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Financial Management Theory And Practice Essay

1450 words - 6 pages

Question a. Why is corporate finance important to all managers?

Corporate Finance is important to all managers because it gives them the skills necessary to identify and select the corporate strategies that could add value to the company.

Question 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.

|Organizational Form |Advantages |Disadvantages |
|Sole Proprietorship |It is easily and inexpensively formed. |Difficult to obtain the ...view middle of the document...

|
|Corporation |A corporation has unlimited life as it can |Corporate earnings may be subject to double |
| |continue after its original owners and managers|taxation. |
| |are deceased. |Setting up a corporation involves many complex |
| |Easy transferability of ownership interest as |and time consuming steps like preparing a |
| |these interests are divided into shares of |charter, writing a set of bylaws and filing the|
| |stock. |many required state and federal reports. |
| |Losses are limited to the actual finds | |
| |invested. | |

Question c. How do corporations go public and continue to grow?
What are agency problems?
What is corporate governance?

When a corporation is growing, it becomes successful enough to attract lending from banks and raise additional funds by selling stock to the public at large. After this initial public offering (IPO), a corporation supports their growth by borrowing from banks, issuing debt, or selling addition shares of stock.

When the managers of large corporations act in their own best interests rather than in the best interests of the stockholder/ owners, these owners are faced with a serious problem known as agency problems.

Agency problems can be addressed by a company’s corporate governance, which is a set of rules that control the company’s behavior towards its directors, managers, employees, shareholders, creditors, customers, competitors, and community.

Question d. What should be the primary objective of managers?

The primary objective of managers should be to maximize the current value of the investments for the shareholders.

1. Do firms have any responsibilities to society at large?

Like any organizations, firms have social responsibilities like providing a safe work environment for employees and maintaining a safe environment for the community by avoiding pollution and producing eco-friendly products.

2. Is stock price maximization good or bad for society?

In general, stock price maximization is good for society as it requires efficient, low-cost businesses that produce high-quality products and services at the lowest possible cost which consumers want and need.

3. Should firms behave ethically?

Firms should behave ethically because any wrong doing on their part may lead to major financial...

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