Fi515 Chapter 1 Mini Case

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MINI CASE

a.Why is corporate finance important to all managers?

Corporate finance is important to all managers because it provides managers the skills needed to identify and select the corporate strategies and individual projects that add value to their firm and forecast the funding requirements of their company and devise strategies for acquiring those funds.

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 a company might have as it evolves from a start-up to a major corporation are proprietorship, partnership, or corporation.

The advantages of a proprietorship are:
Easy and inexpensive to form,
Subject to few government regulations, and
Income not subject to corporate taxation.

The disadvantages of a proprietorship are:
May be difficult to obtain the capital needed for growth, •Unlimited personal liability for the businesses’ debts, and •Limited to the life of its founder.

The advantages of a partnership are:
Relatively easy to establish,
Increased ability to raise funds,
Prospective employees become attracted to the business if given the incentive to become a partner, •May benefit from the combination of complementary skills of two or more people, •Can be cost effective, and

Provide moral support and will allow for more creative brainstorming.

The disadvantages of a partnership are:
Partners are jointly and individually liable for the actions of the other partners, •Profits must be shared,
Disagreements can occur,
May have limited life,
Has limitations that keeps it from becoming a large business, •Partners have to consult with each other before making decisions, and •Unlimited liability.

The advantages of a corporation are:
Unlimited life,
Easy transferability of ownership interest, and
Limited liability.

The disadvantages of a corporation are:
Earnings may be subject to double taxation, and
Complex and time-consuming set up.

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 selling stock to outsiders or venture capitalists, attracting lending from banks or raising additional funds through an initial public offering (IPO) by selling stock to the public at large. Agency problems are conflicts of interest arising between creditors, shareholders and managers because of differing goals. Corporate governance is the relationship between all the stakeholders in the company.

d.What should be the primary objective of managers?

The primary objective of managers is stockholder wealth maximization, which means to maximize the fundamental price of the firm’s common stock and not just the current market price.

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

Yes, firms have responsibilities to society at large. Corporate social responsibility is operating a business in a manner that accounts for the social and environmental impact created by the business. This means a commitment to developing policies that integrate responsible practices into daily business operations and to reporting on progress made toward implementing these practices.

2)Is stock price maximization good or bad for society?

Stock price maximization is good for society. Shareholders are members of society. Consumers benefit when companies develop products and services that consumers want and need, which leads to new technology and new products. Employees benefit generally when companies successfully increase stock prices, it opens up growth and addition for more employees.

3)Should firms behave ethically?

Yes, firms should behave ethically. There is no room for unethical behavior in the business world. Most executives believe that there is a positive correlation between ethics...
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