Understanding the Concepts
Understanding the Concepts
Professor Stephen Harding
Finance 100: Principles of Finance
March 3, 2013
Abstract
The purpose of this paper is to discuss several financial concepts: Financial ratios that are important to me as a small business owner will be determined and compared to the ratios that are of importance to managers of huge corporations. In addition, this paper will describe the advantages and disadvantages of debt financing and the reasons why corporations would decide on stock issuance versus bonds to accumulate funds. This paper will also discuss how financial returns are associated with risk. Furthermore, the concept of beta and the way in which it is used will also be discussed. Another important part of this paper is the contrast of systematic and unsystematic risk. Finally, an explanation will be provided as to how I plan to invest $1 million, as the owner of a manufacturing corporation after winning a patent lawsuit, in order to diversify risk and garner a substantial return on that investment.
As a small business owner, it would be my responsibility to make prudent financial decisions that would minimize expenses and maximize profits. The financial ratios that will be important to my business are liquidity ratios, asset management ratios, financial leverage ratios, and profitability ratios. Liquidity determines my ability to meet short-term debt obligations to creditors, and asset management determines the extent to which assets are turned over to generate revenues and profits. The success of my business will depend on the quick turnover of the inventory because generally efficient turnover results in higher profitability (Melicher & Norton, 2011). In other words, the number of times throughout the year that the business gets rid of its inventory is directly correlated with the financial profitability of the business. Furthermore, financial leverage is an indicator of the extent to which borrowed funds are
Professor Stephen Harding
Finance 100: Principles of Finance
March 3, 2013
Abstract
The purpose of this paper is to discuss several financial concepts: Financial ratios that are important to me as a small business owner will be determined and compared to the ratios that are of importance to managers of huge corporations. In addition, this paper will describe the advantages and disadvantages of debt financing and the reasons why corporations would decide on stock issuance versus bonds to accumulate funds. This paper will also discuss how financial returns are associated with risk. Furthermore, the concept of beta and the way in which it is used will also be discussed. Another important part of this paper is the contrast of systematic and unsystematic risk. Finally, an explanation will be provided as to how I plan to invest $1 million, as the owner of a manufacturing corporation after winning a patent lawsuit, in order to diversify risk and garner a substantial return on that investment.
As a small business owner, it would be my responsibility to make prudent financial decisions that would minimize expenses and maximize profits. The financial ratios that will be important to my business are liquidity ratios, asset management ratios, financial leverage ratios, and profitability ratios. Liquidity determines my ability to meet short-term debt obligations to creditors, and asset management determines the extent to which assets are turned over to generate revenues and profits. The success of my business will depend on the quick turnover of the inventory because generally efficient turnover results in higher profitability (Melicher & Norton, 2011). In other words, the number of times throughout the year that the business gets rid of its inventory is directly correlated with the financial profitability of the business. Furthermore, financial leverage is an indicator of the extent to which borrowed funds are
References: Damron, K. (2010). Debt financing: the good and the bad. Retrieved on March 3, 2013, from http://pros-per.com/492/debt-financing-the-good-and-the-bad/ Little, K. Using and misusing the beta ratio. Retrieved on March 2, 2013, from http://stocks.about.com/od/evaluatingstocks/a/beta120904.html Melicher, R. W., & Norton E. A. (2011). Introduction to finance (14th ed.). Hoboken, NJ: John Wiley & Sons U.S. Department of State. How corporations raise capital. Retrieved on March 3, 2013, from http://economics.about.com/od/smallbigbusiness/a/corp_capital.htm