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FI515_Homework1_BrianLin - Brian Lin D01278742 Week 1...

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Brian Lin D01278742 Week 1 Homework Chapter 1 Homework Mini Case a. Why is corporate finance important to all managers? Corporate finance is important to all managers because the knowledge of corporate finance will equip managers with the knowledge and insight to (1) evaluate any proposal, and (2) implement only the projects that add value for their investors. b. Describe the organizational forms a company might have as it evolves from start-up to a major corporation. List the advantages and disadvantages of each form. As a business starts up, it will begin as a sole proprietorship, which is an "unincorporated business owned by one individual" (pg. 5) Proprietorship has three advantages: "(1) easily and inexpensively formed, (2) it is subject to few government regulations, and (3) its income is not subject to corporate taxation but is taxed as part of the proprietor's personal income." The limitations of a proprietorship are: "(1) may be difficult for a proprietorship to obtain the capital needed for growth; (2) the proprietor has unlimited personal liability for the business's debts, which can result in losses that exceed the money invested in the company (creditors may even be able to seize a proprietor's house or other personal property); and (3) the life of a proprietorship is limited to the life of its founder." (pg. 6) When a business grows to more than one owner, some businesses decide to join into a partnership, which exists when "two or more persons or entities associate to conduct a non- corporate business for profit." (pg. 6) A partnership's advantages and disadvantages are "similar to those of a proprietorship". (pg. 6) When companies grow to a point when a large sum of money is needed to capitalize on opportunity, a company may convert to a corporation. A corporation is "a legal entity created under state laws, and it is separate and distinct from its owners and managers." (pg. 7) A corporation has three advantages: "(1) unlimited life; (2) easy transferability or ownership interest; and (3) limited liability" (pg. 7) The two disadvantages a corporation has over a proprietorship or partnership are "(1) Corporate earnings may be subject to double taxation - the earnings of the corporation are taxed at the corporate level, and then earnings paid out as dividends are taxed again as income to the shareholders; and (2) setting up a corporation involves preparing a charter, writing a set of bylaws, and filing the many required state and federal reports, which is more complex and time-consuming than creating a proprietorship or a partnership." (pg. 7) c. How do corporations go public and continue to grow? What are agency problems?
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