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C. Tapia
Prof. Marcoccia
18 November 2020
Financial Management
Term Paper
Throughout the first semester of the 2020-21 academic school year, I have had the
privilege of being able to take a few finance courses that I potentially will be using in the future
as I am a finance major. While I took 3 finance courses this semester, this essay will be about
financial management and the importance of the material we covered throughout the semester.
This information was not just helpful for finance majors though, it could be used by the other
students who are business majors, as everyone who wants to successfully own and operate their
own business one day should know the fundamentals of finance and should also know how to do
proper calculations as we learned throughout the semester.
We started the semester by learning the four basic forms of business organization. The
four forms of business organization are a Sole Proprietorship, a Partnership, a Corporation, and a
Limited Liability Company (LLC). All of these forms of organization are very different. A Sole
Proprietorship is a “self–owned” business where there is only one owner and the said owner not
only owns it but manage it as well. A partnership involves more than just one owner and it can
be more than just 2 partners. A partnership is not to be confused with a corporation though, a
partnership is formed with at least two individuals who want to do business together and share
the ownership, profits, and liabilities of the business whereas, a corporation is owned by
shareholders and can be formed for profit or for non-profit. In comparison to a corporation, an
LLC has members instead of shareholders, and managers instead of directors and officers.
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Regarding liability, an LLC is always better than a general partnership. You and your partners
can form an LLC and limit your liability. A big difference between sole proprietorships and
partnerships vs corporations and LLC’s is that since they are owned by shareholders, LLC’s and
partnerships can be taken over by corporate raiders. A corporate raider is a financier who makes
money by making hostile takeover bids for companies, either to control their policies or to resell
them for a profit even if the company does not want to be bought out by them. This is not the
only difference between them though, they also have different financial goals. The main
financial goal for sole proprietors and partnerships is to save enough money to retire but for
Corporations and LLC’s the main goal is to get shareholders their dividends. When shareholders
get their dividends, this makes the value of the stock go up. The term that is not to be confused
with the true value of a stock is the intrinsic value of a stock. The Intrinsic Value of a stock is an
estimation of a stock’s true value as it is calculated by a manager in the company who is
competent enough to be rational and understanding of what the stock is worth. This being said,
when there is a scandal going on in a company, the intrinsic value of a stock is usually far from
what the stock price is because, in the eyes of the people who are aware of the situation, the
stock could be worth more or less than what the public sees it at.
When it comes to financial management, hence the name, there are things like accounting
that need to be done correctly. In financial management, we went over simple yet complicated
accounting terms. First, we went over balance sheets, which are statements of the assets,
liabilities, and capital of a business or other organization at a particular point in time, detailing
the balance of income and expenditure over the preceding period. In a balance sheet, you can see
everything that happens that involves using money that affects the business. Balance sheets also
include transactions that can be both debit and credit. Knowing what a balance sheet exactly does
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is very important because, without a balance sheet, you cannot see where you gain or lose
money. Balance sheets are essential for Income Statements because they help double-check the
income a company is making. Every single transaction must be documented on a balance sheet to
know exactly where a company is losing and making money. It also is extremely important to
have a balance sheet when a company is trying to come up with their statement of cash flow for
the month. A statement of cash flow is a financial statement that provides accumulated data
regarding all cash inflows a company receives from its ongoing operations and external
investment sources. Statements of Cash flow also show all cash outflows that pay for business
activities and investments during a given period. This is different however from free cash flow.
Free Cash Flow is the cash the company generates after accounting for cash outflows to support
operations and maintain its capital assets. Interest payments though are excluded from free cash
flow.
When it comes to financial management, it is important to know the rate of growth of an
asset. This is seen in two different ways, present value and future value. Present value is the
current value of a future sum of money or stream of cash flows given a specified rate of return.
Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower
the present value of the future cash flows. – Future value is the value of a current asset at a future
date based on an assumed rate of growth. The future value is important to investors and financial
planners as they use it to estimate how much an investment made today will be worth in the
future. When investing in anything, a person wants their money to grow as much as it possibly
can. As we know, some stocks only grow so much and tend to plateau. For this reason, as
investors, we need to have a general idea of how much a stock is going to grow and what will
keep it growing such as prospects, and how responsible the company is. What investors tend to
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do is look at the history of the stock, see what time of the year the stock does well, and what
helps it do so well. For example, if I were to invest in Apple Inc., I would look at the stock and
see it usually tends to trend upwards during the holiday time when people are buying gifts for
their families. Now, what keeps Apple’s stock growing is their newest line of devices which
people would surge into stores to get their hands on one of the newest devices.
When investing in the stock market, there are interest rates that apply to your investment.
There are also determinants of market interest rates. Market interest rate involves the function of
several factors, which include inflation, risks, and the real cost of money amongst others. There
are also risk-free rates that have become extremely popular among investors. The risk-free rate
of return is the theoretical rate of return of an investment with zero risks. The risk-free rate
represents the interest an investor would expect from a risk-free investment over a specified
