FIN515 Homework1 Mini case
(a) Corporate Finance
Investors provide enough funding for corporations to make quality goods and services that are highly valued by costumers and enables growth of the corporation. So managers’ primary goal is to generate enough cash to distribute compensation to investors. Understanding corporate finance allows managers to make monetary decisions that achieve the goal of adding value for investors and thus contribute to a company’s competitiveness and profitability in long run.
(b) Organizational Forms
There are three types of organizational forms for companies to choose based on different expected speed of growth and the amount of ...view middle of the document...
Initial public offering brings a profiting private corporation to become a publicly traded corporation after register under SEC, going through underwriting process with investment banking, and publicizing financial reports. Investor purchase public corporation’s stock and expects to share of a portion of the company’s earning as the return of investment.
(d) Agency Problem
Managers should make decisions and run the corporation aiming to maximize shareholders’ wealth as managers’ prime objective. Shareholders compensate managers based their performance, which usually measured by stock price. Agency problem arise from managers’ incentive of maximizing their own compensation through increasing short-term stock rather than maximizes the corporation’s intrinsic stock value. In order to prevent and detect agency problem, the board of directors use corporate governance frameworks to increase reliability, transparency and fairness among activities between managers and shareholders.
Firms have responsibility to society at large, because the process of stock price maximization is beneficial to the whole society. In order to maximize intrinsic stock value, firms have to increase efficiency and lower cost in production, which brings customer higher quality product and service with lower cost. Also, the public at large is the stakeholder of the corporation through owning stock, being employee and having economic and noneconomic activity with the corporation. Behave ethically is crucial for firms to add value to its stakeholders. The most fundamental ethical behavior of a publicly traded company is to present relevant and faithful financial report that directly effect investors’ decision rather than publishing misleading information to attract public fund into overvalued businesses. Thus, corporations have responsibility to add value to the society at large and behave ethically.
(i) Capital Allocation
Savers are individuals and firms whose income is greater than expenditure. Capital providers borrow this excess amount of income to borrower such as firms and government who need capital to implement growth. Capital can be transferred between savers and borrowers through three ways, including direct transfer, indirect transfer through investment bankers and indirect transfer through a financial intermediary.
(j) Cost of Money
Interest rate is the price that a borrower must pay for debt capital, while cost of equity is the price of equity capital. Overall, the cost of money is the price that borrower have to pay for using saver’s fund based on demand and supple of fund in a free market. There are four most fundamental factors that affect the cost of money, or the general level of interest rate, including production opportunity, time preference for consumption, risk and inflation.
(k) Economic Conditions
Economic conditions such as Federal Reserve policy, the federal budget deficit or surplus, the level of business...