Mini Case Questions

Mini Case Questions p.45-4

Answer:

Managers of a company must know the finance of a company as this help managers to know the health of the company and can act accordingly with a common guideline. Suppose a marketing manager going to market to sell the company's products .and he does not know the company is running financial trouble and products are not matching proper quality standards and unfortunately the products are sold to the customers .The products fail to produce good result. Imagine what would be the condition of the company with so much adverse impact.

Answer:

In setting up a corporation it involves creating a charter, writing a set of bylaws, and filing many stated and federal reports. The Charter includes: (1) name of proposed corporation; (2) types of activities it will pursue; (3) amount of the capital stock (4) number of directors (5) names and address of directors. This document is then filed with the secretary of state in which it is incorporated once it is approved. Once it is approved the firm is now a corporation. After the corporation begins operations, quarterly and annual employment, financial, and tax reports must be filed with state and federal authorities. Bylaws are a set of rules drawn up by the founders of the corporation. It states how many directors are to be elected (1 year, 1/3 each year for 3 year terms), whether existing stockholders will have the first right to buy and new shares the firms issues and the procedures for changing the bylaws themselves, should conditions require it.

Advantages of becoming a corporation include:

1. unlimited life

can continue after its original owners and managers are deceased

2. Easy transferability of ownership interest

ownership interest are divided into share of stock

3. Limited liability

losses are limited to the actual funds invested

Disadvantages:

1. corporate earnings may be subject to double taxation-corporate level and earnings and on dividends are taxed as income at the stockholder level

2. Setting up a corporation involves preparing a charter, writing by laws, and filing the many required state and federal reports-complex and time consuming

c)

Answer:

Corporations go public by an initiating a public offering (IPO). This is when it sells stock for the first time. If the company continues to grow, and need additional funds to support the growth, they can borrow from banks, issuing debt or selling additional stock (seasoned equity offering). Agency problems are when a manager uses their authority for their own benefit than the interest of the owners the shareholders in the corporation. Corporate governance is the set of rules that control a company's behavior towards its directors, managers, employees, shareholders, creditors, customers, competitors, and community and can control agency problems. An example would be if shareholders wanted a new investment that would increase share value but was risky and management did not conform to the shareholders demands because of their own self welfare this would be an agency problem because the agent's goal is to maximize shareholder wealth.

Answer:

The primary objective of a manager should be to maximize stockholder wealth by maximizing intrinsic stock value.

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

Yes, because shareholders are also member of society. Due to pensions funds, insurance companies and mutual funds, a large part of society are directly or indirectly stockholders. It is important that management act in the best interest to maximize stock prices to the society at large.

2. Is stock price maximizing the good or bad of society?

Stock pricing maximizing is good for society because to a large extent, the owners of stock are society. Due to growth in pension funds, life insurance companies and mutual funds, most individuals now have a direct or indirect stake in the stock market. When managers take actions to maximize the stock price, this improves the quality of life for millions of citizens

Consumer benefit because it requires efficient low-cost businesses that produce high quality goods and services at their lowest possible costs and what the consumers need. This leads to new technology and new products. Companies that maximize their stock prices also must generate growth in sales by creating value to customers in the form of courteous services, adequate stocks of merchandise, and better located for businesses

Employees benefit because companies that successfully increase stock price also grow and add more employees, thus benefiting society.

3. Should firms behave ethically?

Yes, firms should always act ethically. If a company does not follow business ethics it is involved in misleading of financial statements, frauds, discrimination, price discrimination, etc. When a company acts unethically it harms the countries business environment because each business builds their reputation and a promise a free market system and when one company acts unethically, it diminished the other business efforts.

e)

Answer:

The three aspects would be sales revenue, operating cost and taxes, and required new investment in operating capital.

Answer:

A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value.

Answer:

It is a calculation of a firm's cost of capital in which each category of capital is

proportionately weighted. All capital sources - common stock, preferred stock, bonds

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