Business FIN please identify two different stock exchanges in the United States

Homework Set #1: Chapters 1, 2, & 3Directions: Answer the following questions on a separate document. Explain how you reached the answer, or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link above.
A. In your own words, please identify two different stock exchanges in the United States. Describe the similarities and differences between the two stock exchanges. Identify one stock from each of the two stock exchanges.
B. Using the two stocks you identified, determine the free cash flow from 2013 & 2014. What inference can you draw from the companies’ free cash flow?
C. Using the most recent financial statements for both stocks, prepare two financial ratios for each of the following categories: liquidity ratios, asset management ratios, and profitability ratios. You should have a total of six ratios for each stock, per year. What challenges, strengths, or weaknesses do you see? Please be articulate.
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Points: 100
Criteria
1. In your own
words, please
identify two different
stock exchanges in
the United States.
Describe the
similarities and
differences between
the two stock
exchanges. Identify
one stock from
each of the two
stock exchanges.
Weight: 30%
2. Using the two
stocks you
identified,
determine the free
cash flow from 2013
and 2014. What
inference can you
draw from the
companies’ free
cash flow?
Weight: 30%
3. Using the
information and
formulas from your
textbook, please
prepare two
financial ratios for
each stock, using
the 2013 and 2014
financial
statements, to
include: liquidity
ratios, asset
management ratios,
and profitability
ratios. You should
have a total of six
ratios for each
stock, per year.
What challenges,
strengths, or
weaknesses do you
see? Please be
articulate.
Weight: 30%
4. Clarity, writing
mechanics, and
formatting
requirements.
Weight: 10%
Homework Set 1: Chapters 1, 2, and 3
Unacceptable Below
70% F
Fair
70-79% C
Proficient
80-89% B
Exemplary
90-100%A
Did not submit or
incompletely identified
two stock exchanges in
the United States. Did
not submit or
incompletely described
the similarities and
differences between the
two stock exchanges.
Did not submit or
incompletely identified
one stock from each of
the two stock
exchanges.
Partially identified
two stock
exchanges in the
United States.
Partially described
the similarities and
differences
between the two
stock exchanges.
Partially identified
one stock from
each of the two
stock exchanges.
Satisfactorily
identified two stock
exchanges in the
United States.
Satisfactorily
described the
similarities and
differences between
the two stock
exchanges.
Satisfactorily
identified one stock
from each of the two
stock exchanges.
Thoroughly identified
two stock exchanges
in the United States.
Thoroughly
described the
similarities and
differences between
the two stock
exchanges.
Thoroughly identified
one stock from each
of the two stock
exchanges.
Did not submit or
incompletely determined
the free cash flow from
2013 and 2014. Did not
submit or incompletely
explained the inferences
drawn from the
companies’ free cash
flow.
Partially
determined the
free cash flow from
2013 and 2014.
Partially explained
the inferences
drawn from the
companies’ free
cash flow.
Satisfactorily
determined the free
cash flow from 2013
and 2014.
Satisfactorily
explained the
inferences drawn
from the companies’
free cash flow.
Thoroughly
determined the free
cash flow from 2013
and 2014.
Thoroughly
explained the
inferences drawn
from the companies’
free cash flow.
Did not submit or
incompletely prepared
two financial ratios for
each stock, using the
2013 and 2014 financial
statements, to include:
liquidity ratios, asset
management ratios, and
profitability ratios. Did
not submit or
incompletely explained
the challenges,
strengths, or
weaknesses.
Partially prepared
two financial ratios
for each stock,
using the 2013
and 2014 financial
statements, to
include: liquidity
ratios, asset
management
ratios, and
profitability ratios.
Partially explained
the challenges,
strengths, or
weaknesses.
Satisfactorily
prepared two
financial ratios for
each stock, using
the 2013 and 2014
financial statements,
to include: liquidity
ratios, asset
management ratios,
and profitability
ratios. Satisfactorily
explained the
challenges,
strengths, or
weaknesses.
Satisfactorily
prepared two
financial ratios for
each stock, using the
2013 and 2014
financial statements,
to include: liquidity
ratios, asset
management ratios,
and profitability
ratios. Satisfactorily
explained the
challenges,
strengths, or
weaknesses.
More than 6 errors
present
5-6 errors present
3-4 errors present
0-2 errors present
PART 1
The Company and
Its Environment
© EpicStockMedia/Shutterstock.com
CHAPTER 1
An Overview of Financial Management and the Financial
Environment 3
CHAPTER 2
Financial Statements, Cash Flow, and Taxes 57
CHAPTER 3
Analysis of Financial Statements 101
NOT FOR SALE
1
NOT FOR SALE
CHAPTER 1
An Overview of Financial
Management and the
Financial Environment
© Panda3800/Shutterstock.com
www
See http://fortune.com/
worlds-most-admired
-companies for updates
on the rankings.
In a global beauty contest for companies, the winner is … Apple.
Or at least Apple is the most admired company in the world, according to Fortune
magazine’s annual survey. The others in the global top ten are Amazon.com, Google,
Berkshire Hathaway, Starbucks, Coca-Cola, Walt Disney, FedEx, Southwest Airlines,
and General Electric. What do these companies have that separates them from the
rest of the pack?
Based on a survey of executives, directors, and security analysts, these companies
have very high average scores across nine attributes: (1) innovativeness, (2) quality of
management, (3) long-term investment value, (4) social responsibility, (5) people
management, (6) quality of products and services, (7) financial soundness, (8) use
of corporate assets, and (9) effectiveness in doing business globally. After culling
weaker companies, the final rankings are then determined by over 3,900 experts from
a wide variety of industries.
What makes these companies special? In a nutshell, they reduce costs by having
innovative production processes, they create value for customers by providing highquality products and services, and they create value for employees by training and
fostering an environment that allows employees to utilize all of their skills and
talents. As you will see throughout this book, the resulting cash flow and superior
return on capital also create value for investors.
NOT FOR SALE
3
4
Part 1 The Company and Its Environment
resource
The textbook’s Web site
has tools for teaching,
learning, and conducting
financial research.
This chapter should give you an idea of what financial management is all about, including
an overview of the financial markets in which corporations operate. Before going into
details, let’s look at the big picture. You’re probably in school because you want an
interesting, challenging, and rewarding career. To see where finance fits in, here’s a
five-minute MBA.
1-1 The Five-Minute MBA
Okay, we realize you can’t get an MBA in five minutes. But just as an artist quickly
sketches the outline of a picture before filling in the details, we can sketch the key
elements of an MBA education. The primary objective of an MBA program is to provide
managers with the knowledge and skills they need to run successful companies, so we
start our sketch with some common characteristics of successful companies.
First, successful companies have skilled people at all levels inside the company, including leaders, managers, and a capable workforce. Skilled people enable a company to
identify, create, and deliver products or services that are highly valued by customers—
so highly valued that customers choose to purchase from them rather than from their
competitors.
Second, successful companies have strong relationships with groups outside the company. For example, successful companies develop win–win relationships with suppliers
and excel in customer relationship management.
Third, successful companies have enough funding to execute their plans and support
their operations. Most companies need cash to purchase land, buildings, equipment, and
materials. Companies can reinvest a portion of their earnings, but most growing companies also must raise additional funds externally by some combination of selling stock and/
or borrowing in the financial markets. Therefore, all successful companies sell their
products/services at prices that are high enough to cover costs and to compensate owners
and creditors for the use of their money and their exposure to risk.
To help your company succeed, you must be able to evaluate any proposal or idea,
whether it relates to marketing, supply chains, production, strategy, mergers, or any other
area. In addition, you must understand the ways that value-adding proposals can be
funded. Therefore, we will show you how to evaluate proposals and fund value-adding
ideas, essential financial skills that will help you throughout your career.
S E L F – T E S T
What are three attributes of successful companies?
What two essential financial skills must every successful manager have?
1-2 Finance from 40,000 Feet Above
Seeing the big picture of finance from a bird’s-eye view will help you keep track of the
individual parts. It all starts with some individuals or organizations that have more cash
than they presently want to spend. Other individuals or organizations have less cash than
they currently want to spend, but they have opportunities to generate cash in the future.
Let’s call the two groups providers and users: The providers have extra cash today and
the users have opportunities to generate cash in the future. For example, a provider might
be an individual who is spending less today in order to save for retirement. Another
provider might be a bank with more cash on hand than it needs. In either case, the
provider is willing to give up cash today for cash in the future.
NOT FOR SALE
Chapter 1 An Overview of Financial Management and the Financial Environment
5
FIGURE 1-1
Providers and Users: Cash Now versus Claims on Risky Future Cash
Provider:
Person or organization
with cash now
Cash now
User:
Person or organization
with opportunities to
convert cash now into
cash later
Claim on risky future cash
A user might be a student who wants to borrow money for tuition and who plans to
pay it back from future earnings after graduating. Another user might be an entrepreneur
who has an idea for a new social media application that might generate cash in the future
but requires cash today to pay for programmers.
Figure 1-1 shows the relationship between providers and users.
As Figure 1-1 shows, providers supply cash now to users in exchange for a claim on
future cash flows. For example, if you took out a student loan, the bank gave you cash, but
you signed a document giving the bank a claim on future cash flows to be paid from you
to the bank. This claim is risky, because there is some probability (hopefully small) that
you will not be able to repay the loan.
Two problems immediately present themselves. First, how do the providers and users
identify one another and exchange cash now for claims on risky future cash? Second, how
can potential providers evaluate the users’ opportunities? In other words, are the claims
on risky future cash flows sufficient to compensate the providers for giving up their cash
today? At the risk of oversimplification, financial markets are simply ways of connecting
providers with users, and financial analysis is a tool to evaluate risky opportunities.
We cover many topics in this book, and it can be easy to miss the forest for the trees.
So as you read about a particular topic, think about how the topic is related to the role
played by financial markets in connecting providers with users or how the topic explains a
tool for evaluating financial claims on risky future cash flows.
Later in this chapter we provide an overview of financial markets, but first we address
an especially important type of user: companies that are incorporated.
S E L F – T E S T
What do providers supply? What do providers receive?
What do users receive? What do users offer?
What two problems are faced by providers and users?
1-3 The Corporate Life Cycle
Many major corporations, including Apple and Hewlett-Packard, began life in a garage or
basement. How is it possible for such companies to grow into the giants we see today? No
two companies develop in exactly the same way, but the following sections describe some
typical stages in the corporate life cycle.
NOT FOR SALE
6
Part 1 The Company and Its Environment
1-3a Starting Up as a Proprietorship
Many companies begin as a proprietorship, which is an unincorporated business owned
by one individual. Starting a business as a proprietor is easy—one merely begins business
operations after obtaining any required city or state business licenses. The proprietorship
has three important advantages: (1) It is easily and inexpensively formed. (2) It is subject
to few government regulations. (3) Its income is not subject to corporate taxation but is
taxed as part of the proprietor’s personal income.
However, the proprietorship also has three important limitations: (1) It may be
difficult for a proprietorship to obtain the funding needed for growth. (2) The proprietor
has unlimited personal liability for the business’s debts, which can result in losses that
exceed the money invested in the company. (Creditors may even be able to seize a
proprietor’s house or other personal property!) (3) The life of a proprietorship is limited
to the life of its founder. For these three reasons, sole proprietorships are used primarily
for small businesses. In fact, proprietorships account for only about 4% of all sales, based
on dollar values, even though about 72% of all companies are proprietorships.
1-3b More Than One Owner: A Partnership
Some companies start with more than one owner, and some proprietors decide to add a
partner as the business grows. A partnership exists whenever two or more persons or entities
associate to conduct a noncorporate business for profit. Partnerships may operate under
different degrees of formality, ranging from informal, oral understandings to formal agreements filed with the secretary of the state in which the partnership was formed. Partnership
agreements define the ways any profits and losses are shared between partners. A partnership’s advantages and disadvantages are generally similar to those of a proprietorship.
Regarding liability, the partners potentially can lose all of their personal assets, even
assets not invested in the business, because under partnership law, each partner is liable
for the business’s debts. Therefore, in the event the partnership goes bankrupt, if any
partner is unable to meet his or her pro rata liability then the remaining partners must
make good on the unsatisfied claims, drawing on their personal assets to the extent
necessary. To avoid this, it is possible to limit the liabilities of some of the partners by
establishing a limited partnership, wherein certain partners are designated general
partners and others limited partners. In a limited partnership, the limited partners can
lose only the amount of their investment in the partnership, while the general partners
have unlimited liability. However, the limited partners typically have no control—it rests
solely with the general partners—and their returns are likewise limited. Limited partnerships are common in real estate, oil, equipment-leasing ventures, and venture capital.
However, they are not widely used in general business situations, because usually no
partner is willing to be the general partner and thus accept the majority of the business’s
risk, and no partners are willing to be limited partners and give up all control.
In both regular and limited partnerships, at least one partner is liable for the debts of the
partnership. However, in a limited liability partnership (LLP) and a limited liability
company (LLC), all partners (or members) enjoy limited liability with regard to the business’s
liabilities, and their potential losses are limited to their investment in the LLP. Of course, this
arrangement increases the risk faced by an LLP’s lenders, customers, and suppliers.
1-3c Many Owners: A Corporation
Most partnerships have difficulty attracting substantial amounts of capital. This is generally
not a problem for a slow-growing business, but if a business’s products or services really
catch on, and if it needs to raise large sums of money to capitalize on its opportunities, then
NOT FOR SALE
Chapter 1 An Overview of Financial Management and the Financial Environment
7
the difficulty in attracting capital becomes a real drawback. Thus, many growth companies,
such as Hewlett-Packard and Microsoft, began life as a proprietorship or partnership, and at
some point their founders decided to convert to a corporation. On the other hand, some
companies, in anticipation of growth, actually begin as corporations. A corporation is a
legal entity created under state laws, and it is separate and distinct from its owners and
managers. This separation gives the corporation three major advantages: (1) unlimited life—
a corporation can continue after its original owners and managers are deceased; (2) easy
transferability of ownership interest—ownership interests are divided into shares of stock,
which can be transferred far more easily than can proprietorship or partnership interests;
and (3) limited liability—losses are limited to the actual funds invested.
To illustrate limited liability, suppose you invested $10,000 in a partnership that then
went bankrupt and owed $1 million. Because the owners are liable for the debts of a
partnership, you could be assessed for a share of the company’s debt, and you could be
held liable for the entire $1 million if your partners could not pay their shares. On the
other hand, if you invested $10,000 in the stock of a corporation that went bankrupt, your
potential loss on the investment would be limited to your $10,000 investment. Unlimited
life, easy transferability of ownership interest, and limited liability make it much easier for
corporations than proprietorships or partnerships to raise money in the financial markets
and grow into large companies.
The corporate form offers significant advantages over proprietorships and partnerships, but it also has two disadvantages: (1) Corporate earnings may be subject to double
taxation—the earnings of the corporation are taxed at the corporate level, and then
earnings paid out as dividends are taxed again as income to the stockholders. (2) Setting
up a corporation involves preparing a charter, writing a set of bylaws, and filing the many
required state and federal reports, which is more complex and time-consuming than
creating a proprietorship or a partnership.
The charter includes the following information: (1) name of the proposed corporation,
(2) types of activities it will pursue, (3) amount of capital stock, (4) number of directors, and
(5) names and addresses of directors. The charter is filed with the secretary of the state in
which the firm will be incorporated, and when it is approved, the corporation is officially in
existence.1 After the corporation begins operating, quarterly and annual employment,
financial, and tax reports must be filed with state and federal authorities.
The bylaws are a set of rules drawn up by the founders of the corporation. Included
are such points as: (1) how directors are to be elected (all elected each year or perhaps
one-third each year for 3-year terms), (2) whether the existing stockholders will have the
first right to buy any new shares the firm issues, and (3) procedures for changing the
bylaws themselves, should conditions require it.
There are several different types of corporations. Professionals such as doctors, lawyers, and
accountants often form a professional corporation (PC) or a professional association (PA).
These types of corporations do not relieve the participants of professional (malpractice)
liability. Indeed, the primary motivation behind the professional corporation was to
provide a way for groups of professionals to incorporate in order to avoid certain types
of unlimited liability yet still be held responsible for professional liability.
Finally, if certain requirements are met, particularly with regard to size and number of
stockholders, owners can establish a corporation but elect to be taxed as if the business
were a proprietorship or partnership. Such firms, which differ not in organizational form
but only in how their owners are taxed, are called S corporations.
1
More than 60% of major U.S. corporations are charte …
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