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The purpose of this assignment is to explain core concepts related to the U.S. financial system.
Read the Chapter 1 Mini Case in Financial Management: Theory and Practice. Using complete sentences and academic vocabulary, please answer questions a through d.
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 Della Torre, a professional tennis player who has just come to the United States from Chile. Della Torre 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. Della Torre 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?
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.
c. How do corporations go public and continue to grow? What are agency problems? What is corporate governance?
d. What should be the primary objective of managers?
(1) Do firms have any responsibilities to society at large?
(2) Is stock price maximization good or bad for society?
(3) Should firms behave ethically?
a. Corporate finance is important to all managers because it helps them make financial decisions that ensure the long-term viability and growth of the company. These decisions include how to raise capital, how to allocate that capital, and how to manage risk.
b. As a company evolves from a start-up to a major corporation, it may take on different organizational forms. These forms include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.
-A sole proprietorship is the most basic form of organization, and it is owned and run by a single individual. The advantages of this form include ease of formation and the fact that the owner retains full control. The disadvantage is that the owner is personally liable for the company’s debts. -A partnership is similar to a sole proprietorship but is owned by two or more individuals. This form also has ease of formation and the owners share control, but each partner is personally liable for the company’s debts. -A limited liability company combines aspects of both sole proprietorships and corporations. LLCs have personal liability protection for the owners, also known as members, but members can participate in management. The formation of LLC is a bit more complex and restrictive in certain states. -A corporation is a legal entity that is separate from its owners and managers. The advantages of this form include personal liability protection for shareholders and the ability to raise large amounts of capital through the sale of stock. The disadvantages include the relative complexity of formation and the fact that shareholders may have limited control over management decisions.
c. Corporations go public through an initial public offering (IPO) of stock. This process allows them to raise capital by selling shares to the public. Companies also can continue to grow by issuing additional stock or by acquiring other companies. As companies grow and evolve, they may encounter problems stemming from agency relationships, where the interests of management may not align with those of shareholders. Corporate governance is the set of mechanisms that are in place to align these interests and hold management accountable to shareholders.
d. (1) The primary objective of managers is to maximize shareholder value, however, firms also have responsibilities to society at large. They should be environmentally and socially responsible, promoting the welfare of stakeholders such as employees, suppliers, and local communities.
(2) Stock price maximization is a commonly accepted goal of management, but some argue that it may not be good for society as it could lead to short-term decision-making that sacrifices long-term growth for the benefit of shareholders.
(3) Firms should behave ethically, considering not only the financial interests of shareholders but also the interests of other stakeholders and the impact of their decisions on society and the environment.
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