A. Why is corporate finance important to all managers? Corporate finance is important to all mangers because it lets them know the company’s financial situation before any decisions can be made within the organization. It helps managers develop strategic financial issues associated with achieving goals. Having a solid understanding of corporate finance helps mangers find ways to raise and manage its capital, which type of investments the firm should make, if profits are earned, how these profits should be allocated to shareholders in the form of dividends and lastly if any other type of firms should be acquired or urged with.
Knowing these key points about corporate finance will help the overall organization. B. Describe the organizational forms a company might have as it evolves from a start-up too major corporation. List the advantages and disadvantages of each form. The organization forms a company as it evolves from a start-up to a major corporation are a sole proprietorship, partnership and a corporation. A sole proprietorship is a business owned by one individual. A partnership exists when two or more individuals form a business together. It’s common for each partner to have the same amount of responsibility.
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A corporation is a legal entity that has been incorporated through a legislative or registration process through the state it resides in. Each type of business has its advantages and disadvantages. The advantages oaf proprietorship are: * They are easy and inexpensive to form * They are subject to some government regulations * There is no corporate taxation The disadvantages of a proprietorship are: * It can be very difficult to obtain the needed capital to start-up & to grow the business * Life of the business is based on the founder. If the founders were to die or get sick, chances are the business would suffer or not exist.
There is unlimited personal liability for the proprietorship businesses’ debts The advantages of a partnership are: * Very easy to establish * There more chances of gaining more funds to start the business * Able to attract employees easier if they are given the incentive to become a partner * Gained knowledge and skills with having two or more people, in addition the added support will help the business * Can be cost effective The disadvantages of a partnership are: * Profits must be shared amongst partners * Disagreements could occur amongst the partners * Limited life Partners are Jointly and individually liable for the actions of the other partners * In order to make decisions, it requires all partners to be in agreement * Unlimited liability I nee advantages AT a corporation are: * Unlimited life * Ownership interest is easily transferable * Limited Liability The disadvantages of a corporation are: * Double Taxation * Expensive to form * They are very complex to form * There is no one owner c. How do corporations go public and continue to grow? What are agency problems? What is corporate governance? Corporations go public and continue to grow by setting up an PIP (Initial Public Offering); this involves registering the company’s stock with the Securities and Exchange Commission to sell shares to the public.
Companies can also offer a small corporate offering registration, this is considered to be less costly and an easier approach to filing a traditional PIP. This is often done for small businesses. These two ways allow the company to grow by receiving funds for the shares purchased. Companies use these funds to invest in their company. Companies are able to raise significant amounts of capital, giving them the ability to expand their current operation. Agency problems occur within the company when mangers that are working for the company find ways in the process that will benefit themselves that are not in the best interest of the stockholders or the owners of the company.
They find loop holes within the system to benefit themselves; often what they are doing is illegal. Corporate governance are the rules and practices by which the company’s ensures accountability, fairness in a company’s relationship with all stockholders. This includes financiers, customers, management, employees, government and the community. D. What should be the primary objective of managers? The primary objective of mangers is to focus on maximizing the shareholder return, which meaner to maximize the profitability of the company’s stock price. (1) Do firms have any responsibilities to society at large? Yes, companies have the responsibility to be ethical and act in a way that will help society.
Companies cannot produce items that would do harm to the environment, to its customers or to society as a whole. If they did not have any responsibilities, then companies could do what they want without any repercussion. (2) Is stock price minimization good or bad for society? As you look at trying to maximize a company’s stock price there are both good and bad reasons for both. In general, maximizing the stock price can be good for the economy. It can help companies hire more individuals because their product or service is in demand and it meaner that the company is doing well and is growing. However, for every good there is a bad, maximizing the stock price can lead to greed.
Company’s goals are to Increase ten stock price out some ml NT nave ten mental which can be bad for society. (3) Should firms behave ethically? TTY Dye any meaner necessary, Yes, firms should behave ethically. As a business, they have great potential to help transform people’s lives. By doing so, firms help alleviate poverty in the economy by generating economic growth. Firms produce goods and services that customers want and in order to do that, they need people by creating Jobs. With paying taxes, firms contribute to the government revenues that help finance schools, hospitals and other public services. E. What three aspects of cash flows affect the value of any investment?
The three aspects of cash flows that affect the value of any investment are the amount of the expected cash flows, when the company expects to receive the cash and the risk that’s involved with the cash flow. F. What are free cash flows? Fee cash flows is the cash that a company is able to generate after using money to maintain or expand its asset base. G. What is the weighted average cost of capital? “The weighted average cost of capital is the rate that a company is expected to pay on average to all its security holders to finance its assets. ” The WAC is affected by the firm’s capital structure, interest rates, the firm’s risk and the market’s overall value of risk. Wisped. Http://en. Wisped. G/wick/weighted_average_cost_of_capital h. How do free cash flows and the weighted average cost of capital interact to determine a firm’s value? Free cash flows and the weighted average cost of capital interact to determine a firm’s value by changing all of their free cash flow to the dollar today. I. Who are the providers (savers) and users (borrowers) of capital? How is capital transferred between savers and borrowers? The providers (savers) are households. Non-financial corporations are the users (borrowers). In addition, Governments are net borrowers; the government is considered a saver when the economy is at a earplugs. Capital is transferred in 3 ways. Through direct transfer * Through an investment banking house * Through a financial intermediary such as individual deposits, and when a bank makes commercial loan to a company. J. What do we call the price that a borrower must pay for debt capital? What is the price of equity capital? What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy? The interest rate is the price paid for borrowed capital. The return on equity capital comes in the form of dividends plus capital gains. The four most fundamental factors that affect the cost of money or the general level of interest rates in the economy are: * Production opportunities Lime preferences Tort consumption * Risk * inflation k.