FIN301: Principles of Finance
Module 1: Case Template
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Question 1: In your small business you have a finance department with a CFO, controller, and treasurer. For the following scenarios, explain which of these three financial executives would be the most likely to work on the issue based on the descriptions of the roles of the CFO, controller, and treasurer from Brealey, et al. (2009) from the required reading.
- You suspect that a lower-level employee has embezzled around $50,000 over the last three years and you want to try to find out who based on past financial records. Who would be most likely person to look into this issue – the CFO, the treasurer, or the controller? Why?
The controller is responsible for financial statements, accounting and taxes. The controller is the person responsible for day to day financial operations. The controller reports to CFO. So the controller would be the person who is responsible for looking into this possible embezzlement case.
- Your chief marketing officer wants to take out a large loan to finance a major advertising campaign that he claims will bring in large sums of new profits over the next few years. However, your chief operating officer wants to take out a large loan to purchase some new equipment and machinery that she claims will save your company a lot of money over the next few years. You would like to see some estimates about which of the two projects will be most likely to increase profits enough to be able to pay back the loan. Who would be most likely person to look into this issue – the CFO, the treasurer, or the controller? Why?
The CFO is responsible for working any staff financial requests, finance plans, and corporation plans. Chief Management Officer is considered to be corporate and the CFO would be the person responsible to look at the two plan. The CFO can use the finance and corporation plan to see if the funding can be added into the budget. The CFO would also review the financial market to determine of there is enough opportunity there to ensure the money will be coming back after the initial investment.
Question 2: Explain whether the following assets are a real asset or a financial asset. Explain your reasoning using the definitions of real versus financial assets in Brealey, et al. (2009) from the required reading.
- A certificate of deposit at your local bank
Explain: A CD is a financial asset because it is an asset that can be turned into cash quickly. A financial asset is a claim on the real asset the firm which can produce more funds through an investment like a CD with indirect ownership.
- A two-bedroom house
Explain: A house is a real asset because it is something that you have direct ownership of, that is tangible and be considered as an investment. Since a two bedroom house, as long as it is owned and not rented, then it is a real asset that is harder for the bank to take (versus financial assets) if your firm has an error or financial decline.
- $50,000 worth of bonds from an airline company
Explain: Bonds are not a tangible item and are a financial asset since they are a loan and not an item owned by the firm itself. Real assets are used to obtain the bonds which then are used as a financial asset to grow the company.
- Ownership of a copyright to a hit song
Explain: A copyright is an investment and allows you to have direct ownership of the hit song. Since it is something that you can use as a financial against the company it is considered a real asset.
Question 3: Complete financial research on Facebook and General Motors using a web page such as investing.com or finance.yahoo.com or Bloomberg.com. Based on their stock’s P/E ratios, dividend yields, and other information, compare and contrast these two stocks. How would you classify these stocks: growth stock, a value stock, or an income stock? Explain your reasoning using both concepts from the background readings as well as any information you find on these two companies. Your answer should be about 100 – 150 words and can use graphs or calculations.
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