Samuel Osei. FI515
Week 1 Assignment MINI CASE
a. Corporate finance provides the skills managers need to Identify and select the corporate strategies and individual projects that add value to their firm. Forecast the funding requirements of their company, and devise strategies for acquiring those funds.
b. Organizational forms assumed by companies as they evolve include Sole proprietorship, Partnership and Corporation. Each form has its advantages and disadvantages. Sole proprietorship has the following advantages and disadvantages
Advantages: Ease of formation, Subject to few regulations, No corporate income taxes
Disadvantages: Limited life, unlimited liability and difficulty ...view middle of the document...
Yes. Firms have responsibilities to society at large. This is because shareholders constitutes or are part of the society.
Stock price maximization is good for society. Consumer welfare is higher in capitalist free market economies than in communist or socialist economies. Increased stock price creates jobs and attract quality employees that helps create organizational value. Thereby creating wealth.
Yes firms should behave ethically.
e. The three aspects of cash flow that affects the value of money are; Amount of expected cash flows (bigger is better). Timing of the cash flow stream (sooner is better). Risk of the cash flows (less risk is better)
f. Free cash flows are the cash flows that are available for distribution to all stockholders and creditors. It is represented by the following equation: FCF = sales revenues - operating costs - operating taxes - required investments in operating capital.
g. The Weighted Average Cost of Capital WACC is the average rate of return required by all of the company’s investors. WACC is affected by: Capital structure (the firm’s relative use of debt and equity as sources of financing, Interest rates, Risk of the firm, Investors’ overall attitude toward risk.
h. FCF and WACC interact to determine the intrinsic value of a firm by summing up all expected future cash flows and converting them into today’s dollars.
i. Borrowers and savers of capital includes: Households: Net savers. Non-financial corporations: Net users (borrowers) Governments: U.S. governments are net borrowers; some foreign governments are net savers. Financial corporations: Slightly net borrowers, but almost breakeven. Capital is transferred from savers to lenders through; Direct transfer: This is when a corporation issues commercial paper to an insurance company. Through an investment banking house. Example: In an IPO, seasoned equity offering, or debt placement, company sells security to investment banking house, which then sells security to investor. Through a financial intermediary where an individual deposits money in bank and gets certificate of deposit, bank makes commercial loan to a company (bank gets note from company
j. The price a borrower must pay for debt capital is Interest rate. The price of equity capital is the required return or dividend plus capital gain
The four fundamental factors that affect the cost of money are in an economy are: Production opportunities; Time preferences for consumption; Risk; Expected inflation.
k. International Conditions that affect the cost of money centers on...