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FINANCIAL MANAGEMENT

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FINANCIAL MANAGEMENT

Q1: Compounding interest? Explain your understanding of Annual Percentage

Yield (APY):

Ans: Introduction:

In this question, we will explain the relationship between discounting and

compounding interest as well as explain our understanding of the Annual Percentage

Yield (APY).

Relationship between Discounting and Compounding Interest:

Two sides of the same coin are Discounting and Compounding. The two are used

over time to change the value of the currency. They just operate in various directions.

We utilize discounting to show the value of such a potential amount of cash in real

value, and we use compounding and calculate the value in potential dollars of a

current sum of money. From, the similarity between the formulas, the relation

between discounting and compounding is evident. When people discount, people

divide the profitability by the "(1 + r)^n" factor, which reduces the present cash flow

value. When people compound, users multiply the income stream by the identical

factor which increases the future cash flow value (Kawashima, 2006)

Annual Percentage Yield (APY):

The annual percentage yield (APY) is its actual rate of interest received on a

savings deposit or investment that gave the compounding interest effect. As with

simple interest, compounding interest is measured annually, and the sum is applied to

the amount immediately. The account balance gets a little bigger with each time going

forward so that the interest charged on the amount also gets bigger.
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APY Formula and Calculation:

APY is computed with:

Yearly Percentage Yield (YPY):

1 is the quantity deposited in this formulation of the APY. So, if you've invested

$100 at 5 percent interest for one year and your deposit was accumulated annually,

you 'd have $105.09 at the end of the year. if you have been paying basic interest,

$105 would have been yours. This isn't too dramatic. Yet if you put the $100 in the

bank for four years to go on compounding interest, that would just have $121.99. It

would have been $120 with mere interest (Chen, 2019).

Conclusion:

In this question, we learned the calculation of discounting and compounding

interest. We also the relationship between discounting and compound interest. The

Annual percentage yield is the way to calculate yearly deposit or profit. The

calculation is conduct through formal.

Q2: Profit Maximization as the goal of the firm? How does the goal of Wealth

Maximization deal with those problems?

Ans: Introduction:

In this question, we will explain the problems that occur during the use of Profit

Maximization as the goal of the firm and also explain the Wealth Maximization deal

to solve problems.

Profit Maximization:
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The three issues associated with maximizing profit as the firm's objective are:

First, maximizing profit is ambiguous. Financial gain has many various definitions

such as book value-based accounting profit, or market value-based economic profit.

Second, maximizing profit dismisses differences in while we receive the money. It

doesn't make a distinction between getting a dollar today and getting a dollar an in a

year from now. Money plays a significant part in the valuation of an asset or liability.

Third, the maximization of benefit ignores the variations in risk between the

alternative course of action. If two options that provide equal return yet different risks

are given an option, most individuals will choose the least risky one. This makes one

more valuable which is less risky. Maximization of income ignores such disparities in

interest.

Wealth Maximization:

Wealth Maximization of shareholder wealth is increasing the firm's value to its

shareholders. The firm's stock interest is the market value of the shares in its hands

the maximization of shareholder capital solves these three issues by squarely

concentrating financial interests on the shareholders. Secondly, there is an

unambiguous shareholder capital. It is centered on the present value of cash inflows

flows expected to be available at stockholders, rather than an unclear concept of

financial gain and perhaps other revenue. Second, shareholder capital is directly based

upon the timing of potential cash flows. Eventually, our assessment framework for

investor wealth accounts to threat inequalities (Bainbridge, 2005)

Conclusion:

In this question, we learned about three problems of profit maximization and

understand how they are risk-full for people. In this question, we also learn how
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Wealth maximization helps individuals to invest their income without taking too

much risk.

Q3: Differences among Book Value, Liquidation Value, Market Value, and

Intrinsic Value of Securities?

Ans: Introduction:

In this question, we will explain the differences among Book value, Liquidation

Value, Market Value, and Intrinsic Value of Securities and also try to understand why

they are different from each and other.

Differences:

1-Book Value:

The book value is the historical value of the asset and is represented as the actual cost

minus depreciation on the balance sheet.

2-Liquidation Value:

The benefit of liquidation is the sum that could be obtained if the asset was sold

separately and not as part of the current concern.

3-Market Value:

Market value is the creates the greatest for a market place commodity where buyers

and sellers agree to a mutually acceptable price.

4-Intrinsic Value:

Intrinsic value is the current cost of the estimated expected cash profits of the asset

reduced in price at an acceptable rate of discount representing risk. (Subramanyam &

Venkatachalam, 2007)
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Conclusion:

In this question, we learned the difference between Values and securities.

Comprehension of the differences between these values is important in accounting

and finance. These concepts are used in an asset's valuation but they relate to different

aspects of the value of an asset. In this question, we examined the values and their

main distinctions.
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References:

Bainbridge, S. M. (2005). In Defense of the Shareholder Wealth Maximization Norm.

SSRN Electronic Journal, 50(4). https://doi.org/10.2139/ssrn.303780

Fernández, P. (2001). file:///C:/Users/Carlson.LAP-

POOL11/Documents/FOM/THESIS/Literatur/wiso-Innovationen und Start-Ups

im Bereich Healthcare.pdfCompany Valuation Methods. The Most Common

Errors in Valuations. SSRN Electronic Journal, 3(449), 1–20.

https://doi.org/10.2139/ssrn.274973

Jensen, M. C. (2017). Value maximisation, Stakeholder theory and the corporate

objective function. Unfolding Stakeholder Thinking: Theory, Responsibility and

Engagement, 65–84. https://doi.org/10.2307/3857812

Jones, T. M., & Felps, W. (2013). Stakeholder Happiness Enhancement: A Neo-

Utilitarian Objective for the Modern Corporation. Business Ethics Quarterly,

23(3), 349–379. https://doi.org/10.5840/beq201323325

Kawashima, K. (2006). The effects of inflation and interest rates on delay discounting

in human behavior. Psychological Record, 56(4), 551–568.

https://doi.org/10.1007/BF03396033

Subramanyam, K. R., & Venkatachalam, M. (2007). Earnings, cash flows, and ex post

intrinsic value of equity. Accounting Review, 82(2), 457–481.

https://doi.org/10.2308/accr.2007.82.2.457