Question: Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm's clients is Michelle DellaTorre, a professional tennis player who has just come to the United States from Chile. DellaTorre is a highly ranked tennis player who would like to start a company to produce and market apparel she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. DellaTorre is very bright, and she would like to understand in general terms what will happen to her money. Your boss has developed the following set of questions you must answer to explain the U.S. financial system to DellaTorre.
A. What are free cash flows?
B. What is the weighted average cost of capital?
C. How do free cash flows and the weighted average cost of capital interact to determine a firm's
value?
D. What do we call the cost that a borrower must pay to use debt capital?
What two components make up the cost of using equity capital?
What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy?
What are some economic conditions that affect the cost of money?
What are the differences between market orders and limit orders?
2. Statement of Retained Earnings In its most recent financial statements, Del-Castillo Inc. reported $70 million of net income and $900 million of retained earnings. The previous retained earnings were $855 million. How much in dividends did the firm pay to shareholders during the year? Intermediate
Problems 7-11: i. Corporate Tax Liability The Talley Corporation had a taxable income of $365,000 from operations after all operating costs but before: (1) interest charges of $50,000, (2) dividends received of $15,000, (3) dividends paid of $25,000, and (4) income taxes. What is the firm's taxable income? What is it marginal tax rate? What is its tax expense? What is its after-tax income? What is the average tax rate based on taxable income?
ii. Corporate Tax Liability The Wendt Corporation had $10.5 million of taxable income. What is the company's federal income tax bill for the year? Assume the firm receives an additional $1 million of interest income from some bonds it owns. What is the additional tax on this interest income? Now assume that Wendt does not receive the interest income but does receive an additional $1 million as dividends on some stock it owns. What is the additional tax on this dividend income?
3. Much of the analysis done by financial managers is based on numbers that are different from what would seem to be the corresponding numbers presented in the financial statements. This difference is not due to any kind of cooking the books or other attempts to mislead anyone. One example is the use of market value rather than historical cost in the valuation of assets.
For your first post, define financial management. What are some other examples of the differences between financial management and financial accounting? Give examples.