Week 1 Homework 1 Essay

1148 WordsNov 15, 20115 Pages
Week 1 Homework 1 FI515 Managerial Finance a. Corporate finance is important to managers because successful companies have enough funding to execute their plans and support their operations. Most companies need cash to purchase land, buildings, equipment, and materials. Companies can reinvest a portion of their earnings, but most growing companies must also raise additional funds externally. b. Most companies start as proprietorships which is an unincorporated business owned by one individual. The proprietorship has three important advantages, one it is easily and inexpensively formed, two it is subject to few regulations, and three its income is not subject to corporate taxation but is taxed as part of the proprietor’s personal income. The proprietorship also has limitations, one it may be difficult for a proprietorship to obtain capital needed for growth, two the proprietor has unlimited personal liability for the businesses debts which can result in loses that exceed the money invested in the company and three the life of a proprietorship is limited to its founder. As the business grows it may develop into a partnership. A partnerships advantages and disadvantages are generally the same. AS a partnership grows it typically develops into a corporation. The advantages are one unlimited life, two easy transferability of ownership, and three limited liabilities. The disadvantages are one that earnings may be subject to double taxation, and two setting up a corporation involves preparing a chapter, writing a set of bylaws, filing the many required state and federal reports, which is more complex and time-consuming than creating a proprietorship or partnership. c. Companies continue to grow and go public by having an initial public offering (IPO). This helps them raise additional capital that can be used to expand. Agency problems are what it takes to

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