Syed M Quadri

CLSO 1

1a. Describe THOUGHTFULLY the concepts and theories of corporate formations, financial
markets, financial statements, financial ratios, and financial analysis. Share as part of your
thinking some of the pros and cons of these theories, their definitions, as well as the strengths
and limitations of the theories.

According to the Textbook Corporate Finance (Berk, DeMarzo, 2007, p. 4) A

Corporation can be a Judicial Person or a legal entity which is separate from its owner but
possess many of the legal powers and protection that people have. It is a legal entity separate
from its owner and can enter into contracts, acquire assets and incur obligations on its own.
Corporate Formation is a legal process. It involves acquiring the consent of the state in which it
is incorporated by chartering it. It is generally more costly to setup a corporation then it is to
setup a sole proprietorship. Judicial law considers a corporation a citizen of the state it is being
incorporated. Corporations are generally managed by hired Lawyers who creates a corporate
charter which contains the formal articles of incorporations and set of bylaws. This charter
defines the rules that governs how the corporation is run.
Financial market can be defined as a marketplace where buyers and sellers participate in
the trade of assets such as equities, bonds, currencies and derivatives. The financial market can
be large or small based of number of participants. Few of the best example of financial markets
are the New York Stock Exchange (NYSE) and the forex markets. This markets trades trillions of
dollars daily. The financial market in itself is a very broad term. It is an umbrella term for
different markets dealing with finance. Some of the financial markets are; Stock Market, Bond
Market, money Market, Cash and Spot market etc. Some of the Advantages of a financial Market
are; the existence of financial markets allows for the ability of a company to raise funds for a

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new product, or for the ability of a partnership of individuals to raise funds to begin a new
company. Financial markets provide the liquidity and the forum in which to trade either stocks
and bonds or commodities. Some of the disadvantages of financial markets is if they are not
operated honestly, or find ways to get around sound and legal methods of operation. Happily,
such markets will not exist as "rogue" operations for too long. As individuals, news media and
government regulatory bodies will find out about these types of problems and apply corrective
measures.

Financial statements are basically accounting reports which contains past performance
information that a firm issues periodically (usually quarterly and annually). While creating a
financial statement, a set of standard rule called Generally Accepted Accounting Principle
(GAAP) is followed. GAAP provides common set of rules and standard format used by public
companies when creating their reports. Though financial statement can be useful to take
important decision because of the direct financial information it gives out about a company, it
can provide a business owner with a false sense of security, limiting proactive business
development. Financial statement will also not tell you whether a recent trend has broad-based
popular appeal. Information about this appeal may directly impact whether a particular type of
product development is a sound business decision.

Financial Ratios: Financial ratios are indicators that shows firms performance and
financial situations. They are mostly provided by the financial statements of a company. They are
sued to analyze trends and compare the firms financial figures with those of other firms.
Financial Ratios can also be very helpful sometimes in predicting the future bankruptcy of a
firm. Different financial ratios provide different information. Some of the most commonly used

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financial ratios are Liquidity ratios, Assets Turnover ratios, Financial Leverage ratios, and
Profitability ratios. Some of the disadvantages or rather limitations of using financial ratios are;
financial ratios by themselves are generally not meaningful. To be meaningful, they must be
compared to historical value of the same firm or ratios of similar firms.

Financial Analysis: Financial Analysis is basically an assessment of financial aspect of

the company. It is sued to viability, stability and profitability of a business. It is prepared by
professionals called financial analyst using different financial ratios or indicators that are in turn
taken from the financial statement. Typically, financial analysis is used to analyze whether an
entity is stable, solvent, liquid, or profitable enough to be invested in. When looking at a specific
company, the financial analyst will often focus on the income statement, balance sheet, and cash
flow statement. In addition, one key area of financial analysis involves extrapolating the
company's past performance into an estimate of the company's future performance.

1b. Describe THOUGHTFULLY the concepts and theories of the One Price, financial decision
making, and time value of money. Share as part of your thinking some of the pros and cons of
these theories, as well as their strengths and limitations. Remember to consider our definition of
a decision and the financial decision making process.

One price is a law in theory which states that the price of an asset or a commodity will be
same when exchange rate are taken into consideration. By this law, suppose there is a trade of
assets with equivalent investment opportunity but are selling in different competitive market on
different price. Then, the buyers can make an immediate profit by buying it the market that is
seller it for lesser price and sell it in the market where its selling for higher price. In doing so,

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they will equalize the price. When the purchasing power parity doesn't hold, arbitrage profits will
persist until the price converges across markets. One of the limitations of Law of one price is that
not all goods in the market are tradable. So such goods like labor or land, they may be cheaper in
a less developed country vs. developed. This can make a typical consumption basket cheaper in a
less developed country, even if some goods in that basket have their prices equalized by
international trade.

Financial decision making is one of the most important part of any firm as this involves
taking decision on investment or financing or budgeting that a firm has to make to be able to
operate successfully achieving goals and objective of the firm. Primarily there are two broad
financial decision that a company needs to make. One is the investment and the other is the
financing. The two decisions boil down to how to spend money and how to borrow money.
Overall goal of financial decisions is to maximize shareholder value, so every decision must be
put in that context.

The difference in the value of money that a company has today to the value it will have in
the future is call as Time Value of Money. Money deposited in a savings account will earn
interest. Because of this universal fact, we would prefer to receive money today rather than the
same amount in the future. For example, assuming a 5% interest rate, $100 invested today will
be worth $105 in one year ($100 multiplied by 1.05). Conversely, $100 received one year from
now is only worth $95.24 today ($100 divided by 1.05), assuming a 5% interest rate.

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1c. Discuss in WELL-DEVELOPED paragraphs your ORIGINAL insights on how you could use
the concepts and theories in the above sections (a) and (b) to benefit your company or personal
financial interests.

The engine of any company trying to survive the market is its finance. The cash a
company has and the cash it can acquire is the two main block of that engine. The goal of every
company is to make profit. But, to survive it needs to consider how its financial structure is
working. This can be done by creating financial statements which give a report on how much a
company has spent in the previous years and how much it has for future functioning of the
company. Using this statements as a foundation we can forecast the profits and loss of the
company in the future. Forecasting helps us prepare better to improve the functionality and make
plans to continue being in the business.
Financial statements are also one of the most important factor that plays into making a
financial decision of the company. Financial analysis is also very crucial part of financial
decision making. It helps in better planning and management of the companies finance in future.
Time value of money is a very interesting concept that intrigued me. We can use this concept to
evaluate the immediate financial need of the company vs. the need in future.
The law of one price can be used for most tradable goods. But, it does not hold good for
untradeable goods like labor or land.

1d. Do you think this learning outcome was valuable in expanding or challenging your initial
thinking on the (a) and (b) topics? Did you come way from our discussion with a different
perspective on the topics? Justify your answer.

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It was indeed valuable in expanding my initial thinking of topics that are discussed in this
paper. I had no idea that the financial statements of the company can be used not just in
estimating profits and loss that a company made in its last year but, forecasting the companys
performance and using that information to make future planning for the company. I had an indepth understanding in the importance of financial analysis of a company and how it can help
raising the required finance for the company to keep function. The concept of Time value of
money help me see investment in a different light. It helped me understand the value of money I
have today vs. the value of money I will have in the future. It helped me understand that the
money I have today is more useful to me then the money I can have in the future. Time value of
money can be used to calculate the future value of a sum of money, such as money in a savings
account, money market fund, or certificate of deposit. For example, I can deposit the money I
have today in a savings account and watch it multiply over years based on interest rate. So the
value of same money I have today will be increased in the future.