Principles of Finance
Please respond/comment at least 30 words on each of the topic’s below.
1. 5-1 While reinvesting in the company may be the safer approach, it may cause organizations to miss out on profitable changes in the market. I believe an organization should remain open to all sources of capital and weigh the pros and cons of each opportunity independently. There may be an instance where rapid growth is needed. A new large client may become available, or the demand of the market may increase drastically. When this occurs, businesses should be prepared to act on these circumstances or risk losing a profitable opportunity. External capital can give a business the resources they need to expand quickly to meet a market demand, but it should not be used recklessly. Increasing debt without revenue increases can make a business unsustainable and destined to fail.
2. 5-2 In my research for this week's topic, I found large institutional investors to be one of the more appealing ways to fight entrenchment. A single or group of investors who hold a large percentage of shares can place a substantial amount of influence on an organization. "When you have large concentrated institutional investors who own large blocs of shares, they have outsize power and influence because they can vote their shares and thereby put a lot of pressure on the board through activism" (Ciciora, 2016). While such a large stake could have negative effects if the investor wants to pursue a risky path, an institutional investor would be able to force management to focus on the company's best interest and limit managerial entrenchment.
3. 6-1 I imagine investing with high risks could be additive, just like gambling. Investors know what to look for when studying the economic trends. I know people that are older than me that are risk takers when it comes to money. Not me. The few times that I have been to a casino, I would leave with a couple more dollars than I what I came in with.
4. 6-2 To prevent market failure, we have to ensure all cost and profits are accounted for and that all stakeholders are treated equally. I agree that direct link can be made from decision making to a firm’s share price maximization.
5. 5 7-1 I believe it depends on the amount of capital needed and phase of development of the company as to whether debt or equity financing is best. There is certainly benefits to equity financing, and monthly payments of principle and interest can put a strain on operating budgets. However selling stock too early in a venture can have long-term detrimental effects. The valuation will be lower until the business is either sustainable or promising. To acquire capital, it may require the owner put up a larger percentage of stock than preferable, and the ownership percentage continues to diminish each time capital is needed. If loan payments can be made feasibly, debt financing should be seriously considered until the valuation of the venture rises.
6. 7.2 While donation and reward based crowdfunding do not fall under the Securities Exchange Act, equity based crowd funding does and is subject to a number of regulations enforced by the SEC. The venture can raise no more than $1.07M annually, and there are further regulations limiting the amount any single investor can contribute annually. The allowed amount is based on a percentage of the investor's annual income; 5% for individuals earning less than $107,000 annually, and 10% for individuals who earn more than the before mentioned amount. While the SEC does offer some leeway to issuers in compliance, the issuer will have to track contributions and stock issues so these figures can be reported to the proper authorities. The regulations do state that an issuer cannot knowingly permit an investor to exceed their allowable limit, so disregarding this regulation can lead to sanctions and penalties from the SEC.
7. 8-1 Some factors that investors should consider before making investment decisions are their age, net worth and annual income, the duration for which the investment should be made, the tax rate, financial goals, other investment accounts, risk tolerance, etc.
8. 8-2 When it comes to launching a new project I think it is very important to consider all of these factors. Financially you have to consider how much it may cost to get this project to launch and at the same time consider if the return can be great enough to risk all the time assets and money that would go into this project. Potentially it could set your company back so much that you will never be able to recover from the setback, on the other end though this product could do so well that it becomes a breakthrough for your company and help you break through financial boundaries that before you would have never thought you could reach. Making a company altering decision is always a hard one that will always have big risks and also big rewards. There is times though where you may only break even on that project, but then you are left knowing if all that time was really worth it. I think before making a big decision like launching a new project you have to definitely do all the market research and predictions on how the project will do before actually allocating assets and capital on said project.