Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle DellaTorre, a professional tennis player who has just come to the United States from Chile. DellaTorre is a highly ranked tennis player who would like to start a company to produce and market apparel she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. DellaTorre is very bright, and she would like to understand in general terms what will happen to her money. Your boss has developed the following set of questions you must answer to explain the U.S. financial system to DellaTorre.
* a. Why is corporate finance important to all managers?
Corporate finance provides the skills managers need to identify and select the corporate strategies and individual projects that add value to their firm. It also helps them forecast the funding requirements of their company, and devise strategies for acquiring those funds.
* 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.
The three main forms of business organization are sole proprietorships, partnerships, and corporations. There are also hybrid forms such as limited partnership, the limited liability partnership, the professional corporation, and the s corporation.
The proprietorship advantages: it is easily and inexpensively formed, it is subject to few government regulations, and the business pays no corporate income taxes.
Disadvantages: it is difficult for a proprietorship to obtain large sums of capital; the proprietor has unlimited personal liability for the business’s debts, and the life of a business organized as a proprietorship is limited to the life of the individual who created it.
The partnership advantage: low cost, ease of formation and the tax...