Leonardo Chocho Wolfson 1-1 Thursday 1. Describe the type of people who use the financial markets.
Type 2: investors, and type 3: The idea generators, may be individuals. 2. What is the purpose of financial management? Describe the kinds of activities that financial management involves.
The purpose of financial management is to provide the firm decisions about how to organize the firm in a manner that will attract capital, How to raise capital (e.g., bonds versus stocks), which projects to fund, how much capital to retain for ongoing operations and new projects, how to minimize taxations, and how to pay back capital providers. 3. What is the difference in perspective between finance and accounting?
The accountant’s job is to keep track of what happened in the past to the firm’s money, while the finance job uses these historical figures with current information to determine what should happen now and in the future with the firm’s money. 4. What personal decisions can you think of what will benefit from your learning finance?
I think it will help me manage my future investments projections as well as to be able to keep a more accurate and realistic personal financial plan. 5. What are the three basic forms of business ownerships? What are the advantages and disadvantages to each? The three basic forms of business ownerships are: corporations, partnerships and sole proprietorships.
Corporation’s advantages: Limited Liability, more money for investment, size: corporations have the ability to raise large amounts of money, perpetual life.
Disadvantage of corporations: Extensive paperwork, Double Taxation, two tax returns.
Partnerships advantages: More financial Resources, shared managed and pooled/ complementary knowledge, longer survival, no special taxes.
Disadvantages of partnerships: Unlimited liability, division of profits, disagreements among partners.
Sole proprietorships’ advantages: No special taxes, pride of ownership, retention of company’s profits.
Sole proprietorships’ disadvantages: Unlimited liability, limited growth, limited life spam. 6. Between the three basic forms of business ownership, describe the ability of each form to access capital.
A sole Proprietor could raise capital by issuing equity to another investor.
A partnership could raise capital by often changing into a public corporation.
A corporation is able to raise incredible amounts of money by selling stock and borrowing money. 7. Explain how the founder of a business can eventually lose control of the firm. How can the founder ensure this will not happen? When the founder wants the business to grow quickly, more capital is required. In the early stages of a small fast growing company, it is equity capital that is available. In other words, the founder must give up a portion of his/her ownership to other investors. As this process continues over time, the founder may find that he/she no longer owns Homework MDC Page #2
Leonardo Chocho Wolfson 1-1 Thursday majority of the firm. There may come a time when enough of these other owners that own a combined 50+% of the firm come together and change the leadership of the firm.
8. Explain the shareholder wealth maximization goal of the firm and how it can be measured. Make an argument for why it is a better goal than maximizing profit.
The shareholder wealth maximization goal of the firm states that managers should run the company in such a way that maximizes the wealth of the stockholders. Progress for this goal can be measured using the stock price. The stock price contains what investors know about the current profitability of the firm and expectations about future profits and opportunities. Maximizing profit is a similar goal, but quite as good. A manager could maximize this year’s profit at the detriment of