Finance homework 1
Mini Case: a) Finance is the cornerstone of the free market. Corporate financial management is important to managers because it is critical to the economic health of every business. b) Evolution of organizational forms: 1) Startup – Proprietorship: an unincorporated firm owned by 1 person. i. Advantages: cheap and easy to start, minimal government regulations, not subjected to corporate taxation ii. Disadvantages: difficult to acquire capital for growth, unlimited liability for debt on sole proprietor, life of proprietorship limited to founder’s lifespan 2) Partnership – more than one owner conduct noncorporate business together iii. Advantages: same as proprietorship iv. Disadvantages: same as proprietorship except that partners can lose all of their personal assets because each partner is responsible for business debt. 3) Corporation – many owners; a legal entity created under state laws that is separate and distinct from its owners and managers. v. Advantages: unlimited lifespan, easy to transfer ownership interest through stock shares, limited liability to invested funds vi. Disadvantages: earnings may be subject to double taxation, setup requires preparation of a charter c) Corporations may choose to go public by offering an initial public offering where they sell stock to the public. They can continue to grow after the IPO by borrowing from banks, issuing debt, or selling additional shares of stock. Agency problems can occur when managers act out of self-interest rather than the interest of the shareholders. Corporate governance is the set of rules that control the company’s behavior towards its directors, managers, employees, shareholders, creditors, customers, competitors, and community. d) Managers’ primary objective should be stockholder