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Understanding Concepts Essay

1258 words - 6 pages

Understanding Concepts

Finance 100

June 10, 2012

Imagine you are a small business owner. Determine the financial ratios that are important to the business.  Compare your ratios with those that are important to a manager of a larger corporation.

A financial ratio is a simple mathematical comparison of two or more entries from a company's financial statements. Business owners and managers use ratios to chart a company's progress, uncover trends and point to potential problem areas in a business
Financial ratios are relationships determined from a company's financial information and used for comparison purposes. Examples include such often referred to measures as return on ...view middle of the document...

Debt obligations are limited to the loan repayment period, after which the lender has no further claim on the business, whereas equity investors' claim does not end until their stock is sold. The main disadvantage of debt financing is that it requires a small business to make regular monthly payments of principal and interest. Very young companies often experience shortages in cash flow that may make such regular payments difficult. Most lenders provide severe penalties for late or missed payments, which may include charging late fees, taking possession of collateral, or calling the loan due early. Failure to make payments on a loan, even temporarily, can adversely affect a small business's credit rating and its ability to obtain future financing. Bonds do not affect shareholder control over an organization. Stocks purchased on the stock market represent equity or ownership of the corporation, however bonds do not. Bondholders lend cash to an organization and mark a “Bond Payable” liability on their balance, and a Receivable on their finances/books.

Discuss how financial returns are related to risk.
All investments offer a balance between risk and potential return. The risk is the chance that you will lose some or all the money you invest. The return is the money you stand to make on the investment. The balance between risk and return varies by the type of investment, the entity that issues it, the state of the economy and the cycle of the securities markets. As a general rule, to earn the higher returns, you have to take greater risk. Conversely, the least risky investments also have the lowest returns. We all should know you can’t get higher investment returns without taking higher risk, but judging by the chaos in financial markets since about July 2007 even this simple message was not understood, not believed or just ignored. However, higher risk does not guarantee higher returns. In the view of the world’s leading investment researchers, you bias your chances in favor of obtaining higher returns by only taking risks that has been reliably rewarded in the past and can be expected to be rewarded in the future. There are risks worth taking and risks that are not.

Describe the concept of beta and how it is used.
In finance, the Beta (ß) of a stock or portfolio is a number describing the volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to. This benchmark is generally the overall financial market and is often estimated via the use of representative indices, such as the S&P 500.
An asset has a Beta of zero if its returns change independently of changes in the market's returns. A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or...

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