Mini Case (p. 45)
A. Why is corporate finance important to all managers?
Managers of a company must know the finance of a company as these help managers to know the health of the company and can act accordingly with a common guideline.
B. Describe the organizational forms a company might have as it evolves from a start-up to a major corporations. List the advantages and disadvantages of each form.
SOLE PROPRIETORSHIPS: A sole proprietorship is a business owned and managed by one individual. A sole proprietorship is not a legal entity. It refers to an individual who owns the business and is personally responsible for its debts. Owners may freely commingle business and ...view middle of the document...
e. partners are not liable for business debts. Each partner reports business income on his or her individual tax return. LLCs may dissolve on the death or withdrawal of an owner depending on state law. An LLC is not appropriate for businesses seeking to become public or raise capital. LLCs require few ongoing formalities but usually require periodic filings with the state and also require annual fees. LLCs are more expensive to form than partnerships.
CORPORATIONS: A Corporation is a legal entity that has most of the rights and duties of a natural person but with perpetual life and limited liability. Shareholders of a corporation appoint a board of directors and the board of directors appoints the officers for the corporation, who have the authority to manage the day-to-day operations of the corporation. Shareholders are generally liable for the amount of their investment in corporate stock. A corporation pays its own taxes and shareholders pay tax on their dividends. However, in a subchapter S corporation, shareholders report their share of corporate profit or loss in their individual tax return. The corporation is its own legal entity and can survive the death of owners, partners and shareholders. A corporation is the best entity for eventual public companies. Corporations can raise capital through the sale of securities and can transfer ownership through the transfer of securities. Corporations require annual meetings and require owners and directors to observe certain formalities. Corporations are more expensive to form than partnerships and sole proprietorships.
C. How do corporations go public and continue to grow? What are agency problems? What is corporate governance?
A company goes public when it sells stock to the public in an initial public offering (IPO) as the firm grows, it might issue additional stock or debt. This of course gives the corporation capital, which allows it to expand and grow. Agency problem occurs when the managers act in their own best interests, instead of the best interests of the stockholder/owner. While corporate governance is established to address agency problem, which is the set of rules that control the company’s behavior towards its directors, managers, employees, shareholders, creditors, customers, competitors, and community.
D. What should be the primary objective of managers?
The corporation’s primary goal is stockholder wealth maximization, which translates to maximizing the price of the firm’s common stock.
1. Do firms have any responsibilities to society at large?
Firms do have a responsibility to society because the majority of society own stocks either directly or indirectly. Decisions made by corporations directly affect the wealth/livelihood of society.
2. Is stock price maximization good or bad for society?
The same actions that maximize stock prices can also benefit society. Stock price maximization requires efficient, low-cost...