Chat with us, powered by LiveChat Part 1: Question: What is the Sarbanes-Oxley Act, and what is its focus? Why does it focus in these areas? Note ? Please note that the requirement is to post your Initial Response (300 words). Make sure you write these answers by conducting some research and cite both textbook and external credible sources in APA format. Use Chapter 1 Pages 23, 24 Part 2: Please read the Case study A Sad Tale: The Demise of Arthur Andersen in Chapter 4 page No 4-45 and answer the following Questions 1. To what extent do market pressures encourage unethical behavior? Can the demise of Andersen be blamed on the fact that the market began rewarding consulting services of the kind Andersen could provide? 2. How serious are the kinds of conflicts of interest discussed in this case? Did Sarbanes-Oxley eliminate the most serious conflicts? 3. Was it fair for the government to destroy an entire company because of the misdeeds of some of its members, or had Andersen become such a serious offender that such an action on the part of the government was justified? Note: ? Note that each question should be answered in a minimum of 150(total 450 words) words. ? Be typed, double spaced, using Times New Roman font (size 12), with one inch margins on all sides and heading; citations and references must follow APA format. Include a cover page containing the title of the assignment, the student?s name, the professor?s name, the course title, and the date.You are encouraged to provide detailed answer. Chapter1TheFinancialManagerandtheFirm.pdf Chapter4AnalyzingFinancialStatements1.pdf Fundamentals of Corporate Finance Fourth Edition Robert Parrino, Ph.D.; David S. Kidwell, Ph.D.; Thomas W. Bates, Ph.D.; Stuart Gillan, Ph.D. Chapter 1 The Financial Manager and the Firm Chapter 1: The Financial Manager and the Firm 2Copyright 2018 John Wiley & Sons, Inc. Learning Objectives 1. Identify the key financial decisions facing the financial manager of any business 2. Identify common forms of business organization in the United States and their respective strengths and weaknesses 3. Describe the typical organization of the financial function in a large corporation 4. Explain why maximizing the value of the firm?s stock is the appropriate goal for management 5. Discuss how agency conflicts affect the goal of maximizing stockholder value 6. Explain why ethics is an appropriate topic in the study of corporate finance 3Copyright 2018 John Wiley & Sons, Inc. The Role of the Financial Manager (1 of 2) ? Maximize Shareholder Wealth o Maximizing the price of a firm?s stock will maximize the value of a firm and the wealth of its shareholders/owners ? Stakeholders o Managers, employees, suppliers, creditors, and the government 4Copyright 2018 John Wiley & Sons, Inc. The Role of the Financial Manager (2 of 2) ? It?s All About Cash Flows o Positive residual cash flow may be paid to firm owners as dividends or invested in the firm o The larger the positive residual cash flow, the greater the value of a firm o Negative residual cash flow, over the long run, leads to bankruptcy or closing a business 5Copyright 2018 John Wiley & Sons, Inc. 6Copyright 2018 John Wiley & Sons, Inc. The Role of the Financial Manager ? Three Fundamental Decisions in Financial Management o Capital Budgeting: identify which long-term assets to acquire to maximize net benefits for the firm o Financing: determine how to pay for short-term and long-term assets by finding the best combination of short-term debt, long-term debt, and equity o Working Capital: decide how to manage short-term resources and obligations by adjusting current assets and current liabilities to promote growth in cash flow ? Poor decisions about capital budgeting, financing, or working capital may lead to bankruptcy or business failure 7Copyright 2018 John Wiley & Sons, Inc. 8Copyright 2018 John Wiley & Sons, Inc. Forms of Business Organization ? Sole proprietorships ? Partnerships ? Corporations 9Copyright 2018 John Wiley & Sons, Inc. Sole Proprietorship ? Owned by a single person who is financially responsible for the actions and obligations of the business ? Advantages o Easiest to create and control o Easiest to dissolve o Right to all profits ? Disadvantages o Owner?s personal assets at risk due to unlimited liability for firm obligations o Equity only from owner or business profit o Business income taxes as personal income o Difficult to transfer ownership 10Copyright 2018 John Wiley & Sons, Inc. Partnership ? A business owned by more than one person; one or more of them is financially responsible for the actions and obligations of the business ? Advantages o Limited protection of owner?s personal assets o Owner?s limited liability for firm obligations o More sources of equity o More sources of expertise ? Disadvantages o Shared control o Shared profit harder to dissolve 11Copyright 2018 John Wiley & Sons, Inc. Corporation ? A business owned by more than one person; none of them are financially responsible for the actions and obligations of the business. The corporation is responsible for its obligations and actions. ? Advantages o Protects personal assets o No shareholder liability for business o Easiest to change ownership o Greatest access to sources of funds ? Disadvantages o Most difficult and expensive to establish o Dilutes individual control over the firm o Overall higher taxes on income for shareholders 12Copyright 2018 John Wiley & Sons, Inc. Hybrid Forms of Business Organization ? Limited Liability Partnerships (LLPs) ? Limited Liability Companies (LLCs) ? Both combine limited liability with tax advantages of a partnership 13Copyright 2018 John Wiley & Sons, Inc. 14Copyright 2018 John Wiley & Sons, Inc. Managing the Financial Function ? Organizational Structure o Chief Financial Officer (CFO), responsible for the quality of the financial reports received by the Chief Executive Officer (CEO) o Positions Reporting to the CFO ? Treasurer ? Risk Manager ? Controller ? Internal Auditor o External Auditor o Audit Committee o Compliance and Ethics Director 15Copyright 2018 John Wiley & Sons, Inc. 16Copyright 2018 John Wiley & Sons, Inc. The Goal of the Firm ? Why not maximize market share? o Giving away goods or services for free will maximize a firm?s market share for a while, but the firm will not be able to pay its bills and stay in business ? Why not maximize profits? o Accounting profit differs from economic profit o Profit earned may not equal cash received ? Maximize the value of the firm?s stock o Future cash flows are considered o The timing of future cash flows is considered o The risks associated with having to wait to for cash flows are considered ? Management decisions affect cash flows and therefore stock prices 17Copyright 2018 John Wiley & Sons, Inc. 18Copyright 2018 John Wiley & Sons, Inc. Agency Relationship ? An agency relationship is created when the owner (a principal) of a business hires an employee (an agent) ? The owner surrenders some control over the enterprise and its resources to the employee ? Separating ownership from control creates the potential for agency conflicts 19Copyright 2018 John Wiley & Sons, Inc. Agency Conflicts ? An agency relationship exists between stockholders (principals) and the firm?s hired management (agents) ? Ownership and Control o In large corporations, shared ownership among many shareholders may result in relatively little control over management o Shareholders own the corporation, but managers control the firm?s assets and may use them for their own benefit 20Copyright 2018 John Wiley & Sons, Inc. Agency Costs ? Agency Costs are costs that arise from incurring and preventing conflicts of interest between a firm?s owners and its managers ? These costs may reduce positive residual cash flow, stock price, and shareholder wealth ? Agency costs can be reduced by o Increased oversight o Aligning incentives ? Giving agents the right incentives to reduce agency costs o Managers tend to focus on wealth maximization when their compensation depends on stock price 21Copyright 2018 John Wiley & Sons, Inc. Aligning the Interests of Managers and Stockholders ? Board of Directors has oversight over the CEO and major capital decisions ? Managerial labor market provides incentives to run the company well ? Internal competition among managers ? Large stockholders also monitor managerial decisions ? Corporate raiders search for takeover targets ? Legal and regulatory constraints limit managerial behavior 22Copyright 2018 John Wiley & Sons, Inc. Sarbanes-Oxley and Regulatory Reform (1 of 2) ? Better corporate governance reduces agency costs by requiring o More effective monitoring of managers? activities o Programs that promote appropriate behavior by managers o Penalties for executives who do not fulfill their fiduciary responsibilities 23Copyright 2018 John Wiley & Sons, Inc. Sarbanes-Oxley and Regulatory Reform (2 of 2) ? The new regulations require all public corporations to implement the following strategies: o Ensure greater board independence o Establish internal accounting controls o Establish compliance programs o Establish an ethics program o Expand the audit committee?s oversight powers 24Copyright 2018 John Wiley & Sons, Inc. 25Copyright 2018 John Wiley & Sons, Inc. The Importance of Ethics in Business ? What are Ethics? o Ethics are society?s standards for judging whether an action is right or wrong o Business Ethics are society?s standards for acceptable behavior applied to business and financial markets 26Copyright 2018 John Wiley & Sons, Inc. Ethics in Corporate Finance (1 of 2) ? Examples of Ethical Conflict in Business o Agency Cost ? Employee?s unacceptable use of employer?s computer ? Conflict of Interest o Mortgage contract which a home-buyer is unlikely to fulfill but earns a mortgage broker more money? ? Information Asymmetry o Seller knows about prior damage to the vehicle but the potential buyer does not 27Copyright 2018 John Wiley & Sons, Inc. Ethics in Corporate Finance (2 of 2) ? Business Behavior o Regulation and market forces are not enough to maintain integrity in the marketplace o Business norms must be based on ethical beliefs, customs, and practices ? Ethical Behavior o It is sometimes difficult to judge whether behavior is ethical or not ? Was the manager too careful? ? Did the manager take too much risk? ? Consequences of Unethical Behavior o Inefficiency in the economy and costs to society o High legal and social costs o Problems such as the recent financial crisis in the U.S. 28Copyright 2018 John Wiley & Sons, Inc. 29Copyright 2018 John Wiley & Sons, Inc. Copyright Copyright 2018 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. 30Copyright 2018 John Wiley & Sons, Inc. , Fundamentals of Corporate Finance Fourth Edition Robert Parrino, Ph.D.; David S. Kidwell, Ph.D.; Thomas W. Bates, Ph.D.; Stuart Gillan, Ph.D. Chapter 4 Analyzing Financial Statements Chapter 4: Analyzing Financial Statements 2Copyright 2018 John Wiley & Sons, Inc. Learning Objectives 1. Explain the three perspectives from which financial statements can be viewed 2. Describe common-size financial statements, explain why they are used, and be able to prepare and use them to analyze the historical performance of a firm 3. Discuss how financial ratios facilitate financial analysis and be able to compute and use them to analyze a firm?s performance 4. Describe the DuPont system of analysis and be able to use it to evaluate a firm?s performance and identify corrective actions that may be necessary 5. Explain what benchmarks are, describe how they are prepared, and discuss why they are important in financial statement analysis 6. Identify the major limitations in using financial statement analysis 3Copyright 2018 John Wiley & Sons, Inc. Perspectives on Financial Statement Analysis ? Stockholders focus on net cash flows, risk, rate of return, and the market value of the firm?s stock ? Managers focus on rate of return, efficient use of assets, controlling costs, increasing net cash flows, increasing the market value of the firm?s stock, and job security ? Creditors focus on the predictability of revenues and expenses, the ability to meet short-term obligations, the ability to make loan payments as schedule, and avoidance of changes in risk 4Copyright 2018 John Wiley & Sons, Inc. Guidelines for Financial Statement Analysis ? Understand which perspective: stockholder, manager, or creditor ? Use audited financial statements ? Use 3 to 5 years of statements to enable trend analysis ? Benchmark to competitors of similar size with similar products and services 5Copyright 2018 John Wiley & Sons, Inc. Common-Size Financial Statements ? Common-size financial statements show the dollar amount of each item as a percentage of a reference value o Common-size balance sheet may use total assets as the reference value; each item is expressed as a percentage of total assets o Common-size income statement may use net sales as the reference value; each item is expressed as a percentage of net sales 6Copyright 2018 John Wiley & Sons, Inc. Common-Size Balance Sheet ? The Common-Size Balance Sheet standardizes the amount in a balance sheet account by converting the dollar value of each item to its percentage of total assets o Dollar values on a regular balance sheet provide information on the number of dollars associated with a balance sheet account o Percentage values on a common-size balance sheet provide information on the relative size or importance of the dollars associated with a balance sheet account 7Copyright 2018 John Wiley & Sons, Inc. 8Copyright 2018 John Wiley & Sons, Inc. Common-Size Income Statement ? The most useful way to prepare a common size income statement is to express each account as a percentage of net sales ? Each expense is interpreted as the cost incurred to generate $1 in sales 9Copyright 2018 John Wiley & Sons, Inc. 10Copyright 2018 John Wiley & Sons, Inc. Financial Ratios and Firm Performance ? Financial ratios establish a common reference point across firms, even though the numerical value of the reference point will differ from firm-to-firm o Ratios make it easier to compare the performance of large firms to that of small firms o Ratios make it easier to compare the current and historical performance of a single firm as the firm changes over time (trend analysis) 11Copyright 2018 John Wiley & Sons, Inc. Categories of Common Financial Ratios ? Liquidity ratios ? Efficiency ratios ? Leverage ratios ? Profitability ratios ? Market Value ratios 12Copyright 2018 John Wiley & Sons, Inc. Short-Term Liquidity Ratios ? Liquidity ratios indicate a firm?s ability to pay short-term obligations with short-term assets without endangering the firm. In general, higher ratios are a favorable indicator Equation 4.1 ??????? ????? = ??????? ?????? ??????? ??????????? Equation 4.2 ????? ????? = ??????? ?????? – ????????? ??????? ??????????? 13Copyright 2018 John Wiley & Sons, Inc. 14Copyright 2018 John Wiley & Sons, Inc. Efficiency Ratios (1 of 2) ? Efficiency ratios indicate a firm?s ability to use assets to produce sales. These are also called turnover ratios. In general, higher numbers are a favorable indicator. For Days Sales in Inventory, however, a lower number is favorable. Equation 4.3 ????????? ???????? = ???? ?? ????? ???? ????????? Equation 4.4 ???? ????? ?? ????????? = 365 ???? ????????? ???????? 15Copyright 2018 John Wiley & Sons, Inc. Efficiency Ratios (2 of 2) Equation 4.5 ???????? ?????????? ???????? = ??? ????? ???????? ?????????? Equation 4.6 ???? ????? ?????????? = 365 ???? ???????? ?????????? ???????? 16Copyright 2018 John Wiley & Sons, Inc. Asset Turnover Ratios Equation 4.7 ????? ????? ???????? = ??? ????? ????? ?????? Equation 4.8 ????? ????? ???????? = ??? ????? ??? ????? ?????? 17Copyright 2018 John Wiley & Sons, Inc. Leverage Ratios ? Leverage ratios indicate whether a firm is using the appropriate amount of debt financing. In general, higher ratios indicate greater potential return and greater bankruptcy risk. Equation 4.9 ????? ???? ????? = ????? ???? ????? ?????? Equation 4.10 ???? ?? ?????? = ????? ???? ????? ?????? Equation 4.11 ?????? ?????????? = ????? ?????? ????? ?????? 18Copyright 2018 John Wiley & Sons, Inc. Coverage Ratios ? For the following ratios, a higher number generally indicates less bankruptcy risk and (possibly) lower potential return Equation 4.12 ????? ???????? ?????? = ???? ???????? ??????? Equation 4.13 ???h ???????? = ?????? ???????? ??????? 19Copyright 2018 John Wiley & Sons, Inc. Profitability Ratios (1 of 2) ? Profitability ratios indicate whether a firm is generating adequate profit from its assets. In general, higher ratios indicate better performance. Equation 4.14 ????? ?????? ?????? = ??? ????? – ???? ?? ????? ???? ??? ????? Equation 4.15 ????????? ?????? ?????? = ???? ??? ????? 20Copyright 2018 John Wiley & Sons, Inc. Profitability Ratios (2 of 2) Equation 4.16 ??? ?????? ?????? = ??? ?????? ??? ????? Equation 4.17 ???? ?????? ?? ?????? = ???? = ???? ????? ?????? Equation 4.18 ?????? ?? ?????? = ??? ?????? ????? ?????? Equation 4.19 ?????? ?? ?????? = ??? = ??? ?????? ????? ?????? 21Copyright 2018 John Wiley & Sons, Inc. Market Value Indicators ? Market value ratios indicate how the market is valuing the firm?s equity. Higher ratios indicate greater shareholder wealth. Equation 4.20 ???????? ??? ?h??? = ??? ?????? ?h???? ??????????? Equation 4.21 ????? ?? ???????? ????? = ????? ??? ?h??? ???????? ??? ?h??? Equation 4.22 ?????? ?? ???? ????? = ?????? ????? ?? ?????? ??? ?h??? ???? ????? ?? ?????? ??? ?h??? 22Copyright 2018 John Wiley & Sons, Inc. The DuPont System ? Diagnostic tool for evaluating a firm?s financial health ? Uses related ratios that link the balance sheet and income statement ? Based on two equations that connect a firm?s ROA and ROE ? Used by management and shareholders to understand factors that drive ROE 23Copyright 2018 John Wiley & Sons, Inc. ROA and ROE Equations Equation 4.23 ??? = ??? ?????? ?????? ????? ????? ???????? Equation 4.24 ??? = ??? ?????? ?????????? 24Copyright 2018 John Wiley & Sons, Inc. 25Copyright 2018 John Wiley & Sons, Inc. The DuPont Equation Equation 4.25 ??? = ??? ?????? ?????? ????? ????? ???????? ?????? ?????????? Equation 4.26 ??? = ??? ?????? ??? ????? ??? ????? ????? ?????? ????? ?????? ????? ?????? Equations 4.25 and 4.26 show that ROE is driven by profitability, operating efficiency, and amount of leverage (debt) 26Copyright 2018 John Wiley & Sons, Inc. 27Copyright 2018 John Wiley & Sons, Inc. Selecting a Benchmark ? A ratio or ratio analysis is relevant only when compared to an appropriate benchmark o Trend Analysis ? comparison to the firm?s historical performance o Industry Analysis ? comparison to the aggregate of firms in the same industry ? Standard Industrial Classification (SIC) System ? North American Industry Classification System (NAICS) o Peer Group Analysis ? comparison to a select group of firms in the same industry 28Copyright 2018 John Wiley & Sons, Inc. | Gen Paper
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Part 1: Question: What is the Sarbanes-Oxley Act, and what is its focus? Why does it focus in these

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