Corporate Finance

Jason Alexander

Week 1 Mini case

a. Why is corporate finance important to all managers?

Corporate finance deals with the strategic financial issues associated with achieving goals such as how the corporation should raise and manage its capital, what investments the firm should make, what portion of profits should be returned to shareholders in the form of dividends, and whether it makes sense to merge with or acquire another firm.

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 organization forms include sole proprietorships, partnerships and corporations. Some advantages can include ease to start and cheap to form, fewer government regulations and its income is not subject to corporate taxation. With partnership the advantages and disadvantages are similar to sole proprietorships. Liability is more of an issue since every partner is on the hook in case of lawsuits of bankruptcy. Corporations have several major advantages: unlimited life (a corp. can continue after their original owners are deceased); easy transferability of ownership interest (stock is more easily transferred than proprietorship or partnership interests); and limited liability (losses are limited to the actual funds invested). The disadvantages are that corporate earnings are subject to double taxation.

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

Corporations go public by holding an IPO which allows them to sell stock. Agency problems occur when a manager acts on their own best interest rather than the interest of the firm. Corporate governance can solve agency problems, they create the rules that determine the company’s behavior towards all corporate officers and employees of the business.

d. What should be the primary objective of managers?

The primary objective of the manager is...