Domestic financial system: what is it, how does it function, what are the components, how does valuation fit in? (and more...)

Solution Preview

1. What is the financial system and how does it function.

Its a part of the economy which includes all the institutions involved in moving savings from savers (households and firms) to borrowers, and in transferring, sharing, and insuring risks. Financial system provides a framework for carrying out economic transactions and help to channel savings into investment.

2. What are the components of the financial system?

A country's financial system includes its banks, insurance markets, Bond markets, stock market/securities exchanges, pension funds, insurers, central bank and national regulators-all of the firms and institutions that provide a framework for carrying out economic transactions and help to channel savings into investment as mentioned in question 1.

3. What is valuation and how does it fit into the financial system?

Valuation is simply the determination of the value of a company's stock based on earnings and the market value of assets. It is the process of "estimating" the value of an asset or liability. The value is the price of the asset or liability times the quantity held. Valuations are required in many contexts including all industries, finance, property management and the antiques industry.

Generally speaking in advanced economies the valuation rests on some estimate of current price or estimated fair market price now rather than the book value or the book price (the latter being the acquisition cost of the asset or liability, or the depreciated book value, rather than its value now).

In the financial industry, valuations are required for financial assets or liabilities for various reasons including tax, regulatory and accounting (including reporting to owners and stakeholders). The valuations are as of a specific date e.g., the end of the accounting quarter or year. They may alternatively be mark-to-market (estimates of the current value of assets {liabilities} as of this minute or this day) for the purposes of managing portfolios and associated financial risk (e.g., within large financial firms including investment banks and stockbrokers).

4. What are the steps in valuing business opportunities?

There are 3 methods of valuation method, namely: Profit Valuation Method (Which is the commonly used and simplest one), Asset Valuation Method (also commonly used and by many accountants), also Discounted Cash Flow Analysis.

Profit Valuation Method is not based on sound financial management principles and should never be regarded as anything more than a 'ball-park' indication of the true value of a business.

Asset Valuation Method involves assessing the value of the business' assets, ...