Business Finance Solution Assignment

Added on - 28 May 2020

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BUSINESS FINANCE
ContentsSolution 1:.............................................................................................................................................3Solution 2:.............................................................................................................................................4Solution 3:.............................................................................................................................................5Part a:................................................................................................................................................5Part b.................................................................................................................................................5Part c..................................................................................................................................................6Part d:................................................................................................................................................6Solution 4:.............................................................................................................................................7Part a:................................................................................................................................................7Part b:................................................................................................................................................8Part c:................................................................................................................................................8Solution 5:...........................................................................................................................................10Part a:..............................................................................................................................................10Part b:..............................................................................................................................................10Part c:..............................................................................................................................................11Part d (i):..........................................................................................................................................11Part d (ii):........................................................................................................................................12Part e (i):..........................................................................................................................................12Part e (ii):.........................................................................................................................................12References...........................................................................................................................................13
Solution 1:In order to start a business in Australia a person first needs to select the most suitablebusiness structure. The major forms of business structure from which the investor has tochoose are sole proprietorship, partnership and company.Sole proprietorship is the form of business in which all the risks and rewards belong to oneperson. This single person is wholly responsible for all the aspects of the business. This is thesimplest form of business structure and relatively the most inexpensive one. (Fabozzi &Mann, 2012)The partnership form of business is very similar to that of sole proprietorship. The risks andrewards of the business are distributed amongst all the partners in the agreed partnershipratio. Each partner is liable for the actions of any other partner. This is also a simple businessform. The benefit of this type of structure over proprietorship is that the risks are dividedamongst all the partners.The company form of business structure is the most complex form of business structure.Under this business structure the corporate veil divides the ownership and management. Thecompany stands as a separate legal entity and can sue and be sued in its name. The ownershold a stake in the company in the form of shares and are responsible for the management.The liability of the shareholders under this business structure is limited to the value of sharesheld by them.(Berk, Demarzo & Harford, 2012)Therefore, based on the availability of the capital, scale of operations and risks involved, thebest suitable form of business structure is to be opted for.
Solution 2:An investor can invest in bond or equity market or in both. Based on his requirements andability to deal with risk they can take a decision(Graham & Dodd, 2009). Few factors whichcan help an investor take a decision are listed below:-Liquidity:the equity market is more liquid than the bond market. Equity is traded overthe counter and can be any time easily converted into cash, as and when required. Thebonds usually have a lock in period and cannot be converted into cash. Therefore, aperson who is need of high liquid investments should invest in the equity market.-Fixed Income:an investor who looks for a stable income should not opt for equitymarket. In the bond market the investor gets to earn fixed coupon interest at particularintervals. But there is no such fixed income in equity investment. The equity investormay or may not earn dividend. The amount of dividend is based on the profits earned bythe company. The management then decides if any dividend is required to be paid or theprofits are to be retained for further expansion. Therefore, an investor who wants to earna stable income should not invest in the equity market.(Graham, Buffett & Zweig, 2013)-Risk:the equity market involves more risk than the bond market. The prices of the stockare governed by the market forces and the investor may or may not earn any profits.When the investor expects that the market price of a share is expected to rise he wouldinvest in that share. Similarly other investors would also buy that share. In order to fill inthe demand supply gap, the share price increases. As soon as the price increases theinvestors start selling that stock and the price tends to fall. Therefore it is difficult topredict the movement in stock prices. Due to this volatile nature, the equity marketinvolves high risk. An investor not willing to take risks should invest in bond market.(Robert Parrino, 2013)-Rate of returns:the bonds are also referred to as risk free investments. The coupon inthe bond market in very low since it has low risks. Due to high risks involved in theequity market, the return in the equity market includes the risk premium. The couponprovided in the bond market is risk free and hence lower that the returns of the equitymarket. Therefore a person seeking to earn stable but low returns should invest in thebond market, but the investor who has the ability to take risks and wants to earn highprofits should invest in equity market.(Penman, 2013)
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