Finance Concepts as Applied to Guillermo's Furniture

Finance Concepts as Applied to Guillermo’s Furniture’s

Our financial systems are based on principles according to Emery, Finnerty & Stowe, 2007. They serve as the foundation for the day to day financial decisions managers need to make. This paper describes the main principles of the financial system and discusses their applicability to Guillermo’s Furniture’s business case.

Financial Principles

The first principle talks about how people act in their own financial self-interest (Emery, Finnerty & Stowe, 2007). When decisions or actions we take have a value associated with it, there are opportunity costs involved. Making the wrong decision when the opportunity cost is high could be very significant for a business. According to Preuss (2009), conducting a cost benefit analysis helps find an economically rational decision that considers the opportunity cost. For Guillermo’s Furniture’s deciding to merge with a larger organization or staying independent involves an opportunity cost. Deciding to keep independent could represent running out of business, as cost continue to rise, while merging and having increasing responsibility could affect family time.

The principle of two sided transactions indicates that every financial transaction has at least two sides. An example of this is stock trading, where there is a buyer and a seller for each share that changes hands (Emery, Finnerty & Stowe, 2007). Mergers and acquisitions can benefit firms, depending on market reaction and the firms involved in the transaction. The decision for Guillermo’s Furniture’s to merge or being acquired might have the effect of increasing or diminishing the value of their firm, depending on market reaction and customers’ impact.

When business decisions reveal something about the firm’s position, the signaling principle is acknowledged. A decision for Guillermo’s Furniture’s of being acquired by a larger company could be signaled as an action based on a deteriorated financial condition for...