Week 1 Assignment:
Mini Case (p.45)
Week 1 Assignment
September 9, 2012
a) Why is corporate finance important to all managers?
Corporate finance is important because it enables managers to have an understanding of what funds would be necessary for upcoming projects and projects of their company as well as allowing them to plan ahead.
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. When a company is evolving from a start up to a major corporation, it will probably have to grow through the stages of sole proprietorship, partnership, and then a corporation. A sole proprietorship has advantages such as being easily and inexpensively formed and has to deal with less regulation by the government. Some of the disadvantages of a sole proprietorship include difficulties with obtaining capital to enable. The life of a cole proprietorship is limited to the life of the owner Some of the advantages to a partnership are similar to that of a sole proprietorship, however there is more of a liability placed on partnerships because they are responsible for the company’s debt. When it comes to a corporation, the advantages included the unlimited life of the company despite the death of the owners. Also, there is also limited liability. Unfortunately, corporations are subject to double taxation and have to follow many government regulations.
c) How do corporations go public and continue to grow? What are agency problems? What is corporate governance? Corporations sell stock to the public to help the firm grow. A corporation’s ability to grow depends on its interaction with financial markets when ti comes to borrowing capital, investing, and selling stock. An agency problem happens when the stockholders are partial owners to a company and may make decision based on their best individual interests and not the company as a whole. Corporate governance are a set of rules and policies given to the company as a whole to follow which will usually help to eliminate agency problems.
d) What should be the primary objective of managers?
The primary objective of managers is to make stockholders happy by trying to maximize their wealth.
1) Do firms have any responsibilities to society at large? Firms have responsibility to society at large to help to protect the environment by not adding harmful pollutants to their area where they many manufacture or conduct business. It is especially important for them to produce products that are indeed safe.
2) Is stock prices maximization good or bad for society?
When stock price maximization takes place, ultimately the company is trying to produce better products and use newer technology which will benefit the consumer during evolving times.
3) Should firms behave ethically?
Yes, based on regulations by the government, it is important for firms to behave ethically. Also, when they behave ethically, they develop a more loyal consumer base.
e) What three aspects of cash flows affect the value of any investment? The amount of cash flow, the timing of cash flows, and the risk involved with it affect the value of any investment.
f) What are free cash flows?
Free cash flows are the cash flows available after the firm has paid all of its expenses.
g) What is the weighted average cost of capital?
The weighted average cost of capital is average return required by all of the firm’s investors. Usually the firm’s capital structure, interest rates, the firm’s risk, and the market’s interpretation of risk also help with this decision. h) How do free cash flows and the weighted average cost of capital interact to determine a firm’s value? Free cash flows and weighted average cost are the determinants of intrinsic...