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a. Why is corporate finance important to all managers?

1. Corporate finance is important for managers, because it can make or break a
company if they do not focus on their investments and finances. Budgeting is a
critical component for any business, and understanding how to divide focus up for
different initiatives helps to drive companies to success. The ability to select
profitable initiatives and determine the correct strategies to pursue helps build
revenue and grow a company.

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.
1. Generally a company would start as an idea, which would be formed as a sole
proprietor or partnership. In this stage, the advantage is the company is small, less
complex, and more free-forming as rules don’t need to be approved by others.
The disadvantages would include difficulties in fundraising, less likely to be able
to hire fulltime employees and rely on freelancers to help, and not able to take
valuable tax deductions.

Once past the sole proprietor stage or partnership phase, a corporation is born.
Corporations are easier to sell and transfer ownership (equity) and raise capital.
Corporations also are easier to get loans and rely less on the owner’s personal
credit. The disadvantage of a corporation would be in taxes. Most corporations
(C-Corps) experience double taxation. The company pays tax on revenue and
passes the money to the investor which is taxed again. In a sole proprietor
formation, taxes are only applied once, on the individual.

c. How do corporations go public and continue to grow? What are agency problems?
What is corporate governance?
1. Most companies that go public do so through an Initial Public Offering (IPO). At
this point, the company sells out shares, or a portion of the company’s equity, to
investors, raising capital for the company to continue to execute their business
plan. Going public is extremely costly. Companies who venture down this road
can experience a year of costly attorney bills, so they need to ensure that the
capital raised is enough to cover expenses of going public. Companies can also
petition to be listed on the Over The Counter (OTC) marketplace, which is a
subset of NASDAQ. Here the company contacts a market maker to request them
to list them on the OTC.

Companies can experience agency issues if they continue to sell stock to investors
and weigh down current investors stake, or act against how investors want the
company to act. Corporate governance helps to ensure that the company continues
to follow the rules in place by the Security and Exchange Commission (SEC), as
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well as federal law.

d. What should be the primary objective of managers?

The primary objective of a manager is to ensure the company is providing returns to the
company’s investors, and the company is acting on behalf of the company’s mission, the
stakeholders vision, and the best interest of the success of the business.

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

a. Corporate responsibility an asset to any company who is looking to create
a positive image of themselves within their community, region, state,
nation, etc. Ensuring the company is acting on the best interest of its
community, promoting volunteering within the organization, or donating
to local charities helps build a positive image.

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

a. Stock price maximization is good for a society, as it help create a low-cost
operating model that yields a high quality product or service. This helps to
build new production that are needed within society.

3. Should firms behave ethically?

a. Not only should firms behave ethically, they should be required to.
Companies who are willing to harm communities, break the law, or idolize
revenue over ethics, should not be allowed to do business anywhere.
Company CEOs should he held more responsible of what their company is
doing, so they can ensure that proper controls are in place to prevent
instances where the company harms an individual.

An example of this is Wells Fargo’s 2016 case of opening millions of

accounts in customer’s names to ensure sales figures continued to grow in
investors perspective. This helped boost the value of Wells Fargo stock,
and allowed a lot of company insiders to take massive profits. Wells Fargo
CEO should have been put in jail for the misconduct that took place under
his watch. Another perspective to this is understanding the sheer size of
companies. Wells Fargo employs over 300,000 individuals all over the
globe, making it more difficult for it to actively monitor business
practices.

e. What three aspects of cash flows affect the value of any investment?
1. Investing plays a large role in the cash flow value of an investment. This is
because a company can invest its money in poorly returning investments or high
risk investments and ruin the value of that investment.

Investment in operations can also impact the value of an investment. Well thought
out spending in a company’s operations can yield multiples of returns. Providing
stellar training to employees around process improvement can help boost
efficiency and lower the company’s expenses. Poorly invested operations can
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show a lack of skillset in employees, less efficiency, and a higher turnover.

Financing can impact the value of an investment by the rates and terms of the
financing, the amount financed, and the expenses brought on by financing.

f. What are free cash flows?

1. Free cash flow is best described as the company’s net on income, or the funds left
after the company pays its employees and all of its expenses.

g. What is the weighted average cost of capital?

1. According to Investopedia (2019), the weighted average cost of capital (WACC)
of a company is the rate the company is expected to pay in financing its assets to
financiers.

h. How do free cash flows and the weighted average cost of capital interact to
determine a firm’s value?
1. A firms value can be calculated by understanding the free cash flow (net) against
its weighted average cost of capital to determine the amount expensed to
financiers where the free cash flow could pay off debt and avoid interest.

i. Who are the providers (savers) and users (borrowers) of capital? How is capital
transferred between savers and borrowers?
1. Individuals are the providers of capital and governments are the users of capital.
Capital is transferred by means of investment banking, bank deposits, and loans.

j. What do we call the cost that a borrower must pay to use debt capital? What two
components make up the cost of using equity capital? What are the four most
fundamental factors that affect the cost of money, or the general level of interest
rates in the economy?
1. The cost that a borrower pays to use debt capital is called debt capital interest.
2. The two components that make up the cost of using equity capital are the risk free
rate of return (rate that is guaranteed) and the premium anticipated for risk
(unguaranteed return).
3. Production opportunity, inflation, risk, and timing for consumption.

k. What are some economic conditions that affect the cost of money?
1. Economic conditions that affect the cost of money can include recessions or
economic booms, policies put in place by the Federal Reserve, industrial
supply/demand, trade surplus and deficits.

l. What are financial securities? Describe some financial instruments.

1. Financial securities are securities that are backed by money, such as bonds, stock,
promissory notes, and other equities.

m. List some financial institutions.

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1. Credit Unions, banks, mutual funds, and insurance companies.

n. What are some different types of markets?

1. According to Chron (2019), there are five different types of market systems. They
are: Perfect competition with infinite buyers and sellers, monopolies with one
producer, oligopoly with a handful of producers, monopolistic competition with
many competitors, and monopsony with one buyer.

o. Along what two dimensions can we classify trading procedures?

1. The two dimension we can classify trading procedures are method of matching
orders and location.

p. What are the differences between market orders and limit orders?
1. Market orders are fulfilled when a buyer or seller is present and willing to sell,
regardless of price. Limit orders are fulfilled only at a specific target price and
specified volume of stock.

q. Explain the differences among broker-dealer networks, alternative trading systems,

and registered stock exchanges.
1. Broker-dealer networks are networks of brokers who fulfill trade orders on behalf
of the investor. Alternative trading systems, including foreign exchange (FOREX)
operate at real-time broker-less trading. Registered stock exchanges are listing
keepers, such as NASDAQ or the OTC (over the counter) marketplaces.

r. Briefly explain mortgage securitization and how it contributed to the global

economic crisis.
1. Mortgage securitization comes from the value a financier puts on a property for
which it is mortgaging. Generally, mortgages are secured by the property itself
and banks or credit unions will generally not exceed a percentage of the
property’s value in the loan it provides to the individual or company. The global
economic crisis was born out of bad regulatory practices in home lending, where
banks and credit unions were able to extend much more in credit to individuals
and companies than the property was valued in order to take on more risk and
maximize profits. The crisis began as these individuals and companies were not
able to afford to pay back the mortgages and defaulted.
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References:

Brigham, E. F., & Ehrhardt, M. C. (2008). Financial management. Mason, OH: Thomson Business

and Economics.

Hargrave, M. (2019, November 18). How to Calculate the Weighted Average Cost of Capital

– WACC. Retrieved from https://www.investopedia.com/terms/w/wacc.asp.

Kennon, J. (2019, June 25). Here Is a New Investor's Guide to Capital Structure and Why It Matters.

Retrieved from https://www.thebalance.com/an-introduction-to-capital-structure-357496.

Kenton, W. (2019, December 9). Cost of Equity. Retrieved from

https://www.investopedia.com/terms/c/costofequity.asp.

McArthur, C., & Edelman, S. (n.d.). The 2008 Housing Crisis. Retrieved from

https://www.americanprogress.org/issues/economy/reports/2017/04/13/430424/2008-housing-

crisis/.

Richards, L. (2019, March 6). 5 Different Types of Market Systems. Retrieved from

https://smallbusiness.chron.com/5-different-types-market-systems-25818.html.