Research Paper Help on the Essentials of Corporate Finance

Student Discussion Reply Week 2: The Essentials of Corporate Finance

  1. Evaluate the following statement: “Financial managers should not focus on the present stock value of the company. Instead, they should focus on the profitability of the company. Doing so will result in increasing the value of the stock.

I agree on the statement as we carried out in our discussion. The general conclusion was that financial managers should focus on how their company should be profitable over the long-term. Furthermore, from the inferences made during the discussion profitable companies are the ones whose stock value increases in the long run (Ross et.al, 1998, p. 55). For instance, on the analysis that was carried out on the profitability of companies such as Wal-Mart, Exxon Mobil, Microsoft, Google, and Apple I found out that profit increased consistently since the companies were incorporated; hence, their stock value has increased in tandem, leading to an increase in the shareholder value.

  • Explain how a company can be profitable in terms of the ‘bottom line’ and cash-poor at the same time. Provide company and industry examples to justify your answer. Think about the life cycle of the business, its key customers, etc…

A company that is improving its bottom line is also said to be improving its net earnings or net income or profit. I agree that from the findings of our discussion, subsequent improvement in net profits means that the wages/revenue per share of the company is rising. I would recommend that a company may undertake decisions during boardroom meetings that are intended to increase the overall profits. This normally takes an angle of cost reduction (Ross et.al, 1998, p. 50). I would recommend the following cost reduction strategies: cutting down the workforce, outsourcing some of the company’s services such as IT, HR and manufacturing, and minimizing wastes using lean management. From the analysis of various multinationals I found out that majority of the banking corporations such as Wells Fargo, JP Morgan Chase, and Bank of America have outsourced majority of their back office services such as Human Resource and IT, which has played a key role in cutting down the costs. From the insight I got, I understood that when a company is in a poor cash position, this means that it is constantly ploughing back money in its operations, and is thus avoiding borrowing from the financial markets, which might increase its amounts of debt (Ross et.al, 1998, p. 75).

  • What are some ways to determine if a company poses a credit risk?

I agree that our discussion comprehensively covered various ways of assessing whether a company poses a credit risk. The various methodologies that I saw were effective include calculating the amount of debts accrued in its financial books, the ability of a company to service its current debts, and using various debt gearing ratios. From the findings in our discussion capital intensive industries such as mining normally accrue huge amounts of debts from financial markets which they fail to repay leading them to be declared bankrupt (Ross et.al, 1998, p. 515). From the inferences generated in our discussion a company may not be able to service its current debts due to volatile business environment forcing them to be placed under receivership (Ross et.al, 1998, p. 812). Additionally, from our research on various financial investments analysis books, I found out that the credit risk that a company poses can be determined using gearing ratios which are determined by financial analysts (Ross et.al, 1998, p. 635). I got a vivid comprehension that if a company is a giant corporation, its credit risk can crumble down the economy of an entire country (Ross et.al, 1998, p. 432).

Works Cited

Ross, Stephen, et al. Essentials of Corporate Finance. McGraw-Hill Education, 1998.