Principles of Finance
Please respond/comment at least 30 words on each of the topic’s
below.
1.
5-1 While
reinvesting in the company may be the safer approach, it may cause
organizations to miss out on profitable changes in the market. I
believe an organization should remain open to all sources of capital and weigh
the pros and cons of each opportunity independently. There may be an
instance where rapid growth is needed. A new large client may become
available, or the demand of the market may increase
drastically. When this occurs, businesses should be prepared to
act on these circumstances or risk losing a profitable
opportunity. External capital can give a business the resources they
need to expand quickly to meet a market demand, but it should not be used
recklessly. Increasing debt without revenue increases can make a business
unsustainable and destined to fail.
2.
5-2 In
my research for this week's topic, I found large institutional investors
to be one of the more appealing ways to fight entrenchment. A single or
group of investors who hold a large percentage of shares can place a
substantial amount of influence on an organization. "When you have
large concentrated institutional investors who own large blocs of shares, they
have outsize power and influence because they can vote their shares and thereby
put a lot of pressure on the board through activism" (Ciciora,
2016). While such a large stake could have negative effects if the
investor wants to pursue a risky path, an institutional investor would be able
to force management to focus on the company's best interest and limit
managerial entrenchment.
3.
6-1 I
imagine investing with high risks could be additive, just like gambling.
Investors know what to look for when studying the economic trends. I know
people that are older than me that are risk takers when it comes to money.
Not me. The few times that I have been to a casino, I would leave
with a couple more dollars than I what I came in with.
4.
6-2 To
prevent market failure, we have to ensure all cost and profits are accounted
for and that all stakeholders are treated equally. I agree that goals come at a cost of other important goals for the organization
and a direct link can be made from decision making to a firm’s share
price maximization.
5.
5 7-1 I believe it depends on the amount of
capital needed and phase of development of the company as to whether debt or
equity financing is best. There is certainly benefits to equity
financing, and monthly payments of principle and interest can put a strain on
operating budgets. However selling stock too early in a venture can have
long-term detrimental effects. The valuation will be lower until the
business is either sustainable or promising. To acquire capital, it may
require the owner put up a larger percentage of stock than preferable, and the
ownership percentage continues to diminish each time capital is needed.
If loan payments can be made feasibly, debt financing should be seriously
considered until the valuation of the venture rises.
6.
7.2 While
donation and reward based crowdfunding do not fall under the Securities
Exchange Act, equity based crowd funding does and is subject to a number of
regulations enforced by the SEC. The venture can raise no more than
$1.07M annually, and there are further regulations limiting the amount any
single investor can contribute annually. The allowed amount is based on a
percentage of the investor's annual income; 5% for individuals earning less
than $107,000 annually, and 10% for individuals who earn more than the before
mentioned amount. While the SEC does offer some leeway to
issuers in compliance, the issuer will have to track contributions and stock
issues so these figures can be reported to the proper authorities. The
regulations do state that an issuer cannot knowingly permit an investor to
exceed their allowable limit, so disregarding this regulation can lead to
sanctions and penalties from the SEC.
7.
8-1 Some
factors that investors should consider before making investment decisions are
their age, net worth and annual income, the duration for which the investment
should be made, the tax rate, financial goals, other investment accounts, risk
tolerance, etc.
8.
8-2 When it comes to launching a new project
I think it is very important to consider all of these factors. Financially you
have to consider how much it may cost to get this project to launch and at the
same time consider if the return can be great enough to risk all the time
assets and money that would go into this project. Potentially it could set your
company back so much that you will never be able to recover from the setback,
on the other end though this product could do so well that it becomes a
breakthrough for your company and help you break through financial boundaries
that before you would have never thought you could reach. Making a company
altering decision is always a hard one that will always have big risks and also
big rewards. There is times though where you may only break even on that
project, but then you are left knowing if all that time was really worth it. I
think before making a big decision like launching a new project you have to
definitely do all the market research and predictions on how the project will
do before actually allocating assets and capital on said project.
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