a. Why is corporate finance important to all managers? 1.

In order to be an effective manager it is essential that a manager understand the finances of their company. The manager needs to know what products or services are the most lucrative, and which ones are not. They need to know the financial position of their company, meaning they need to know if they are profiting or losing money. So, that is why corporate finance should be important to managers.

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. 2. The three forms of organizational forms a company might have as it evolves are sole proprietorship, partnership, and organization. The advantages of a sole proprietorship are that it is easy to start up, and fairly inexpensive to start as well. The disadvantages of a sole proprietorship are that the owner of the sole proprietorship is that there is no limit to the liability for the owner of that proprietorship. The advantages of a partnership is similar to that of a sole proprietorship meaning that a partnership is easy to start and cheap. The disadvantage of a partnership is that the partners have the ability to lose all of their assets, even the assets not linked to the company. The advantages of forming a corporation are that it is easy to raise large amounts of capital for the corporation. The major disadvantage for a corporation is that they sometimes may have their earnings double taxed. c. How do corporations go public and continue to grow? What are agency problems? What is corporate governance? 3. Corporations go public by selling their stock to the public, and they continue to grow by issuing debt, borrowing from banks, and selling additional shares of stock to the public. An agency problem is when a manager acts in their best interest rather than the best interest of the company. d. What should be the primary objective of managers? 4. The primary objective of any manager is to maximize shareholder value. (1) Do firms have any responsibilities to society at large? A. Yes, a firm needs to ensure that they are acting socially responsible. The firm needs to be socially responsible to their employees, and treat them fairly. To the environment in which the company operates, and ensue they are not polluting the environment unnecessarily. (2) Is stock price maximization good or bad for society? A. Yes, in general it is a good thing for society. The stockholders that will benefit from the stock price maximization are a part of society. Consumers also benefit from this concept as well. They get the

products they want, and this is mostly done at the lowest cost possible. Also companies that are able to maximize price tend to add employees versus lay employees off. (3) Should firms behave ethically? A. Yes, they should always behave ethically. When a company does not behave ethically they will eventually fall, as we have seen in the past. I believe companies that behave ethically will outlast the dishonest companies. e. What three aspects of cash flows affect the value of any investment? (2) Sales Revenue, Operating Cost and Taxes, and Required New Investments in Operating Capital f. What are free cash flows? (3) Free cash flows are the assets and cash that are available for distribution to all of companys investors after obligations have been met. g. What is the weighted average cost of capital?

(4) The weighted average cost is the rate of return required by investors. h. How do free cash flows and the weighted average cost of capital interact to determine a firms value?
(5) Value
FCF1 (1 WACC)
1

FCF2 (1 WACC)
2

....

(1 WACC)

FCF

i. Who are the providers (savers) and users (borrowers) of capital? How is capital transferred between savers and borrowers? ( 5 ) Individuals are the net savers, and provide most of the funds used by non-financial corporations. The non-financial corporations are net borrowers as wells as the United States local, federal, and state government. Capital transfers happen three ways: direct transfers, indirect transfers through investment bankers, and indirect transfers through a financial intermediary. j. What do we call the price that a borrower must pay for debt capital? What is the price of equity capital? What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy? 5. The price a borrower must pay for debt capital is interest rate, and the price of equity capital is cost of equity. The four fundamental factors are: production opportunities, time preferences for consumption, risk, and inflation. k. What are some economic conditions (including international aspects) that affect the cost of money?

6. The economic conditions that affect the cost of money are Federal Reserve policy, the federal budget surplus or deficit, business activity, and international exchange rates. l. What are financial securities? Describe some financial instruments. 7. Financial securities are simply pieces of paper with contractual provisions that entitle their owners to specific rights and claims on specific cash flows or values. Financial instruments are checks, stocks, bonds, and credit and consumer loans. m. List some financial institutions. 8. Investment banking houses, credit unions, commercial banks, and savings and loan associations. n. What are some different types of markets? 9. Physical assets markets, spot markets, mortgage markets, primary markets, and money markets. o. How are secondary markets organized? 10. Secondary markets are organized by location, and by the way that orders from buyers and sellers matched. (1) List some physical location markets and some computer/telephone networks. Physical Locations Markets: New York Stock Exchange, Tokyo Stock Exchange Computer/Telephone Networks: Nasdaq, government bond markets, (2) Explain the differences between open outcry auctions, dealer markets, and electronic communications networks (ECNs). In an open outcry auction participants have a spot on the exchange and meet face to face and place orders for themselves, and or their clients. In dealer markets dealers keep inventory and places bids and ask prices at which they are willing to buy and sell. Electronic communications networks are computerized systems that keep track of bids and ask prices, and some systems automatically match buyers and sellers while others do not. p. Briefly explain mortgage securitization and how it contributed to the global economic crisis. (3) Mortgage-backed securities are debts that represent claims to the cash flows from groups of mortgage home loans. Mortgage loans are then bought from banks, and various mortgage companies. The company then issues securities that represent claims on the loan payments made by borrowers on the loans in the pool, a process known as securitization. This contributed to the global economic crisis because this caused a larger number of people to default on their loans.

(2-6) 780 million + 50 million 810 million = 20 million (2-7) 365,000-50000+4500=319500(Taxable Income) 15000*30%=4500 22250 + 319500-100000*0.39= 22250+85650=107855 Taxable Income: 319500, Taxes: 107855 319500-107855=211645+10500=222145 The Marginal Tax Rate=39%, The Average Tax Rate 107855/319500=33.76% (2-9) 10000*7.5=750 750*.35=262.50 750 262.50 = $487.50 $487.50/10000=4.875%

10000*6.0=600 600*.70=420 600 420 = 180 Taxable Income 180*.35=$63.00 600 63 = 547 547/10000= 5.47%

10000*5.0=500 500/10000= 5%