F515 Homework 1

Mini Case

a. Why is corporate finance important to all managers?

Corporate finance provides managers with the skills needed to identify, choose tactics, and projects that add value to their business.

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 proprietorship is a business formed by one person. A proprietorship has many advantages: it’s easy and inexpensive to start, no corporate taxation, and it’s subject to few government regulations. The disadvantages of a proprietorship: the owner is responsible for all legal obligations, which puts the owners personal assets are at risk, it’s hard to raise large amounts of capital, and the business dies with the owner.

A partnership is a group of two or more people that come together to form a business and share the profits. A partnership has some of the same advantages and disadvantages as a proprietorship. In a partnership, both individuals personal assets are at risk and neither partner would want to give up all rights and let the other partner have full control.

A corporation is a legal entity formed and owned by its investors. Corporations have several advantages: unlimited life after death of owners, unlimited liability, and it’s easy to transfer ownership. The biggest disadvantages are: double taxation and its time consuming to setup due to the paperwork involved. A corporation is subject to corporate income tax and the dividends paid to shareholders are also taxed.

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. An agency problem exists when the managers act in their own interests rather than the interests of the shareholders.

d. What should be the primary objective of managers?

Managers are liaisons of stockholders and owners....