Finance – 4 short answer questions

1. Form of Organization: 

One of the most important decisions business owners make is the form of organization they select for conducting business. Read the article “forms of organization” attached and provide your thoughts or opinions on that. This article summarizes the pros and cons of company structures. Since this decision will affect nearly every aspect of a firm’s operations, it is important that the finance professionals understand the tax and economic implications of the company structure.

2. Examining Differences between Cash Flow and Earnings:

 If you have experienced a ride on the tube (the subway system) in London you were probably surprised by the kind reminder when the train arrives at the station. As the train stops you are reminded to “Mind the Gap,” the gap being the distance between the train and the station platform. A gentle reminder issued by polite voice than warns you to be careful and watch your step when leaving the train.

A recent article in CFO Magazine issues a similar warning to the GapPreview the document between earnings and cash flows. The article warns of a potential disconnect between earnings and cash flow that is important when analyzing a company’s performance.

After reading the article, answer the following questions:

· The article points out that it may be important to compare top-line and bottom-line growth. What is the difference between top and bottom-line growth?

· What factors could lead to a difference in top- and bottom-line growth?

· Do companies have some flexibility in recognizing gains from sales of assets? Give an example of how that could affect growth.

· How could outsourcing impact growth in cash flow? Give an example of how outsourcing affected growth in cash flow.

3. Use of Debt in the Capital Structure

Outstanding corporate debt increased by 46% between 1995 and 1999. This increase prompted some observers to express concern about the financial health of the nonfinancial corporate sector. An article entitled, “Rapidly Rising Corporate Debt: Are Firms Now Vulnerable to an Economic Slowdown,” (Links to an external site.) was published by the Federal Reserve Bank in June of 2000. The relevance of this analysis to current conditions is very interesting.

After reading the article, address the following questions:

· What three measures of corporate health give us a clearer picture of the relationship between corporate indebtedness and vulnerability?

· Why would the central measure of corporate leverage be distorted by the inclusion of hi-tech firms in the sector-wide average?

· Solvency is measured by computing the Z-score. What five accounting ratios are combined to give the Z-score?

· What conclusions do the authors make with respect to a firm’s vulnerability to a downturn in the economy or financial markets?

4. Stock Valuations

In stock investments, stock valuation is the method of calculating intrinsic values of companies and their stocks. The main use of these methods is to determine potential current market prices, and thus to profit from price movement – stocks that are judged under-priced (with respect to their intrinsic value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will overall rise in value, while overvalued stocks will generally decrease in value.

In the fundamental analysis, stock valuation based on fundamentals aims to give an estimate of the intrinsic value of a stock, based on predictions of the future cash flows and profitability of the business.

After reading the article, address the following questions:

1. What is the best measure of shareholder value? Discuss a detailed description of each of the four measures covered in the article.

2. Discuss the importance of free cash flows in determining stock valuations.