INTRODUCTION TO CORPORATE FINANCE
Answers to Concepts Review and Critical Thinking Questions
Capital budgeting (deciding on whether to expand a manufacturing plant), capital structure (deciding whether to issue
new equity and use the proceeds to retire outstanding debt), and working capital management (modifying the firm’s
credit collection policy with its customers).
Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise capital funds. Some
advantages: simpler, less regulation, the owners are also the managers, sometimes personal tax rates are better than
corporate tax rates.
The primary disadvantage of the corporate form is the double taxation to shareholders of distributed earnings and
dividends. Some advantages include: limited liability, ease of transferability, ability to raise capital, and unlimited life.
The treasurer’s office and the controller’s office are the two primary organizational groups that report directly to the
chief financial officer. The controller’s office handles cost and financial accounting, tax management, and management
information systems. The treasurer’s office is responsible for cash and credit management, capital budgeting, and
financial planning. Therefore, the study of corporate finance is concentrated within the functions of the treasurer’s
To maximize the current market value (share price) of the equity of the firm (whether it’s publicly traded or not).
In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of
the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate
form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best
interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the
share price of the equity of the firm.
A primary market transaction.
In auction markets like the NYSE, brokers and agents meet at a physical location (the exchange) to buy and sell their
assets. Dealer markets like Nasdaq represent dealers operating in dispersed locales who buy and sell assets themselves,
usually communicating with other dealers electronically or literally over the counter.
Since such organizations frequently pursue social or political missions, many different goals are conceivable. One goal
that is often cited is revenue minimization; i.e., providing their goods and services to society at the lowest possible cost.
Another approach might be to observe that even a not-for-profit business has equity. Thus, an appropriate goal would be
to maximize the value of the equity.