Financing Concepts From Idea Café, Essay Example

There are a few advantages and disadvantages to promoting anyone within a company to a higher position. Many companies feel as though their financial officers are competent enough to perform the duties of a CEO. There are two key advantages to this practice: the CEO will have an excellent understanding of financial management and the CEO could increase the company’s annual revenue. These are the first two things that come to mind when a company decides to promote its financial officer to CEO. A CEO must have an excellent understanding of the financial aspects of running a business. The two main disadvantages of this practice: the CEO might struggle to manage areas outside of finance and the CEO may have a certain difficulty adapting to the level of change involved in the process. Financial officers are typically used to managing everyone within the accounting or finance department. When they are promoted, they are usually in charge of an entirely different group of people in various departments throughout the company. This can prove difficult for new CEOs as they may be used to doing things a certain way and must now find other ways of managing employees from other departments.

10 percent seems like a reasonable discount rate to receive $1,000 one year from now. Therefore, this would be my personal rate of preference because it isn’t too high but it also isn’t too low.

Yes, I would use CAPM (Capital Asset Pricing Model) to make personal investment decisions. CAPM represents the relationship between risk and expected return. It’s used primarily to price securities that are considered risky. The main idea in CAPM is that investors should be paid in time value of money and risk. This model would make sense for someone considering a future in day trading.

Net present value (NPV) describes the difference between the present value of incoming cash flows and the present value of outgoing cash flows. It is frequently used in capital budgeting to analyze the profitability of investments and projects. Given the choice between a brand new retail startup, a pharmaceutical company producing a new drug, and a company with a successful product in Chile trying to introduce it to the USA; I would choose the pharmaceutical company introducing a new drug as having the most accurate NPV calculation. The retail startup is still new so it will take time to accurately calculate its NPV. The company with a successful product in Chile trying to market it in the USA will also most likely not have the most accurate NPV as they are new to the U.S. markets and it will take time to determine the company’s overall NPV; especially if they are venturing out into the global marketplace for the first time. However, the pharmaceutical company would most likely have the most accurate NPV as they most likely already have products that are established.

Convertible debt is “a loan that can convert to equity under certain circumstances, usually when the lender says so” (Convertible Debt). Convertible debt is generally a win-win situation (Convertible Debt). It looks good to lenders because either way, they are getting something out of it. If the company does well then they become equity investors. If the company does just alright, then the loan gets repaid (Convertible Debt). Convertible debt works best for online companies because online companies are very risky entities. While the start-up capital involved to create an online business is much lower than the startup capital that is required to fund a traditional brick and mortar establishment, the risk of failure is much greater. A local business is only competing with businesses in a certain geographical area while an online company is competing with the entire Internet. Therefore, many Internet entrepreneurs choose convertible debt as an option for start-up capital to minimize risk on what is already a heavily risky investment. This is a good idea for online vendors who sell products. Service-providers should attempt to fund their startups with cash, if possible. Generally speaking, it’s best if an online company can be funded entirely with cash. If this is not possible then the second-best option would be convertible debt.

The two important key concepts that would help me with my professional discipline include business financial management and evaluating investment options. I would like to own my own business one day and one of the most important aspects of business management is financial management. Learning how to manage finances from a business perspective helped me to gain the necessary insight that I need in order to be successful at owning my own company in the future. I would also like to invest wisely so learning how to evaluate investment options was important. With so many changes happening in the stock market, it only makes sense to be educated in this area.

Works Cited

“Convertible Debt – Financing Concepts from Idea Cafe.” Small Business Help – Business Owners Idea Cafe, Small Business Ideas, Information, Networking. N.p., n.d. Web. 14 May 2010. <http://www.businessownersideacafe.com/financing/convertible_debt.php>.