to the firm by diminishing the taxable income (Graham et al., 2020).
Question 2
There is contention between the main objective being either the maximization of shareholder wealth or the maximization of stakeholder wealth. In my perspective, maximizing shareholder wealth is the more appropriate primary objective of the firm. Based on definitions, it is perceptible that a shareholder is a component of a stakeholder. However, arguing that stakeholder interest is greater contrasted against shareholder wealth also implies considering all stakeholder interest objectives. It is hard to implement this because different stakeholders bear conflicting or dissimilar objectives (Nicholas and Sacco, 2018).
On the other hand, maximizing shareholder wealth is an objective with the sole value that emphasizes the firm owners. According to this, it facilitates the total value creation of the company. Consequently, it promotes every stakeholder group to attain a greater share, including employees, suppliers, investors, and others. Therefore, it is essential to maximize shareholder wealth (Ho, 2010).
Question 3
The Dividend Discount Model (DDM) is one of the most basic stock valuation approaches. The DDM approach computes the true value of a companys stock based on the dividends the firm pays its shareholders. This approach supposes that investors lack control over the firms payout policy (Larrabee and Voss, 2012). Secondly, the Free Cash Flow (FCF) approach considers the firms cash flows. It is critical to note that these two approaches are largely associated with one another. The fundamental dissimilarity is that we examine all the cash flows accessible for distribution to the investors and utilize them to attain value for the whole firm. Bearing that we are utilizing the cash flows for all investors, it is necessary to discount them based on the weighted average cost of capital and not the expected return on equity (Luecke, 2002).
Question 4
Interest can be classified as either simple interest or compound interest. On the one hand, simple interest is computed on the original loan amount, also referred to as the principal. Alternatively, the compound interest is computed on the principal loan amount and the massed interest of the preceding periods (Corporate Finance Institute, 2022). It is imperative to point out that there can be a significant disparity in the amount of interest payable on a loan if the interest is computed using compound interest instead of simple interest (Besley and Brigham, 2014).
Assume the principal...
…quote If that were a real $100 bill lying there, somebody would already have picked it up! has insightful implications and ramifications for comprehending finance and market efficiency. First, this quote signifies the principle of efficiency and its limitations. Specifically, in finance, the efficient-market hypothesis insists that financial markets are efficient regarding information. In line with this, it is not possible for one to incessantly attain returns that are more than average market returns based on risk adjustments, taking into account the accessible information precisely the time of investing (Pennant-Rea and Crook, 1986).The intent of the student leaning down to pick the $100 bill that is lying on the pavement signifies the economic decisions made by investors. Notably, this indicates that investors are systematically irrational. Mostly, they make decisions based on emotions. Such decisions are usually centered on unstable hypotheses and are usually fast to perceive cause and effect in areas where there may be none (Banerjee, 2009). Bearing this in mind, it is imperative to note that the market has deemed a mechanism that makes the most of the joint information of participants in the stock market to generate efficient prices and that there is no easy money. This implies that the easy money, such as the $100 bills lying on the Ground, that investors can easily make in making predictions on the behavior of stocks does not exist. This implies that it is difficult to toy around incessantly with and beat the Standard and Poor (S&Ps) 500 Index (Siegel, 2002).
References
Banerjee, A. V. (2009).Creative capitalism: A conversation with Bill Gates, Warren Buffett Berk, J., & DeMarzo, P. (2016).Corporate Finance, GE. Pearson Australia Pty Limited. Besley, S., & Brigham, E. F. (2014).Principles of finance. Cengage Learning. Corporate Finance Institute. (2022). Simple Interest vs. Compound Interest. Retrieved from: https://corporatefinanceinstitute.com/resources/knowledge/finance/simple-interest-vs-compound-interest/ Damodaran, A. (2012).Investment valuation: Tools and techniques for determining the value of any asset. John Wiley & Sons. Graham, J., Adam, C., & Gunasingham, B. (2020).Corporate…
References
Banerjee, A. V. (2009). Creative capitalism: A conversation with Bill Gates, Warren Buffett, and other economic leaders. Simon and Schuster.
Besley, S., & Brigham, E. F. (2014). Principles of finance. Cengage Learning.
Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value of any asset. John Wiley & Sons.
Ho, V. H. (2010). Enlightened shareholder value: Corporate governance beyond the shareholder-stakeholder divide. Journal of Corporate Law., 36, 59.
Luecke, R. (2002). Finance for managers (Vol. 1). Harvard Business Press.
Merna, T., & Al-Thani, F. F. (2008). Corporate risk management. John Wiley & Sons.
Pennant-Rea, R., & Crook, C. (1986). The Economist Economics. Penguin Group USA.
Shefrin, H., & Statman, M. (1985). The disposition to sell winners too early and ride losers too long: Theory and evidence. The Journal of Finance, 40(3), 777-790.
Siegel, J. (2002). Is That a $100 Bill Lying on the Ground? Two Views of Market Efficiency. Knowledge At Wharton. Retrieved from: https://knowledge.wharton.upenn.edu/article/is-that-a-100-bill-lying-on-the-ground-two-views-of-market-efficiency-2/
Swedroe, L. (2015). The Agony and the Ecstasy: Risks and Rewards of a Concentrated Stock Position. Mutual Funds.com. Retrieved from: https://mutualfunds.com/news/2015/11/25/the-agony-and-the-ecstasy/
Tuckman, B., & Serrat, A. (2022). Fixed income securities: tools for today’s markets. John Wiley & Sons.
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