What are the advantages and disadvantages of the mostcommon forms of business organization? Which formsare most suitable to different types of businesses?Businesses may be organized as sole proprietorships,partnerships, or corporations. A corporation is legallydistinct from its owners. Therefore, the shareholders whoown a corporation enjoy limited liability for its obligations.Ownership and management of corporations areusually separate, which means that the firm’s operationsneed not be disrupted by changes in ownership. On theother hand, corporations are subject to double taxation.Large public companies are always corporations.
What are the two major decisions made by financialmanagers?Financial management can be broken down into (1) theinvestment, or capital budgeting, decision and (2) thefinancing decision. The firm has to decide (1) how muchto invest and which real assets to invest in and (2) how toraise the necessary cash.
What does “real asset” mean? What is a “financialasset”?Real assets include all assets used in the production orsale of the firms’ products or services. Real assets can betangible (plant and equipment, for example) or intangible(patents or trademarks, for example). Financial assets aresecurities (such as shares) sold by the firm to raise money,and represent claims on the firm’s real assets and the cashgenerated by those assets.
Who is the financial manager?Almost all managers are involved to some degree ininvestment decisions, but some managers specialize infinance, for example, the treasurer, controller, and CFO.
Why does it make sense for corporations to maximizetheir market value?Value maximization is the natural financial goal of thefirm. Maximizing value maximizes the wealth of thefirm’s owners, its shareholders. Shareholders can investor consume that wealth as they wish.
Is value maximization ethical?Modern finance does not condone attempts to pump upstock price by unethical means. But there need be no conflictbetween ethics and value maximization. The surestroute to maximum value starts with products and servicesthat satisfy customers. A good reputation with customers,employees, and other stakeholders is also importantfor the firms’ long-term profitability and value.
How do corporations ensure that managers’ andstockholders’ interests coincide?Conflicts of interest between managers and stockholderscan lead to agency problems. These problems are kept incheck by compensation plans that link the well-being ofemployees to that of the firm; by monitoring of managementby the board of directors, security holders, and creditors;and by the threat of takeover.
