MINI CASE Assume that you recently graduated and have just reported to work as a
ID: 2740032 • Letter: M
Question
MINI CASE 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 under- stand 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? e. What three aspects of cash flows affect the value of any investment? f What are free cash flows? g. What is the weighted average cost of capital? h. How do free cash flows and the weighted average cost of capital interact to determine a firm's value?Explanation / Answer
a.)
Corporate finance provides the skills
managers need to:
b.) LLP
Advantage :
1. liabilties are limited to the extent of capital.
2. members not needed as in the case of company for taking any decision.
Disadvantages:
1. process is lengthy and hectic.
2. Trust of society is difficult to get.
Sole-proprietership
Advantages:
1. Easy to form and exit.
2. Minimum formalities are required.
Disadvantage
1. unlimited liability in case of bad debt.
2. As person is controlling by self, Expertise for the other segments very difficult such as finance, marketing and operations.
Company as Private or public
Advantages:
1. Bank loans easily available.
2. Liability is limitedto the extent of capital employed in the business.
Disadvantages
1. Lengthy formalities are there for registration and other compulsion.
2. Timely decision as formalities such as return filling, Tax return etc. need to be complied with and other legal rules also need to be followed as well.
c.) A company goes public when it sells stock to the public in an initial public as the firm grows, it might issue additional stock or debt rather than taking bank loans. This gives common public to become part of the company this might or not give them return but may be good as ROI offered may outweigh there cost for future as price may be overstated as per present. An agency problem occurs when the managers of the firm act in their own self- interests and not in the interests of the shareholders.
Corporate governance is the set of rules that control a company’s behavior towards its directors, managers, employes, shareholders, creditors, competitors, and community.
d.) yes managers seek profitability and business stgabilityinfact they also look for long term growth of the business they are involved in forecast and predict based on available data.
(1) Yes, firms have responsibility towards society as What belongs to society must be returned to back society as in india, Goverment has Asked companies operating in india to Contribute 5% of net profits in the form of corporate social responsibility.
(2) It is neither good or bad, if for maximizing profit it employs unfair practises same can be said to be bad practises, If same is Implied but it doesnot cause any bad to the society as all practises are within social obligations then it cannot be considered bad.
(3) Yes, It serves society and people at large but same company will loose respect from people and goverment if doesnot act ethically, thus detoriating its value and image in the society at large.
e.)
1. Risk
2. Timing of cash flow
3.Amount expected
f.) Free cash flow: Capital revenues - Capital expenditures defines the value of a free cash flow.
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