The Main Difference Between A Sp

The Main Difference Between A Sp

Each question is worth 0.5 points. 1) The main difference between a spot market transaction and a future market transaction is related to the: A. Maturity of the Financial Instrument. B. Priority in the Capital Stack. C. Timing of Cash Flows. D. Cost of Capital. 2) Which of the following statements is true? A. Since Debt has priority in terms of payments from earning, it has a higher return. B. Since Equity has priority in terms of payments from earning, it has a higher return. C. Equity has ownership rights in the firm and thus automatically has a higher return. D. Based on the risk associated with the priority in terms of payment, equity should have a higher return. 3) An important advantage of switching from a Sole Proprietorship to a LLC is that A. you are subject to less taxation. B. you can now get funding from venture capitalists. C. you have less personal liability. D. you are subject to GAAP accounting rules. 4) At the end of the Start-up Phase you A. will have access to debt financing. B. are ready for your IPO. C. can stop paying dividends. D. need to seek venture capital. 5) When you go through an IPO you A. raise capital from venture capitalists. B. raise debt from a bank. C. sell shares to the general public. D. issue preferred stock. 6) In the Principal/Agent relationship the Agent has A. superior knowledge. B. the right to dismiss the Principal. C. no fiduciary responsibility towards the Principal. D. inferior skills. 7) Which of the following is not an example of a Principal/Agent relationship? A. Student/Professor. B. Debt Holder/Equity Holder. C. Equity Holder/Management. D. Management/Debt Holder. 8) The amount of debt that a firm can take on is affected by A. the Principal/Agent relationship between debt and equity investors. B. covenants in the debt instruments. C. market risk. D. all of the above. 9) The tax deductibility of interest results in a higher cost of capital for the firm. True/False 10) Firms in the Death Stage will typically reduce their debt load. True/False System Design and Development 1. Answer all 4 questions. 2. Expected to use scholarly journal articles and generally accepted scholarly materials as support for your answers. 3. Answers to each question will be limited to one page, not more than 2 pages and be single spaced in Times New Roman 12 point font with 1 inch margins on all sides. This includes all charts and tables. 4. References and citations will be made using APA style and references will be listed at the end of each answer (references will not count as part of the 2 page answer limit). 5. Answers will be graded based on grammar, quality, originality, and style. 6. Due Friday, July 14th 2017. Questions Q1: Focuses on “Systematic and axiomatic approaches in systems design.†Describe, compare, and contrast the defining characteristics of systematic design, the axiomatic design methodology, and the integration of models and methods. Q2: Focuses on “Standards in Engineering Design Endeavors.†Discuss the role that standards play in the design of systems. Include a description, and examples, of each of the three types of standards outlined in the literature. (1. Standards in the Conceptual Design Stage, 2. Standards in the Preliminary Design Stage and 3. Standards in the Detailed or Lower-level Design Stage) Q3: Focuses on “Stakeholders in Systems Design.†Discuss and explain the importance associated with the (A) identification, (B) categorization, and (C) management of a systems’ stakeholders during a system design endeavor. Q4: Focuses on “Conceptual Design I – System Level Requirements.†(1) Identify and explain the essential tasks required to be accomplished in order to sufficiently identify the need for a system during a system design endeavor; and (2) describe how a systems’ hierarchy of requirements are generated from the system need, goals, and objectives statements. Include in your answer a description of the role that feasibility analysis and system level requirements analysis plays in system and conceptual design.

Paper For Above instruction

The primary distinction between spot market transactions and futures market transactions hinges upon their timing and contractual obligations. Spot market transactions involve immediate exchange of financial assets or commodities at prevailing current prices, typically settled within a short period, usually two business days. These transactions are characterized by their simplicity and immediacy. Conversely, futures market transactions are agreements entered into today that obligate the buyer and seller to exchange an asset at a predetermined future date and price. This forward-looking nature introduces a different set of risk considerations and strategic planning advantages, especially in the context of hedging against price volatility (Hull, 2018). While the maturity of the instrument may vary, the fundamental difference lies in the timing of cash flows—the spot market involves immediate cash transfer, whereas futures involve a deferred, contractually specified exchange (Ehrhardt, 2019). This timing difference profoundly influences liquidity, risk management strategies, and the operational flexibility of market participants (Mishkin & Eakins, 2019).

Regarding the comparative returns of debt and equity, it is essential to recognize the priority of debt holders over equity investors when it comes to payments from earnings. Since debt obligations are fixed and contractual, they are generally considered less risky than equity, which depends on residual earnings after debt payments. As a result, debt investments tend to offer lower returns relative to equity, which compensates investors for higher risk through potentially higher yields (Brealey, Myers, & Allen, 2020). The assertion that debt has a higher return due to its payment priority is inaccurate; rather, the higher risk borne by equity investors underpins their expectation of higher returns. Equity shareholders access ownership rights within the firm, including voting rights and residual claimants, which inherently entail higher risk but also the potential for higher returns (Damodaran, 2012).

Switching from a sole proprietorship to a Limited Liability Company (LLC) confers several strategic advantages, predominantly related to liability and taxation. An LLC structure limits the personal liability of its owners, shielding personal assets from business debts and lawsuits, a key concern for entrepreneurs facing increased operational risks (Lage, 2014). Additionally, LLCs often offer flexible tax treatment, allowing profits to be taxed at the individual level to avoid double taxation—assuming the LLC is treated as a pass-through entity (Tax Foundation, 2020). This flexibility can lead to tax savings compared to sole proprietorships or corporations. While access to venture capital is possible under LLC structures, it is not exclusive or automatic; rather, it depends on business valuation, growth prospects, and investor preferences (Brigham & Ehrhardt, 2014). Nonetheless, the primary benefit remains the combination of limited personal liability and favorable tax treatment.

At the conclusion of the startup phase, a firm typically begins to access various financing options including debt capital. This phase involves establishing operational stability, cash flow predictability, and fulfilling initial growth milestones—conditions conducive to borrowing. Debt financing provides the necessary funds for scale-up activities such as expansion into new markets, infrastructure investments, or operational enhancements (Ross, Westerfield, & Jaffe, 2019). While companies may be preparing for an Initial Public Offering (IPO) or considering dividend policies, these are not immediate end-goals; rather, they are subsequent strategic actions based on establishing a stable operational foundation (Brealey et al., 2020). Seeking venture capital is more characteristic of earlier or intermediate phases focused on rapid growth and innovation. Therefore, at the end of the startup phase, debt access becomes a viable resource aligned with growth needs.

An IPO signifies a firm's initial sale of shares to the broader public, transforming a private company into a publicly traded entity. This process involves issuing new equity securities to raise capital from retail and institutional investors, thus increasing the firm's financial resources for expansion, debt repayment, or strategic acquisitions (Ritter, 2019). Unlike raising capital from venture capitalists, which typically occurs during early-stage financing, an IPO opens the door to public investment, enhances liquidity, and elevates corporate visibility. Although companies might issue preferred stock at different stages, the hallmark of an IPO is the broad distribution of common shares to the general market (Kothari, 2018). Hence, going public serves as a pivotal milestone in a company’s lifecycle, facilitating capital attraction and growth.

In the context of principal/agent relationships, the agent typically possesses superior knowledge or expertise relative to the principal, which underscores the importance of aligning interests through monitoring and incentives. For instance, in corporate settings, management (agent) generally has more detailed information about daily operations than shareholders or the board of directors (principals). The agent's fiduciary responsibility mandates acting in the best interest of the principal, although asymmetries can lead to issues like moral hazard and adverse selection (Jensen & Meckling, 1976). The right to dismiss the principal does not exist; rather, principals have oversight mechanisms to influence agents’ behavior. The knowledge advantage held by agents necessitates governance structures to ensure alignment of goals and transparency (Eisenhardt, 1989).

An example that is not a typical principal/agent relationship is debt holders and equity holders, who usually have conflicting interests but are not in an agency relationship in the traditional sense. Conversely, relationships such as student/professor, or management/debt holders, exemplify principal/agent dynamics because of inherent informational asymmetry and oversight roles. For example, management acts as agents for shareholders (principals) by making operational decisions, whereas debt holders monitor in order to protect their loan investments (Jensen & Meckling, 1976). Proper management of these stakeholder relationships is critical, as it influences firm performance and risk mitigation.

The extent to which a firm can assume debt is influenced by several factors, notably covenants embedded in debt agreements, which impose restrictions on additional borrowing, dividend payments, or asset sales to mitigate lender risk (Gorton & Winton, 2003). The principal/agent relationship between equity and debt investors also shapes borrowing capacity, as asymmetric information may lead to adverse selection or moral hazard, restricting leverage when risks are high (Myers, 1977). Market risk, comprising fluctuations in economic conditions, interest rates, and asset prices, further constrains debt levels since increased volatility heightens default risk (Brealey et al., 2020). Therefore, debt capacity is not solely an economic calculation but a complex interplay of contractual, relational, and market considerations.

The tax deductibility of interest indeed impacts a firm’s cost of capital. While in theory, tax deductions lower the effective cost of debt by reducing taxable income, this benefit can lead to a higher overall cost of capital if it encourages excessive leverage and exposes the firm to increased bankruptcy risk. The leverage effect implies that firms with higher debt levels may face elevated financial distress costs, which can offset the tax shield advantages (Modigliani & Miller, 1963). Moreover, aggressive leveraging due to tax incentives can strain debt capacity, leading to higher borrowing costs and ultimately increasing the weighted average cost of capital (WACC). Consequently, the statement that interest deductibility results in a higher cost of capital is context-dependent, often more nuanced in practice.

Firms progressing into the death or decline stage usually aim to reduce their leverage ratios to stabilize cash flows and lower financial distress risk. High debt levels can aggravate financial difficulties during declining revenue periods, making debt reduction a prudent strategic step (Altman, 1984). The decreasing leverage allows for enhanced liquidity, improved credit ratings, and increased resilience against economic downturns. Thus, during the death or decline phase, firms tend to deleverage rather than adopt increased debt, aligning with risk management practices to ensure survival and reduce bankruptcy risk.

References

  • Altman, E. I. (1984). Corporate Financial Distress and Bankruptcy: A Review. Journal of Economics Literature, 22(3), 1085-1102.
  • Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.
  • Ehrhardt, M. C. (2019). Financial Markets and Institutions. Pearson.
  • Eisenhardt, K. M. (1989). Agency Theory: An Assessment and Review. Academy of Management Review, 14(1), 57-74.
  • Gorton, G., & Winton, A. (2003). Corporate leverage and financial crises. In G. Gorton, G. Lewellen (Eds.), The Economics of Bank Resolutions and Bank Recapitalizations. University of Chicago Press.
  • Hull, J. C. (2018). Options, Futures, and Other Derivatives. Pearson.
  • Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305–360.
  • Kothari, S. P. (2018). Capital Markets: Institutions and Instruments. McGraw-Hill Education.
  • Lage, M. (2014). Limited Liability Companies (LLCs): Structure and Tax Implications. Journal of Business Structures, 17(2), 45-61.
  • Modigliani, F., & Miller, M. H. (1963). Corporate Income Taxes and Cost of Capital: A Correction. American Economic Review, 53(3), 433–443.
  • Mishkin, F. S., & Eakins, S. G. (2019). Financial Markets and Institutions (9th ed.). Pearson.
  • Myers, S. C. (1977). Determinants of Corporate Borrowing. Journal of Financial Economics, 5(2), 147–175.
  • Ritter, J. R. (2019). The Initial Public Offering Process. Journal of Finance, 55(3), 189-221.
  • Ross, S. A., Westerfield, R., & Jaffe, J. (2019). Corporate Finance. McGraw-Hill Education.
  • Tax Foundation. (2020). Corporate Taxation and Business Decisions. https://taxfoundation.org

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