ASSIGNMENT 2 (38 PTS)

I. Refer to the following simple Income Statements and Cash Flows

COMPANY A
Income Statement Cash Flow

Sales P 100, 000 Collection from Customers P0

Less: Cost 50, 000 Payment of Expenses 50, 000

Profit P 50, 000 Net Cash Flow (P50, 000)

COMPANY B
Income Statement Cash Flow

Sales P 100, 000 Collection from Customers P 100,000

Less: Cost 150, 000 Payment of Expenses 50, 000

Profit (P 50, 000) Net Cash Flow P50, 000

COMPANY C
Income Statement Cash Flow

Sales P 100, 000 Collection from Customers P 100,000

Less: Cost 70, 000 Payment of Expenses 70, 000

Profit P 30, 000 Net Cash Flow P30, 000

Suppose the above given Income Statements and Cash Flow Statementsof companies A, B and C were
presented to you. Which do you think is a more attractive company? Justify your answer. (5PTS)
- Because firm C has the highest profitability and the most effective cash flow based on the
statistics provided above, we assume that it is the most alluring of the three. It displays a
positive cash flow, the debts have already been paid, and the provided income statement and
net cash flow both indicate a surplus. Furthermore, in comparison to both firm A and company
B, it demonstrates steadiness in financial health.

II. The following are different factors that may affect the price of stocks. Give your opinion on how each
of them may cause to increase or decrease the stock prices of a company. (3 PTS EACH)

A. Profitability of business operations

- The stock price variable has been found to be positively impacted by profitability, therefore the
more profitable a company is, the higher its stock price will be on the stock market. Depending on
the circumstances, a business operation may fail. For example, too much profit can result in too
much taxation, which can result in little profit due to the taxes you've already paid. A stock's price
rises if there is a greater demand (buyers) than supply (sellers) for it. On the other hand, if there was
a bigger supply than there was a demand for a stock, the price would drop. It has been
demonstrated that profitability has a positive impact on the stock price variable, indicating that the
higher a company's profits, the higher its stock price on the stock market.
B. Competent management
- The number of shares increases proportionally while the face value lowers when the management
divides the shares. Your ability to reach more people will increase your consumer base, which will
increase your sales and, ultimately, your profit. It can also lower business risk since if your
management is capable of maintaining the company's sales, you won't lose clients or sales. If their
inventory is out of reach for the customer, the management decides to reduce the price. A
company's stock price may vary as a result of competent management in order to increase sales.

C. Political Instability
- This refers to the potential for political turmoil or changes in a nation to negatively affect the
performance of an investment. Instability could result from a shift in the military, judicial, legislative,
or executive departments of the government, which would affect investment returns. Political
instability is a significant element that could have a disastrous impact on your business, especially if
the elected official is incompetent and unconcerned with the businesses in the area. Additionally, it
can result in frequent policy changes that could have an impact on how you conduct your business.
By raising the value-added tax on goods or the business rates, they may also have an impact on
enterprises. They have the power to enact new legislation, such as the National Minimum Wage,
which affects business earnings and employee rights.

D. Having health crisis like pandemic

- The impact of "delay" on the economy's financial stability, household demand, and supply chains is
entirely unpredictable. Because of this, estimates for future growth are constantly updated by
policymakers in the market, business, and government. If there is an active virus spreading,
individuals tend to avoid physical contact and any other activities that are related to your business,
which might result in lower sales because people prioritize their health above everything else. Face
masks, alcohol, and face shields all price increases following the outbreak because people prioritized
them. The business owner would price their product higher since more people would buy it given
the necessity of having these three items wherever you go, while some are lowering their prices so
that customers will undoubtedly purchase their goods due to their more reasonable costs.

II. Assume that you are the biggest shareholder of a corporation. Give three objectives that you want
to achieve as owner of the corporation (2 PTS EACH OBJECTIVE)

- Maximization of net assets - In order for businesses to generate revenue and turn a profit, they
must sell goods and services.
- Employee and customer satisfaction - Generating new business, referrals, testimonials for
marketing, and sales case studies all depend on satisfied customers.
- Increase in Shareholder Wealth - In addition to raising revenues and profit margins for the company,
increasing shareholder wealth may also consider the impact of taxes.

III. Answer the following questions.

1. What defines a shareholder’s wealth? (2PTS)

- Prices for the investments he or she made will climb soon, increasing the profit. The number of
shares you possess and their market value are used to calculate shareholder wealth. Increasing
shareholder wealth is frequently the company's first priority, and by making money, it can increase
the dividends paid on each common shares. Furthermore, the difference between assets and
liabilities is what is referred to as shareholders' equity and represents the value that all of the
shareholders collectively own in the company. Your degree of shareholder wealth is determined by
the number of shares you individually own and their market value.
2. What do you think is the most crucial role of a financial manager? Why do you think so? (2PTS)
- Their most important duty is making financial decisions and exercising financial control over the
organization. because they maintain a company's financial health and help ensure its long-term
viability by doing so. Additionally, when it comes to money management, the financial manager is in
charge of retaining the company's funds and conducting all transactions. If he makes a mistake, the
entire net worth of the business could suffer significantly.

3. Given that you have excess funds, where will you invest the funds? Will you opt to buy stocks (an
equity-based financial instrument) or corporate bonds (a debt-based financial instrument)? Explain your
answer.
(3PTS)
- I'll decide to purchase stocks. The fundamental advantage of equity financing is that repayment of
the funds gained from it is not necessary. The owners of a company naturally want it to be
successful and provide equity investors with a positive return on their investment, but without
having to make payments or pay interest, as is the case with debt financing. If the stocks are sold,
we will make additional money. Additionally, we can purchase corporate bonds if we make more
money.

IV. Explain how the following financial institutions can help individuals or firms. (2PTS EACH)

A. Commercial banks
- Savings accounts are available from commercial banks, where the money you deposit earns interest
over time. Commercial banks will safeguard their clients' money while giving company owners the
opportunity to use their deposits as security for loans that will support the smooth functioning of
their operations. A trustworthy payment system is required for an economy to function properly.
Also, commercial banks take deposits and offer their clients convenience and security. Offering
customers a secure place to store their money was a part of the original aim of banks.

B. Investment Bank
- Investment banks offer their clients assistance with financing, research, trading, sales, IPOs,
mergers, securitized products, and other services. After all, an investment bank's primary goal is to
advise governments and businesses on how to solve financial challenges. Investment banks offer
programs for investing that require a certain amount of time, but when that moment arrives, your
money will have a high return. In comparison to commercial banks that collect deposits, their
operations are very different. It is a type of financial intermediary that offers a range of services to
governments and enterprises. As a mediator between securities issuers and the investing public,
these services also include underwriting debt and equity issues.

C. Investment Company
- Investment companies let small investors access professional financial management services,
diversify their portfolios, and lower risk. They hire seasoned finance managers who can make wise
financial decisions for the client, especially during times of crisis. It gathers money from investors in
a collective manner, and if the conditions are already met, they will give it later. The services of
insurance businesses, which act as financial middlemen and offer direct insurance or reinsurance,
protect customers' finances from potential risks in the future.

D. Brokerage Firms
- Essentially, this organization serves as a middleman between buyers and sellers. It doesn't generate
anything valuable. It just provides a service to the financial industry, which serves as its primary
source of income. They act as the intermediary between market participants to complete a
transaction and to prevent fraud and scams. When buying or selling stocks, a brokerage functions as
a middleman between the parties. Following the successful completion of the transaction,
brokerage firms are paid a commission. For instance, when a trade order for stock is carried out, a
person frequently pays a transaction fee to cover the brokerage firm's costs associated with carrying
out the trade.