Fi 515 Week 1

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Mini case p.45
a.Why is corporate finance important to all managers?

Corporate finance is important because of the skills that mangers can obtain from it. Some of these skills are selecting the best corporate strategies and projects that add value to business.

b.Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form.

The organizational forms are proprietorships, partnerships, and corporations.

Advantages of proprietorships are that they in cheaper to start up, they have few government regulations, and no corporate income tax. Some disadvantages are they often acquire a lot of debt and are limited to last only as long as the person who created it.

Advantages of a partnership are they are cheap and easy to start. Some disadvantages are they are have a short life span, and they can be difficult to transfer ownership.

Advantages of corporations are that they have unlimited life span, ownership interest is easily transferred, and they have a limited amount of liability. Some disadvantages are earnings can be double taxed and setting up a corporation requires completing diffucult state and federal reports.

c.How do corporations go public and continue to grow? What are agency problems? What is corporate governance?

A company goes public when it sells stock to the public. One problem that may happened is the corporation will begin to do business that helps itself better that the shareholders.

d.What should be the primary objective of managers?

The corporation’s primary goal is stockholder wealth maximization, which translates to maximizing the price of the firm’s common stock.

1.Do firms have any responsibilities to society at large?

Yes, firms should provide a safe working environment for employees, strive to be green, and to produce safe products.

2.Is stock private maximization good or bad for society?

Stock price maximization requires efficient, low-cost businesses that produce high-quality goods and services at the lowest possible cost. This means that companies must develop products and services that consumers want and need, which leads to new technology and new products. Also, companies that maximize their stock price must generate growth in sales by creating value for customers in the form of efficient and courteous service, adequate stocks of merchandise, and well-located business establishments.

3.Should firms behave ethically?

Yes, companies should always behave ethically.

e.What three aspects of cash flows affect the value of any investment?

Amount of expected cash flows, timing of the cash flow stream, and riskiness of the cash flows.

f.What are free cash flows?
Free cash flows are the cash flow actually available for distribution to all investors after the company has made all investments in fixed assets and working capital necessary to sustain ongoing operations

g.What is the weighted average cost of capital?
The weighted average of the after-tax component costs of capital—debt, preferred stock, and common equity. Each weighting factor is the proportion of that type of capital in the optimal, or target, capital structure.

h.How do free cash flows and the weighted average cost of capital interact to determine a firm’s value?

A firm’s value is the sum of all future expected free cash flows, converted into today’s dollars.

i.Who are the providers (savers) and users (borrowers) of capital? How is capital transferred between savers and borrowers?

Savers are households and the U.S. government when it runs a surplus. Borrowers are non-financial corporations, governments, and non-financial corporations. Capital can be transferred through a direct transfer, an investment banking house, or a financial intermediary.

j.What do we call the price that a borrower must pay for debt capital? What is the price of equity capital? What...
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