Fin516

FIN 515_HOMEWORK1_CYNTHIALOPEZ

CHAPTER 1

MINI CASE (p. 45)

a. Why is corporate finance important to all managers?

Corporate finance explains how the company runs. Managers who understand corporate finance better understands the financial status of the company. They know if the company is at high risk for bankruptcy or for expansion. Understanding corporate finance will help managers in investing company funds more efficiently with the use of return on investment. It will also help managers on the return needed for efficient profit producing decisions. It helps managers come up with the right strategies and projects to add value. Managers can decide whether to issue debt for funding or use existing cash.

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.

There are three organizational forms for companies. The first is sole proprietorships followed by partnerships and then corporations. Although there are several other sub-organizational forms, such as s-corporations and limited liability partnerships, the first three are the main forms for a company to be organized as. Sole proprietorship can be owned by one individual. The owner is its own boss and is treated differently than other organizational forms in that it does not pay corporate income taxes. The unfortunate is that is has unlimited personal liability for the debts of the company. Partnerships do not have to pay income taxes but are required to file information returns. Unfortunately for partnerships, they tend to have a hard time increasing capital amounts. Corporations are able to transfer ownership interest quicker and easier but, unfortunately, have to report taxes and are subject to higher more complex taxes including double taxation, unlike sole proprietorships and partnerships.

c. How do corporations go public and continue to grow? What are agency problems? What is...