Discussion Question-Original Work.2 different posts and 4 replies to posts

This discussion has 2 parts:

You are working as a financial analyst at a brokerage firm and a colleague says to you “the Potts Corporation had a return on equity (ROE) of 20% last year. We should recommend the stock to our clients.” How would you respond to your colleague? (Note: Your response for this question should be no more than 100 words)

A corporation’s earnings and associated ratios, such as earnings per share, are metrics that investors and other stakeholders use when making decisions. The SEC recently began investigating corporations for manipulating earnings via rounding errors. In the early 2000s, it became clear that corporation’s rarely missed earnings estimates provided by financial analysts. Offer your opinion on the ethics underlying these practices, any possible broader implications of such behavior, and any real-life experiences you may have come across that are similar.
See Assigned Readings “Related to agency theory and the goal of financial management”

Submission Instructions:

Your initial post for each question should be approximately 100 to 200 words (unless the discussion question specifically provides a different guideline), formatted and cited in current APA style with at least one source other than the required textbook. Your initial posts are worth 8 points each.
You should respond to two of your peers by extending, refuting/correcting, or adding additional nuance to their posts. Your reply posts are worth 2 points (1 point per response.)

4 Posts by classmates are:

1.

Note1: Response to Colleague

As one of the brokerage firm’s financial analysts, I would respond to my colleagues by pointing out that higher ROE is considered positive for a firm, but there should be a close Examination when it increases. For instance, if the value of an item decreases more than the net income, the ROE will increase though this is not positive for a firm. The firm can respond by issuing a debt to repurchase equity, which reduces the item value of equity and increases the ROE ( Steger, 2017). However, it also increases the risk of the firms’ shares because of financial leverage.

Note 2: Opinion on Corporation’s practices

According to SEC, companies are allowed to round up the earnings of the estimates to the next whole numbers if the digit following the decimal is five and above. The figures less than four have to be reported in the lowest integers. The regulators, therefore, probed whether companies have been unlawfully rounding up the earnings. The agency theory is concerned with different stakeholders that have different ideas which do not match the company’s growth. The managers of various companies are trying to gain personal wealth by projecting the companies in a better way to increase market values.

The investment managers are also continually looking for institutional investors to increase their bonuses at the end of each year. A higher dividend per share translates to a confident forecast in a company’s future cash flow. Unfortunately, this idea will not last, and the investors will be forced to offload shares first which will lead to an intense reaction because of unrealistic expectations. All the works against financial management goals, which is to increase a company’s profit and market share, make the practices unethical (Tae-Il Yoon & Hae-Young Byun, 2015). In case the investors are unable to trust the financial reports of various companies, there is a high probability that they will move money to safer instruments. This, in turn, affects the company when it tries to raise revenues for expansion and therefore affects the economy as a whole.

References

Steger, D. (2017). The Returns of Private Equity Funds: A Swiss Perspective. The Journal Of Private Equity. https://doi.org/10.3905/jpe.2017.2017.1.059

Tae-Il Yoon, & Hae-Young Byun. (2015). Investor Relations, Corporate Governance Practices and Firm Value. The Journal Of International Trade & Commerce, 11(3), 107-127. https://doi.org/10.16980/jitc.11.3.201506.107

 

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Discussion Question-Original Work.2 different posts and 4 replies to posts was first posted on March 16, 2020 at 4:49 pm.
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