Mini Case Financial Ethics and Company Valuations

Topics: Finance, Stock market, Corporation Pages: 8 (2211 words) Published: August 25, 2013
Kent Spencer

Finance 550

Professor Ahn

May 12, 2013

Mini Case
Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle DellaTorre, a professional tennis player who has just come to the United States from Chile. DellaTorre is a highly ranked tennis player who would like to start a company to produce and market apparel she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. DellaTorre is very bright, and she would like to understand in general terms what will happen to her money. Your boss has developed the following set of questions you must answer to explain the U.S. financial system to DellaTorre.

a. Why is corporate finance important to all managers?
It is important to managers because it determines what limitations managers have to expand operations, make improvements to the corporation and its ability to raise capital.
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.
A company may begin as a sole proprietorship which has the ease of formation and reporting, but has the risk of unlimited liability, lack of continuity and the inability to raise capital. A partnership allows for more than a single participant, but it still has limitations on raise capital and the exposure of unlimited liability, unless a limited partnership. The hybrid Limited Liability corporation allows sole proprietors and partnership the ability to have the ease of formations of the aforementioned types of company, but offer some of the benefits of a corporation without the disclosures and filings. An LLC may usually have two of the characteristics of a corporation such as limited liability and perpetuity. The public corporation is the form of business that has the most responsibilities, as it has the greatest advantages. A corporation can raise capital, issue stock and has the protection of limited liability.

c. How do corporations go public and continue to grow? What are agency problems? What is corporate governance?
Corporation go public by making their newly issued stock available to the investing public by market makers, this is triggered through an IPO or initial public offering on the primary and secondary markets.

Agency problems can occur when corporate managers act in their own best interest, rather in the corporation and its stakeholders’ (owners and creditors) best interest.
Corporate governance is the rules and bylaws that dictate the corporate policies and ultimate behavior that is encountered by all corporate stakeholders and the community.

d. What should be the primary objective of managers?
The primary objective of managers should ensure that the financial goals of the corporation and its stakeholders are met.

(1) Do firms have any responsibilities to society at large?
No, corporations must follow the laws of the communities in which they exist. Ethically corporations should attempt to extend benefits to the society that purchases its products or its services however, it may make good business sense to consider society its decision process it is not a requirement.

(2) Is stock price maximization good or bad for society?
Stock price maximization can do great damage to financial markets if the pricing is induced by unethical, deceptive or illegal practices. On the other hand if pension funds or university endowments are invested in the stock market then of course efforts to maximize share value through normal growth and earnings.

(3) Should firms behave ethically?
If a firm does not behave ethically, it risks eroding goodwill with the community that may support it both financially via tax breaks and other incentives and further if it behaves unethically it may turn off...
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