Finance Essay Samples
[...] Adam Smith considered banking function to save and store precious metals. The total amount of paper money under any circumstances could not exceed the value of gold or silver coins of which they are equivalents. Otherwise the excessive amount of paper money will flow abroad or will be changed for gold at banks. This is the law of reverse flow of money. But as Smith himself has said, in practice paper money are issued in excess. According to him, this would not have happened if banks accounted for only the "real" notes. This is the start of the real notes banking concept. [...]
[...] Cost of capital, opportunity cost or interest rates as shown to be the alternative value to the given business activity. In the case of a merger activity, the money invested in the deal as well could have been invested in a bank, in stock or bonds, each providing an alternative opportunity. One needs to assess the risk free opportunities that are presented in this case. One should remember that different cash flows within each project are valued differently. For instance, the operating cash flow which is related to the WACC (weighted average cost of capital) of any given project or firm that involves capital is assessed by the cost of capital of the industry in which company operates, while the assessment by the major rating agencies like Moody's, or Standard's and Poor's is used to assess the cost of the company's or project's debt, that together with the cost of equity is the cost of capital that needs to be assessed for the DFCF method. [...]
[...] The central bank occupies a unique position in government as the monetary authority of the state. This function requires a large degree of institutional independence from the executive or legislative branches. Otherwise the central bank cannot resist political pressures by either body for faster money growth to finance expensive government programs. On the other hand, too much independence is often seen to come at the direct expense of its public accountability and democratic control (Friedman 1986). Given the immense powers of a central bank and the often enormous impact of its policies, it is not surprising that this problem has often been the subject of heated debate among politicians as well as policymakers in the United States. As the monetary authority, the central bank also has to regulate the creation of private bank money. This raises a second issue concerning its structure, and that is the relation between the central bank and the commercial banks it regulates. Conservatives tend to criticize the regulatory powers of the Federal Reserve as excessive and harmful. In contrast, their liberal opponents maintain that the central bank has been "captured" by the banks and therefore tends to protect above all their interests in its policy choices. [...]
[...] To make a choice with NPV analysis, we must take into account the ratio of the initial investments and NPV's of the both projects. The ratio of initial investment of B to A is $70,00/$100,00 = 70% while the NPV ratio is $71,680/$72,300 = 99%. Thus while project B's initial investment is smaller by almost a third, its NPV is almost the same as the NPV of project A. This fact is explained by the higher IRR rate (20% to 18%) while the cost of capital for the both projects is constant at 14%. Our analysis indicates that project B is most efficient investment project that among three other alternatives offers an optimal balance between amount of initial investment and internal rate of return. [...]