Fin 515 Homework 1

Mini case

A: Why is corporate finance important to all managers?

Corporate finance is important to all managers because they need to know what financial state the company is in before making decisions. The ultimate goal for managers is a positive financial outcome so they need to understand financial statements and how their decision will affect the company.

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.

Proprietorship

Advantages:

1. It is easily and inexpensively formed

2. It is subject to few government regulations

3. Its income is not subject to corporate taxation but is taxed as part of the proprietor’s personal income.

Disadvantages:

1. It may be difficult for a proprietorship to obtain the capital needed for growth

2. The proprietor has unlimited personal liability for the business’s debts, which can result in losses that exceed the money invested in the company.

3. The life of the proprietorship is limited to the life of its founder.

Partnership

Advantages:

1. Simple to establish

2. Shared control

3. Broader skills and resources

4. Tax advantages

Disadvantages:

1. Business Partners are jointly and individually liable for the actions of the other partners.

2. Profits must be shared with others.

3. Management conflicts and disputes.

Corporation

Advantages:

1. Unlimited life

2. Easily transfer ownership interest

3. Limited liability

Disadvantages:

1. Corporate earnings may be subject to double taxation

2. Setting up a corporation involves preparing a charter, writing a set of bylaws and filing the many required state and federal reports.

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

A company goes public when it sells stock to the public for the first time in an initial public offering; the company continues to grow by issuing additional...