Individual Paper: Workshop 1 – Discussion Questions “DQ”
University of Phoenix – FIN/370
Finance for Business
Week 1
100%

Workshop 1 – Discussion Questions
This paper will explore the discussion questions for the first of five workshops of Finance for Business. The three topics include: 1) The capital market, how the primary market differs from the secondary market, and in the student’s opinion are these markets efficient, and why.
2) The three primary roles of the U.S. Securities and Exchange Commission, how the Sarbanes-Oxley Act of 2002 augments the SEC’s role in managing financial governance, and if the writer thinks the passage of this act had the outcome of businesses becoming more ethical. Examples will be used to support this thinking.3) Ratios which measure a corporation’s liquidity, some problems associated with using these ratios, and how the DuPont analysis would overcome these problems. The DQ’s will be stated, and then the Discussion Answers will be explored below.
DQ 1 – The Capital Market
What is the capital market? How is the primary market different from the secondary market? In your opinion, are these markets efficient? Why?
Discussion Answer 1
The capital market is “Any market in which securities are traded. Capital markets include the stock and bond markets.” (Farlex Financial Dictionary 2009) “Traditionally, this has referred to the market for trading long-term debt instruments (those that mature in more than one year). That is, the market where capital is raised. More recently, capital markets is used in a more general context to refer to the market for stocks, bonds, derivatives and other investments.” (Harvey 2011)
The primary market differs from the secondary market. Primary Markets are Transactions insecurities offered for the first time to potential investors. This is the only time that the issuing firm receives money for its stock. Secondary Markets are those in which stock previously issued by the firm trades Secondary markets Transactions in currently outstanding securities. Once the newly issued stock is purchased by the public, it begins trading in the secondary market. Previously issued securities will be traded in the secondary market.
“Companies and governments use capital markets to raise funds for their operations; for example, a company may issue an IPO while a government may issue a bond in order to conduct new or expand ongoing activities. Investors purchase securities in the capital markets in order to extract a return and earn profit on the securities. Capital markets include primary markets, such as IPOs that are placed with investors through underwriters, and secondary markets, in which all subsequent trading takes place. Government agencies in different countries regulate local capital markets, though some, especially exchanges, play some role in regulating themselves.” (Farlex Financial Dictionary 2009)
In the student’s opinion these markets are sometimes efficient, based on the definition of an efficient capital market in which the market is quick and the prices are right. However when profit maximization is the absolute goal without a combined goal of long-term growth and health of an organization, short cuts to profitability may not always be efficient. A delicate balance between short-term profitability and long-term wisdom must be reviewed in light of the expectations of the stakeholders. If they are in it for the short-run, having an efficient capital market may be a good decision. But if they are in it for a long-term growth potential, the time frame and profits over a longer period, by building the organization carefully and with prudence could be a much better decision.
In an example given in the textbook, a “financial manager could easily increase current profits by eliminating research and development expenditures and cutting down on routine maintenance. In the short run, this might result in increased profits, but this clearly is not in the best long-run interests of the firm. If we are to base financial decisions on a goal, that goal must be precise, not allow for misinterpretation, and deal with all the complexities of the real world. In microeconomics, profit maximization functions largely as a theoretical goal, with economists using it to prove how firms behave rationally to increase profit. Unfortunately, it ignores many real-world complexities that financial managers must address in their decisions. In the more applied discipline of financial management, firms must deal every day with two major factors not considered by the goal of profit maximization: uncertainty and timing.” (Keown, Martin, Petty & Scott2005).
DQ 2 – U.S. SEC
What are three primary roles of the U.S. Securities and Exchange Commission (SEC)? How does the Sarbanes-Oxley Act of 2002 augment the SEC’s role in managing financial governance? Do you think businesses became more ethical after Sarbanes-Oxley was passed? Provide examples to support your answer.
Discussion Answer 2
The U.S. Securities and Exchange Commission (SEC) was established in the early 1930’s for the purpose of protecting investors and maintaining the integrity of the securities market. (SEC website) There are five divisions of the SEC, whose three primary roles are: 1) to enforce securities laws; 2) protect investors; and 3) promote the disclosure of important information to the public.
Mary L. Schapiro is the 29th Chairman of the U.S. Securities and Exchange Commission. Chairman Schapiro, appointed by President Barrack Obama and sworn in on January 27, 2009. “Chairman Schapiro has sought to restore investor confidence and refocus the agency on its core mission of protecting investors. She has worked to streamline enforcement procedures, nurture a culture of collaboration within the SEC, revamp the system for handling tips and complaints, bring the agency’s technical infrastructure up to date, and refine the risk-based targeting strategies that inform the agency’s exam¬ination and investigation efforts.” (SEC Website)
The Sarbanes-Oxley Act of 2002 augments the SEC’s role in managing financial governance by allowing regulations problem-solving to be examined through the eyes of all stakeholders
After consideration of the Sarbanes-Oxley Act, this writer believes businesses have had the opportunity to become more ethical after Sarbanes-Oxley was passed. Even though this can be time consuming, it will usually produce sound business judgments.
For example, the corporate office looks at issues through ethical lenses and done primarily because of the need for transparency, due to the Sarbanes-Oxley Regulations.
The negative aspects include the time-consuming nature of this style. Customers may not get a response back as soon as they want it. However, this usually produces very sound business decisions, and while solving the problems for customers, they also tend to maximize profitability for the company
DQ 3 – Corporation Liquidity Measurements
What ratios measure a corporation’s liquidity? What are some problems associated with using such ratios? How would the DuPont analysis overcome these problems?
Discussion Answer 3
To measure a corporation’s liquidity several different ratios may be used depending upon the desired information by the financial manager or individual investor. There are three different ratios which measure Corporate Liquidity. They are: 1) Working Capital; 2) Current Ratio; and 3) Acid-Test Ratio, also called Quick Ratio.
With these ratios, one is able to identify some of the financial strengths and weaknesses of a company. The ratios provide two ways of making meaningful comparisons of a firm’s financial data: 1) By analyzing the ratios across time (for example over the last seven years) to identify any trends; and 2) By comparing the company’s ratios with those of other companies.
Some problems associated with using such ratios are not getting the full view of the profitability. The question that may not be answered with these ratios is “what drives the return on equity as well as the interrelationships among the net profit margin, the asset turnover, and the debt ratio.”(Keown, Martin, Petty & Scott2005).Sometimes there may be an incomplete or skewed result which may need to be analyzed more thoroughly to be certain that the shareholders are receiving the value for their investments.
One way to overcome these problems is to use the DuPont analysis method which is an Integrative Approach to Ratio Analysis and is used to evaluate a firm’s return on equity. This method is used to analyze a firm’s profitability and return on equity.
It helps to overcome the problem by showing the organization’s overall profitability and the amount of debt use. “Management is provided with a roadmap to follow in determining its effectiveness in managing the firm’s resources to maximize the return earned on the owners’ investment.”(Keown, Martin, Petty & Scott2005).
Conclusion
This discussion leads this student to believe that there are many checks and balances in order to provide the shareholders and financial managers with important information to make good decisions. The SEC is an important entity which can help investors to research, study and find important information to help them make wise determinations about how to invest their money in the securities markets. Because stocks, bonds and other securities can lose value, unlike insured bank accounts, it is crucial to weigh the risk against the potential profitability. Since there are no guarantees in investing, and there is a lot of potential to be successful, the SEC provides valuable access to information to those who invest.
Learning how to understand and analyze the numbers on the Balance Sheet and Income Statement and how the different ratios are used provide invaluable information in analysis of one’s small or large organization, helping to guide one to success or change and modifications. It has been an enlightening discussion for this student who wishes to make sound financial decisions about her own small business. References
Keown, A. J., Martin, J. D., Petty, J. W., & Scott, D. F. (2005).Financial management: Principles and applications (10th ed.). Chapters 1, 3 and 14. Upper Saddle River, NJ: Pearson/Prentice Hall.
Cooper, J. C. (2008). THE FED: NOW THE NAVIGATING GETS REALLY TOUGH. Business Week, (4090), 012.Retrieved from EBSCOhost.
Kay, M. (2006).Financial 101 terms. (cover story). Landscape Management, 45(1), 36.Retrieved from EBSCOhost.
Scidman, D. L. (2006).Effective Board Governance. Corporate Board, 27(156), 8-12. Retrieved from EBSCOhost.
Sniderman, M. (2006).The Economy in Perspective. Economic Trends (07482922), 1.Retrieved from EBSCOhost.
Muchin, J. A. (2000). A librarian's self-education of financial terminology. The Bottom Line, 13(2), 90-90-92. Retrieved from http://search.proquest.com/docview/219145769?accountid=35812
The U.S. Securities and Exchange Commission website, The Investor's Advocate:
How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation as viewed at http://www.sec.gov/asec/wwwsec.htm
The U.S. Securities and Exchange Commission website, Appendix A: Chairman and Commissioners,retrievedfromhttp://www.sec.gov/about/secpar/secpar2010.pdf#mission
Farlex Financial Dictionary (2009) Farlex, Inc., and Campbell R. Harvey retrieved from http://financial-dictionary.thefreedictionary.com/Capital+Market