Homework 1

Mini Case

1. Why is corporate finance important to all managers?

Corporate finance is the basic component on how a business is run. Corporate finance allows managers to understand where money needs to be invested in order to optimize the investment in the business. It also allows the managers to understand how the company is financed.

2. Corporate Forms:

a. Sole Propriortership

i. Advantages

1. Ease of formation

2. Low cost

3. No corporate income tax

ii. Disadvantages

4. Difficult to obtain loans or large sums of cash

5. Limited organizational life

6. Personally liable for debt

b. Partnerships

iii. Advantages

7. Ease of formation

8. Low cost

iv. Disadvantages

9. Difficult to obtain loans or large sums of cash

10. Limited organizational life

11. Personally liable for debt

c. Corporations

v. Advantages

12. Unlimited life

13. Easy transfer of ownership interests

14. Limited liability

vi. Disadvantages

15. Difficult to form

16. Earnings could be subject to double taxation.

3. A company goes public when it begins to sell stock to the public. Agency problems arise when managers of the firm act in their own self-interests and not the interest of the shareholders. Corporate governance is are rules and regulations that govern how a company is run.

4. The primary objective of managers are to maximize the stock price for the shareholders.

d. While corporations do have an ethical responsibility to protect the environment and its workers.

e. The maximization of the stock price is good for society. To grow the stock price items that the consumer wants or needs are created and sold on the market. It can become bad when you have management that tries...