a. Why is corporate finance important to all managers? Corporate finance is important to all managers because you need to be aware of the tools needed to evaluate the firm’s value and be able to accurately make decisions to maximize wealth.
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 business may start as a sole proprietorship, or a partnership. These are where the business is owned by one person, or partners. The advantages that lie with these types are that they are easily formed, they are subject to few government regulations, and its income is not subject to corporate taxation (Ehrhardt,7). The disadvantages to these are that it may be difficult to raise capital to grow, the proprietor or the partners have personal liabilities for the business’ debt and the business is limited to the life of the proprietors (Ehrhardt, 7)). As the need for more capital rises business may decide to incorporate. The advantages to this are unlimited life, easy transferability of ownership interest and limited liability. The disadvantages to having a corporation is that corporate earnings may be taxed at double the rate, the process to set up a corporation is more complex and time-consuming than other types (Erhardt, 8).
c. How do corporations go public and continue to grow? What are agency problems? What is corporate governance? Corporations go public and raise more capital through an initial public offering or IPO, which is where corporations start to sell their stock to the public. They can then borrow funds from banks or selling more stock. Agency problems are what the corporation can run into by hiring managers. You want to make sure that the managers are acting in the best interest of the corporation. A corporation can solve these problems by having a corporate governance which is a set of which is