Financial Decision-Making: How to Make Smart Money Moves

Part 1 

Question A 

The computation of the returns derived from selling the shares is shown below. 

Number of shares	500
Current share price as of 09/12/2020	$124.80
Total returns	500*124.80=$62,400

The calculation of the returns obtained from selling bonds is shown below. 

Coupon payments	100*1000*0.0325=$3,250
Year 1 to year 4 returns	$3250*4=$13,000
Year 5 returns	100*$1000+$3250=$103,250
Total returns	$13000+$103250=$116,250

The returns derived from selling the bonds will cater for entire tuition costs. In this case, I can sell the bonds and keep Apple shares. 

Question B 

The sale of a combination of bonds and shares is beneficial since the individual will have a diversified portfolio. Stocks typically provide greater earnings than bonds. However, they are riskier than the latter. Stocks can reduce in value quickly and may even drop to zero. In this case, when the individual sells the shares, they may not receive any earnings. On the contrary, the payouts of bonds are typically guaranteed by the borrowers (Noddings et al., 2013). In this case, selling a combination of bonds and stocks allows the investor to reduce the risk of complete loss in case one type of investment does not measure up. Resultantly, the risk to the investor is hedged. However, the sale of both bonds and shares denies the investor an opportunity to earn significantly high returns since they forego the high earnings they could have received from selling shares only. Selling a combination of bonds and shares can lead to a low return on investment on investment, given the significant cash investment required for both investments. 

Question C 

Selling both the shares and bonds would provide me with return totaling to $178,650. This amount would be more than sufficient to cater for my school expenses. The sale of both types of investments would allow me to recoup the costs of my investments. 

Question D 

If I accept the job, I may fail to attend school, and, in this case, I will save $100,000. If I choose to attend school while working, I may use my salary to pay for the school expenses. 

Part 2 

Question A 

From a mathematical perspective, the cash bonus is better than the stock allocation. The cash bonus is likely to be paid immediately, with the company paying me cash. On the other hand, if I choose to sell the share worth $5,000, I will incur commission fees, and this fee will reduce my total earnings. In addition, liquidating the stock can take time, and, in this case, there is a chance of receiving an amount lower than $5,000. The time value of cash concept indicates that cash that is received now is worth more than a similar amount later as a result of its potential return capacity (Drake & Fabozzi, 2009) . In this sense, the amount received in the future from the sale of the shares is less valuable than the cash sum received now. 

Question B 

The cash payout is beneficial since it is a surety, and it incurs no potential transaction cost. However, it is disadvantageous since it does not offer upside potential. Stock compensation is beneficial since it provides an upside potential due to price appreciation (Flood, 2015). The drawbacks of stock compensation incorporate transaction costs and low returns. 

Question C 

I would accept the cash bonus of $5,000 since I could receive it immediately at no transaction cost. In this sense, I would avoid receiving an amount lower than $5,000. 

Part 3 

Question A 

As an employee of the entity, my job security would be under threat if legal action is brought up against the company. If the entity has been selling unregistered shares, it can be taken to court, and, as a result, it can have financial problems after meeting the legal costs and penalties. Moreover, I cannot sell the shares offered by the firm. The Securities Act enacted in 1933 prohibits fraud in the sale of stocks. Securities being sold by companies need to be registered with the SEC (Graham & Carmichael, 2012) . If I sell my shares to other individuals, I will face legal action due to my acts' criminal nature. In addition, as a potential shareholder, I cannot sell the shares due to similar reasons. In this case, I cannot earn capital gains. 

Question B 

As a financial manager, I would need to observe the federal and shareholder requirements related to the disclosure of financial information and registration of shares as per the Securities Act to ensure that the entity is compliant. The SEC guidelines outline that public entities need to reveal information pertaining to the entity's financial position and performance (Mulford & Comiskey, 2011) . The entity is required to create two yearly financial reports, with one being given to the SEC and the other one being distributed to the firm's shareholders. The financial reports to be disclosed need to be fair and truthful to ensure shareholders make correct decisions when they react to the financial information. As the financial manager, I would also ensure that the entity is registered under the Securities Act to ensure the shareholders are protected from legal ramifications. Registration could also protect the employees who have been rewarded with stock compensation. 

References 

Drake, P. P., & Fabozzi, F. J. (2009). Foundations and applications of the time value of money . John Wiley & Sons. 

Flood, J. M. (2015). Wiley GAAP 2015: Interpretation and application of generally accepted accounting principles 2015 . Hoboken: John Wiley & Sons. 

Graham, L., & Carmichael, D. R. (2012). Accountants' handbook: Volume one . Hoboken, N.J: Wiley. 

Mulford, C. W., & Comiskey, E. E. (2011). The financial numbers game: Detecting creative accounting practices . Hoboken: John Wiley & Sons. 

Noddings, T., Christoph, S. C., & Noddings, J. G. (2013). International handbook of convertible securities . Routledge.