FIN515 Managerial Finance
Dr. Wayne Morgan
Week 1 Homework Assignment
15 of May 2013
Mini Case (page 45)
Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle DellaTorre, a professional tennis player who has just come to the United States from Chile. DellaTorre is a highly ranked tennis player who would like to start a company to produce and market apparel she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. DellaTorre is very bright, and she would like to understand in general terms what will happen to her money. Your boss has developed the following set of questions you must answer to explain the U.S. financial system to DellaTorre.
a. Why is corporate finance important to all managers? * To Get Sufficient fund for running the company, * To make use of the obtained finance in a efficient manner, * To maximize the profit by minimizing the cost, * To provide proper information for decision making, * To enable sufficient fund flow!
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.
1. Sole Proprietorship
* Owners can establish a sole proprietorship instantly, easily and inexpensively. * They carry little, if any, ongoing formalities as a company. * A sole proprietor need not pay unemployment tax on himself or herself (although he or she must pay unemployment tax on employees). * Owners may freely mix business or personal assets.
* Owners are subject to unlimited personal liability for the debts, losses and liabilities of the business. Very risky in my opinion. * Owners cannot raise capital by selling an interest in the business. * Sole proprietorships rarely survive the death or incapacity of their owners and so do not retain value. * It may be difficult for a proprietorship to obtain the capital needed for growth.
* They are easily and inexpensively created. * They are subject to few government regulations, and * Their income is not subject to corporate taxation but is taxed as part of the proprietor’s personal income.
* The proprietors of the partnership have unlimited personal liability for the business’s debts, which can result in losses that exceed the money invested in the company (creditors may even be able to seize the proprietor’s house or other personal property!). * The partners can potentially lose all of their personal assets, even assets not invested in the business
* Unlimited life — a corporation can continue after its original owners and managers are deceased. * Easy transferability of ownership interest—ownership interests are divided into shares of stock, which can be transferred far more easily than can proprietorship or partnership interests. * Limited liability—losses are limited to the actual funds invested.
* Corporate earnings may be subject to double taxation — the earnings of the corporation are taxed at the corporate level, and then earnings paid out as dividends are taxed again as income to the stockholders. * Setting up a corporation involves preparing a charter, writing a set of bylaws, and filing the many required state and federal reports, which is more complex and time-consuming than creating a proprietorship or a partnership.
c. How do corporations go public and continue to grow? What are agency problems? What is corporate governance?
Companies go public when they decide to open up or sell stock or shares to the public. Most of the time, when a Company does this is because it helps them generate capital needed for current or future investments on the growth of the company. An