Question

Question 6: Assume you are a credit manager in charge of approving commercial loans to business firms. Identify three aspects of a firm's cash flows you would review and explain the type of information you hope to gain from reviewing each of those five aspects. Question 7: Give some examples of ways in which manager's goals can differ from those of shareholders. Question 8: Describe the major differences between individual and institutional investors.

Answer 1

Question 6 :

The five aspects of cash flows are the information obtained is:

• Operating cash flow : How much cash flow is a firm generating from its operations.
• Cash flow to creditors: Is the firm paying back its creditors and what additional debt it has been raising.
• Cash flow to stockholders : Is the company, paying dividends to the shareholders and are these shareholders investing further capital to the firm.
• Net working capital: Is the firm increasing its networking capital or decreasing it and does it affect the firm's liquidity.
• Net capital spending : Is the firm spending on additional fixed assets.

Question 7 :

Managers may have goals like increase in sales level, customer satisfaction , they may also focus on increases market share. Managers sometimes may also have their personal goals in mind and might think about maximization of their personal income. They go for large projects, which increase the size of the firm irrespective of the profitability so that their personal salary rises ,as their salary is tied to with the firm size. Managers may sometimes set personal goals,and take decisions that fulfill their goals. Managers are hires as agents to achieve the goals set by the shareholders.

When managers create goals of generating more profits and in doing so they destroy the value of equity of the company. They have want huge compensation packages which the shareholders might nor agree with. They might want large corporate spaces to work in.

Shareholders goals is to increase the value of the company. Shareholders do not wish to accept risky projects as they wish to maximize the share price , they may undertake risky projects if they will believe that the project will pay-off and generate a higher share price, due to higher profitability of the firm.As their ultimate goals is to maximize the firm value.

Question 8:

An individual investor is an individual who is investing in the stock market.

The institutional investor is a mutual fund company, the insurance company, pension funds and banks or nay other such large institutes.

An institutional investor is a professional , who invests other people's money in the stock market. They trade in large quantities and they enjoy preferential treatment and lower fees.They are considers to be sophisticated investors and so they are subject to fewer regulations.

The retail/individual investor invests through brokerages or savings accounts and they can deal in large or small amounts.They have personal goals like retirement, education of children due to which they plan to invest in the market. The SEC considers retail investors unsophisticated investors, who are afforded certain protections and barred from making certain risky, complex investments.