a) Why is corporate finance important to all managers?
Corporate finance provides the skills managers need to identify and select the corporate strategies and individual projects that add value to their firm. It also helps to avoid costly mistakes. It also helps in forecasting the funding requirements of their company and to figure out how to acquire necessary funding.
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.
The 3 organizational forms are
(1) Sole Proprietorship
The advantages of a sole proprietorship are that it’s very ...view middle of the document...
d) What should be the primary objective of managers?
The primary goal of the manager should be to maximize shareholder’s wealth.
(1)Do firms have any responsibilities to society at large?
Yes firms have a responsibility to society
(2)Is stock price maximization good or bad for society?
Stock price maximization is good for society
(3)Should firms behave ethically?
Yes they should
e) What three aspects of cash flows affect the value of any investment?
• The amount of expected cash flows
• The timing of the cash flow stream
• The risk associated with cash flows
f) What are free cash flows?
Free cash flows are the cash flows that are available (free) for distribution to all investors (stockholders and creditors)
Sales revenue – operating costs – operating taxes – required investments in operating capital.
g) What is the weighted average cost of capital?
Weighted average cost of capital is the average rate of return required by all of the company investors.
h) How do free cash flows and the weighted average cost of capital interact to determine a firm’s value.
FCF and WACC interacts by determining how much free cash flows should be retained for company growth and how much should be paid to shareholders as dividends.
i) Who are the providers (savers) and users (borrowers) of capital? How is capital transferred between savers and borrowers?
The everyday consumer is the provider (saver) of capital. Non-financial corporations are the users (borrowers) of capital.
Capital is transferred between borrowers and savers by:
• Direct transfer
• Through investment banks
• Through a financial intermediary
j) What do we call the price that a borrower must pay for debt capital? What is the price of equity capital? What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy?
The interest rate is the price that a borrower must pay for capital debt. The price of equity capital is called dividends and capital gains. The four fundamental factors that affect the cost of money are:
• Production Opportunities
• Time preference for consumption
• Expected Inflation
k) What are some economic conditions (including international aspects) that affect the cost of money?
Economic conditions that affect the cost of money are: