Long term securities are similar to short term securities, where a firm may invest in human resources, bonds, stocks, real estate, equipment, cash, etc… The advantage of long term investments is that they allow a firm to gain a steady income over a longer period of time than short term investments. Some people may question why a firm may invest in human resources, not realizing that having a staff of workers helps reduce cost. Although this an indirect cost to an entity, but it can be beneficial, because of the continuity of operations. An entity can save on the training of new personnel and supplies will continue to meet demand of the products or services provided by the firm. The main difference between short term securities and long term securities is that, short term securities are sold in a short period, whereas long term securities may never be sold (Schroeder et al, 2011). Firms may invest in long term securities, with the impression that the security will mature in ten to fifteen years. Some companies invest millions of dollars in long term securities risking the possibility of gaining a profit; however, over time there are so many changes in the economy, governmental regulations and policies and even the change in competition can prove challenging during a length of time. Therefore, managers should strategically make decisions on the type of long term investments that would benefit their firms and shareholders. Investors are particularly interested in forecasting a firm’s future cash flow and associated risks (Arora et al, 2014).
Schroeder et al (2011) stated that long term assets such as property, plant and equipment are assets not easily converted to cash and represents the main source of a firm’s future existence. ...
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...20 percent or more of stocks, may have an influence on the investee. However, FASB Interpretation No. 35 suggests that regardless if an investor own 20 percent of a firm, they might be refrained from using the equity method due to the following explanation from Schroder et al (2011);
• The investee opposes the investor’s rights to use the equity method, by governmental regulatory authority and challenging the investor’s ability to exercise significant influence.
• Both parties have a signed agreement that the investor relinquish their rights as shareholders.
• Ownership of the investee is controlled by a small group which operates without regard to the views of other investors.
• The investor need or want more financial information than available to the investee’s other shareholders.
• The investor tries and fails to obtain representation on the board of directors.
·The proposed band would raise $10 million through a public stock offering. The Treasury would hold one fifth of the stock and name one fifth of the directors, but four fifths of the control would fall to private hands. Private investors could purchase shares by paying for three quarters of their value in government bonds. In this way, the bank would capture a significant portion of the recently funded debt and make it available for loans; it would also receive a substantial and steady flow of interest payments for the Treasury. Anyone buying shares under these circumstances had little chance of loosing money.
The purpose of this paper is to provide a summary of the article called “Can We Keep Our Promises?” by Robert D. Arnott, and to help better understand the three key risks facing each investor.
company's equity are purchased, i.e. the buyer gains complete control over its target. Equity stakes of lesser percentages are referred to as minority holdings.
So the theory behind the whole argument is that while the shareholders are involved in the Business they simply do not own the business.
A long-term capital investment are classified as an investment that is longer than a year. Capital investments are necessary for ongoing business activities Capital budgeting is an estimate at the time, “the budgeting process is subject to purposeful manipulation, as well as judgmental errors.” “Considering the significant size and long duration of these investments, inappropriate capital investment decisions may have serious financial consequences for a business.” (Regis University, n.d. p.2 )
“…separate legal entity possessed of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group …”
...ries where minority shareholders possesses the right to participate in significant decisions (Exxon Mobil 2013 10-K, 71)”. Furthermore, the accounting policies of Exxon Mobil indicate that there may be probable factors why “majority-owned investment is not controlled and henceforth must follow the accounting method. As for the corporation’s share of the ‘cumulative foreign exchange translation adjustment for equity method investments is reported in Accumulated Other Comprehensive Income’ (67).
... the public and private sector. It uses both the weak form and semi strong from to make decisions. When an investor is given both public and private information the investor would not be able to profit about the average investor even if he was provided with new information at any given time. These investors are given name such as insiders, exchange specialist, analyst and money mangers. Insiders are senior managers that have access to inside information of that company. The security exchange commission prohibits that allow of inside information use to achieve abnormal returns on investments. An exchange specialist can achieve above average returns with specific order information on a specific equity. Analysts can analyze whether an analyst opinion can help an investor achieve above average returns. Institutional money mangers work handle mutual funds and pensions.
The first ration to consider is the Debt to Equity Ratio. The Debt to Equity ratio is DE ratio= (Total Debt)/(Shareholders^' Equity) (D’Amato, 2010). Facebook’s DE ratio is 4.4× (Bloomberg Businessweek [BB]. 2013). This shows that Facebook Inc. is heavily reliant on borrowing or debt rather than relying on shareholder capital when seeking asset and activity funds. However, Adelman and Marks (2010) argue that some industries require higher DE ration so that they can invest more heavily in fixed assets. This ratio shows that Facebook’s financial health is good when gauged against industrial average. Nevertheless, overreliance on fixed asset as the most outstanding investment portfolio for Facebook is misguided. Recent events that led to the 2007/ 2008 global financial crisis were attributed to overpriced fixed assets and unsecured subprime mort...
One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery, etc., in anticipation of being able to earn an income greater than the funds committed. In order to handle these decisions, firms have to make an assessment of the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds.
private equity firm with the company it buys and ensures that the company has a lasting success.
MYERS, S.C. and MAJLUF, N.S., 1984. Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), pp. 187-221.
Analyzing in terms of investment, if a private investor puts money into a company he has an expectation of both risk and return on the investment. Given a particular level of risk, the investment needs to be expected to have a particular level of return. For example, investment in a start-up needs to have the potential for a very high return, given the higher risk of failure, while investment in a large established business can be coupled with a lower expected return, given the lower risk of failure.
When compared to the physical capital maintenance concept, the financial capital maintenance concept is the better choice for standard setting when distinguishing between a return of capital and a return on capital. The main argument in favor of physical capital maintenance is that it provides information that has better predictive value, confirmatory value, and is more complete. However, due to agency theory, prospect theory, and positive accounting theory, neutrality and completeness under physical capital maintenance would be impaired so gravely that predictive value and confirmatory value become inefficacious. As a result, financial capital maintenance, with its use of historical cost, is able to provide information to decision makers with stronger confirmatory value and predictive value.
Using the Modern Portfolio Theory, overtime risk assets will provide a higher expected rate of return, as compensation to the investors for accepting a high risk. The high risk will eventually lower collecting asset classes to the portfolio, thus reducing the volatile risk, and increasing the expected rates of return. Furthermore the purpose of this theory is to develop the most optimal investments portfolio which would yield the highest rate of return while ascertaining the risk for the individual or corporate investor.