UNIVERSIDAD POLITCNICA SALESIANA

NOMBRE: Jhulliza Zambrano Briones PROFESOR: Henry Fred Lavayen

Yavar
CURSO: D-202
MATERIA:
FINANZAS
CORPORATIVA
GRUPO:1802
SEMESTRE: Octavo
1. Forms of Business What are the three basic legal forms of
organizing a business? What are the advantages and
disadvantages of each? What business form do most start-up
companies take? Why?
These are the basic forms of business ownership: Sole Proprietorship,
Partnership, and Corporation.
Sole Proprietorship
Advantages
Simplest and least expensive form of business to establish
and to dissolve.
The owner is making all the decisions and controlling the
whole operations.
All profit flows directly to the owner.
It is subject to fewer regulations.
It has tax advantage: any income is declared as the owners
personal income tax return, therefore there are no corporate
income taxes.
Disadvantages
The owner is responsible for all the obligations of the
business.
It is difficult to raise capital: it can only use the owners
personal saving and consumer loans.
Partnership
Advantages
It is relatively easy to form but considerable amount of
time should be invested in developing the partnership
agreement.
It is easier to raise capital compared to a sole
proprietorship as there are more than one investor.
Any income is declared as the partners personal income
tax returns, therefore there are no corporate income
taxes.
Employees may be motivated and attracted to the
business by the inventive to become a partner
Disadvantages
Partners are jointly responsible for all the obligations of
the business.
Partners must make decision together therefore disputes
or conflicts may occur. It may eventually lead to
dissolving the partnership.
Corporation
Advantages of a corporation

It can raise additional funds through the sale of stock.

Shareholders can easily transfer the ownership by selling
their stock.
Individual owner liability is limited to the value of stock
they are holding in the corporation.
Disadvantages of a corporation
It is restricted by more regulations, more closely
monitored by governmental agencies and are more
costly to incorporate than other forms of the
organizations.
Profit of the business is taxed by the corporate tax rate.
Dividends paid to shareholders are not deductible from
corporate income, so this part of income is taxed twice
as the shareholders must declare dividends as their
personal income and pay personal income taxes too.
What business form do most start-up companies take? Why? It is important
to understand the different types of business organizations types such as a
sole
proprietorship,
partnership,
and
corporation.
A
businesss
organizational structure influences issues, legal issues, financial concerns,
and personal concerns. We can choose the best type of business
organizations for our company.
2.

Goal of Financial Management What goal should always

motivate the actions of the firm s financial manager?
To maximize the current market value (share price) of the equity of the
firm (whether its publicly traded or not).
3. Agency Problems Who owns a corporation? Describe the process
whereby the owners control the firm s management. What is
the main reason that an agency relationship exists in the
corporate form of organization? In this context, what kinds of
problems can arise?
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 firms 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 elses
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.
4. Not-for-Profit Firm Goals suppose you were the financial
manager of a not-for-profit business (a not-for-profit hospital,
perhaps). What kinds of goals do you think would be
appropriate?
Such organizations frequently pursue social or political missions, so
many different goals are conceivable. One goal that is often cited is
revenue minimization; i.e., provide whatever goods and services are
offered at the lowest possible cost to society. A better approach might be
to observe that even a not-for-profit business has equity. Thus, one
answer is that the appropriate goal is to maximize the value of the
equity.

5. Goal of the Firm Evaluate the following statement: Managers

should not focus on the current stock value because doing so
will lead to an overemphasis on short-term profits at the
expense of long-term profits.
Presumably, the current stock value reflects the risk, timing, and
magnitude of all future cash flows, both short-term and long-term. If this
is correct, then the statement is false.
6. Ethics and Firm Goals Can our goal of maximizing the value of
the stock conflict with other goals, such as avoiding unethical or
illegal behavior? In particular, do you think subjects like
customer and employee safety, the environment, and the
general good of society fi t in this framework, or are they
essentially ignored? Try to think of some specific scenarios to
illustrate your answer.
An argument can be made either way. At the one extreme, we could
argue that in a market economy, all of these things are priced. There is
thus an optimal level of, for example, ethical and/or illegal behavior, and
the framework of stock valuation explicitly includes these. At the other
extreme, we could argue that these are non-economic phenomena and
are best handled through the political process. A classic (and highly
relevant) thought question that illustrates this debate goes something
like this: A firm has estimated that the cost of improving the safety of
one of its products is $30 million. However, the firm believes that
improving the safety of the product will only save $20 million in product
liability claims. What should the firm do?
7. International Firm Goal Would our goal of maximizing the value
of the stock be different if we were thinking about financial
management in a foreign country? Why or why not?
The goal will be the same, but the best course of action toward that goal
may be different because of differing social, political, and economic
institutions.
8. Agency Problems Suppose you own stock in a company. The
current price per share is $ 25. Another company has just
announced that it wants to buy your company and will pay $ 35
per share to acquire all the outstanding stock. Your company s
management immediately begins fighting off this hostile bid. Is
management acting in the shareholders best interests? Why or
why not?
The goal of management should be to maximize the share price for the
current shareholders. If management believes that it can improve the
profitability of the firm so that the share price will exceed $35, then they
should fight the offer from the outside company. If management believes
that this bidder or other unidentified bidders will actually pay more than
$35 per share to acquire the company, then they should still fight the
offer. However, if the current management cannot increase the value of
the firm beyond the bid price, and no other higher bids come in, then
management is not acting in the interests of the shareholders by fighting
the offer. Since current managers often lose their jobs when the

corporation is acquired, poorly monitored managers have an incentive to

fight corporate takeovers in situations such as this.
9. Agency Problems and Corporate Ownership Corporate ownership
varies around the world. Historically, individuals have owned the
majority of shares in public corporations in the United States. In
Germany and Japan, however, banks, other large financial
institutions, and other companies own most of the stock in
public corporations. Do you think agency problems are likely to
be more or less severe in Germany and Japan than in the United
States? Why? In recent years, large financial institutions such as
mutual funds and pension funds have been becoming the
dominant owners of stock in the United States, and these
institutions are becoming more active in corporate affairs. What
are the implications of this trend for agency problems and
corporate control?
We would expect agency problems to be less severe in other countries,
primarily due to the relatively small percentage of individual ownership.
Fewer individual owners should reduce the number of diverse opinions
concerning corporate goals. The high percentage of institutional
ownership might lead to a higher degree of agreement between owners
and managers on decisions concerning risky projects. In addition,
institutions may be better able to implement effective monitoring
mechanisms on managers than can individual owners, based on the
institutions deeper resources and experiences with their own
management. The increase in institutional ownership of stock in the
United States and the growing activism of these large shareholder
groups may lead to a reduction in agency problems for U.S. corporations
and a more efficient market for corporate control.
10. Executive
Compensation
Critics
have
charged
that
compensation to top management in the United States is simply
too high and should be cut back. For example, focusing on large
corporations, Ray Irani of Occidental Petroleum has been one of
the best compensated CEOs in the United States, earning about
$ 223 million in 2008 alone and $ 744 million over the 2004
2008 period. Are such amounts excessive? In answering, it might
be helpful to recognize that superstar athletes such as Tiger
Woods, top people in entertainment such as Oprah Winfrey and
Jerry Bruckheimer, and many others at the peak of their
respective fields can earn at least as much, if not a great deal
more.
How much is too much? Who is worth more, Larry Ellison or Tiger Woods?
The simplest answer is that there is a market for executives just as there
is for all types of labor. Executive compensation is the price that clears
the market. The same is true for athletes and performers. Having said
that, one aspect of executive compensation deserves comment. A
primary reason executive compensation has grown so dramatically is
that companies have increasingly moved to stock-based compensation.
Such movement is obviously consistent with the attempt to better align
stockholder and management interests. In recent years, stock prices
have soared, so management has cleaned up. It is sometimes argued

that much of this reward is simply due to rising stock prices in general,
not managerial performance. Perhaps in the future, executive
compensation will be designed to reward only differential performance,
i.e., stock price increases in excess of general market increases