Fin515 Week 1 Homework

a) Corporate finance is important to all managers because it plays a direct role in many of the decisions made about the business. It will also show the health and strength of the company with analyzed correctly. The most important reason for managers to understand corporate finance is to determine return of investment over time.

b) A company may start out as a Proprietorship or a Partnership and then as more growth occurs – a corporation is formed. There are several pros and cons for each type. With a proprietorship there are the liabilities and risk that the individual could be held responsible for. Unlike the proprietorship, the corporation shields the individual and there are many other benefits like taxes and raising capital with the selling of stocks.

c) Corporations “go public” by offering stock in the form of an IPO (Initial Public Offering). An agency problem is when the firm’s owners are also its managers, the question if asked, “What is to prevent managers from acting in their best interest, rather than in the interest of the stockholders/owners?” again this is an agency problem.

d) The primary objective of managers is to increase the company’s intrinsic value.

1. Firms do have a responsibility to society at large; it should be one of the core objectives.

2. Stock price maximization is a good thing; this requires efficient, low-cost businesses that produce high-quality goods and services at the lowest possible price. This is very positive for the consumer and society as a whole.

3. Firms should behave ethically and that commitment should show from the top down. In some cases there are ethical dilemmas and the company must evaluate where to side on the issues. In some instances, legal and ethical considerations make the choice obvious.

e) The following are three aspects that affect value of any investments: Sales revenue, operating costs and taxes and required new investments in operating capital....