Corporate Finance

a. Why is corporate finance important to all managers?

It is important because it provides managers the information they need in order to make decisions. Managers can decide which strategies to employ and which projects to complete in order to add value to their companies. They also use that information to forecast how much funding would be required and how to raise that 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.

The three main forms of business organization are:

(1) Sole proprietorships: The advantages of sole proprietorships are that they are simple and can be inexpensive to form, there are few government regulations, and there are no corporate income taxes. The disadvantages of a sole proprietorship are that loans can be difficult to obtain, business debts can become personal liabilities, and the business only lasts as long as the business owner or their capabilities.

(2) Partnerships: Partnerships are usually inexpensive, can be easily formed, and has similar tax advantages to proprietorships. Also like proprietorships, there is personal liability and a limited organization lifecycle. The disadvantage is that it may be difficult to transfer ownership, and there may be disagreements amongst the partners.

(3) Corporations: The major advantages of this type of business are that it has an unlimited lifecycle and ownership can be easily transferred. Also, unlike sole proprietorships and partnerships, there is limited liability. However, there are tax implications such as double taxation, and it is more complex to set up, often needing the assistance of a lawyer.

c. How do corporations go public and continue to grow?

A company goes public when it sells stock to the public in an initial public offering (IPO). As the firm grows, it might issue additional stock or debt.

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