Principles of Finance: Threaded Questions
This paper presents a discussion on four questions that are been given. All the questions are about business and investment decisions. The answers are discussed as per each question as shown below. 1. Advantages and disadvantages are provided on the current trend of promoting financial officers to Chief Executive Officers all across the Corporate America. Financial officers have background training in accounts and stand a better chance of comprehending matters of finance in an appropriate manner than those without financial knowledge (Khan, 1993). By having such expertise, financial decisions could be made wisely. On the other hand, to be a CEO, it not only requires the financial knowledge but a combination of many attributes from knowledge to leadership skills. It is therefore imprudent just to rely on the financial knowledge for the promotion of Financial Officers to Chief Executive Officers.
2. The desirable discount rate for any rational person or investor is one, which is lower relative to the rate offered in the market (McCracken, 2005). This is based on the premises that one is to borrow. In case of lending, then a higher discount rate should be preferred. The discount rate denotes the cost of funds. When it is higher, it means that it is expensive to borrow unlike when lower. I would prefer 5% to 10% as a discount rate for a promise to $ 1,000 to be received in a year’s time. This is because with a lower rate, it shows that the risk is lower, chances of receiving the money are higher.
3. I would use the Capital Pricing Model to make an investment decision. This is because the model guides in understanding the relationship between risk and expected return (Nikbakht, 2000). It is used to price risky securities. From the model, an informed decision can thus be made. For instance, where the expected return does not beat the required return, then it is advisable that the investment be shelved. Hence an appropriate basis for decision-making.
4. The accuracy of any Net Present Value of a company’s projects would depend on the accuracy of the inputs that are used to compute the Value. Where they are accurate and reliable, then the Value obtained would be much accurate (Anthes, 2003). The inputs include; initial outlay, cash flows, cost of funds, depreciation, taxes, and life of the project. From the three investments given, a brand new retail startup would give the most accurate NPV. This is because, a retail shop is more flexible, chances of it failing to achieve expected performance are minimal than the other investments that are to be produced in foreign markets.