Corporate finance is important to all managers because it helps them to understand the flow of the business. It also helps the managers to understand what products and/or services drive the company. It also helps them to determine which products and/or services must be revamped, replaced or even removed from the company to avoid any undue risks.
* 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.
Easy to form The owner has total liability for all debts
Does not cost a lot to get started Insurance Premiums and Out of Pocket expense is Higher
Total Control of the company May have trouble raising startup capital or obtaining investors
Easy to close company The life of the company ends with the sole proprietor
Partnerships: (Limited, General or Joint Venture)
Easy to start-up
Able to attract employees or additional partners
Easier to raise capital or get investors
Profits are realized on personal income taxes
Each partner is liable for the company debts
No one person is in total control of the company
One partner may be unethical, so both parties may be liable for any risks taken
Can be a limited partnership
Profits and decision are divided
Corporations: (LLC or S Corporation)
The liability is limited to only the corporation’s assets
Corporations have an easier time raising capital and getting investors
There are many deductions that the corporation can take
Corporations can sell stock
They have an unlimited life span and it can change ownership very easily
Disadvantages It is very costly to establish
Higher taxes for the corporation and the corporation can be taxed twice
The corporation is monitored by state agencies and regulated by the state laws * c. How do corporations go public and continue to grow? What are agency problems? What is corporate governance?
When a corporation continues to grow and has depleted all of its funds they tend to sell stock to people who are outside of the company to continue to raise capital and expand. Some companies attract investors such as banks and large private funding companies because of the rate of their returns through initial public offering. Initial Public Offering allows the company to sell stock to the public and not just private investors. Once IPO takes place the company must hire managers to govern on behalf of the stock owners, this avoids any agency problems. These managers are then controlled by rules that dictate how the company will conduct itself with the employees, the consumers and the stakeholders. * d. What should be the primary objective of managers?
The primary objective of the managers should be to act on behalf of the shareholders and look for ways to increase the value of the shareholders vested interest. * (1) Do firms have any responsibilities to society at large?
Firms have a social responsibility to the society at large to act responsibly. Companies do not wish to deal with companies that have unethical practices * (2) Is stock price maximization good or bad for society?
Stock price maximization is good for society as long as there are no ethical issues that will make what the company is doing illegal. Stock price maximization affects all stakeholders. This includes the shareholders, the employees and the community. * (3) Should firms behave ethically?
Firms should behave ethically. Ethical behavior begins at the top and works its way down. It is called “lead by example.” Firms should act ethically in all aspects, such as hiring practices, regulations, selling of goods and services to the community and handling of information. * e. What three aspects