Why Is Corporate Finance Important to All Managers?

Mini Case (p. 45)

a. Why is corporate finance important to all managers?

It is important because successful companies must not only be able to obtain high valued product and satisfy customers; they must be able to generate enough cash to compensate investors who provide the capital. Corporate finance helps to do this by giving managers tools to evaluate any proposal, such as marketing, production, and strategy and be able to implement only the projects that add value for the investors.

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.

Companies can have three organizational forms which are proprietorships, partnerships and corporations.

Companies usually start as a proprietorship which is owned by one individual. It is generally easy and inexpensive to startup; it has fewer regulations than other organizational forms; and the income is not subjected to corporate taxation but is taxed as part of the proprietor’s personal income. However, the disadvantages of a proprietorship are that it may be difficult for a sole owner to generate needed capital for growth; personal liabilities are unlimited for the business debt, which can have implications on the owner’s personal assets such as property; and the life of the company is limited to the life of the founder.

A general partnership is the same as a sole proprietorship in that it is a business that conducts non-corporate business; however, it has two or more people. The advantages and disadvantages are generally the same as a sole proprietorship; however, partners are responsible for their remaining partners’ liabilities and may have to make up the difference with their personal assets. One way to combat this is to establish a limited partnership where the limited partner can only lose what they invested and the others have unlimited liability meaning their personal assets can be seized. A Limited liability company can do the same thing; in that all partners will enjoy limited liabilities in regards to their investment. However, this may increase risk with lenders, customers, and suppliers.

Corporations are a legal entity created under state laws, and are separate and distinct from its owners and managers. This gives companies three major advantages: They have unlimited lifespans because the business can continue after the original owners are deceased; it is easy to transfer ownership through shares of stock; and they enjoy limited liabilities. However, the disadvantages are that corporation earnings can be subjected to double taxation meaning the earnings are taxed on the corporation and then as the dividends received as income and it is more difficult to setup due to preparing charters, writing bylaws, and filing the required