Finance de La Torre

Topics: Stock market, Debt, Stock exchange Pages: 6 (1503 words) Published: September 20, 2010
De la Torre
a) Why is corporate finance important to all managers?
* It is important for the decisions taken in the company, investment decisions and financing decisions. * Every decision taken in the company has a financial impact. * Investment projects, how much to invest and what assets to invest. * To raise the necessary cash

* To increase the shareholders’ stake in the firm.

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. Sole Proprietorship. Sole owner of a business. The manager and the owner is the same person. The sole proprietorship has unlimited liability. You pay taxes as owner and for the business ones. The advantage is the ease with which it can be establish and the lack of regulation s governing it. Partnership. Business owned by two or more persons who are personal responsible for all its liabilities. The partners pay personal income tax on their share of these profits. Each partner has unlimited liabilities for all the business’s debts. Corporations. Business owned by stockholders who are not personally liable for the business‘s liabilities. A corporation is legally distinct from its owners. A corporation pays taxes on its own. It is owned by stockholders and it has limited liability. There is a separation between owners and managers; they are not the same person.

c) How do corporations go public and continue to grow? What are agency problems? What is corporate governance? As a firm grows, it needs more capital. The firm finds out that it’s advantageous to raise funds directly from investors. This is when the firm is ready to sell new financial assets, such as share of stocks, to the public. Agency problems are the conflict of interest between the firm’s owner and the managers. Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. There is a separation between ownership and management in corporations, so corporate governance includes the relationships among the stakeholders and the goals for which the corporation is governed. d) What should be the primary objective of managers?

a. Do firms have any responsibilities to society at large? b. Is stock price maximization good or bad for society at large? c. Should firms behave ethically?
The managers will act to maximize the value of the firm to its stockholders. The primary objective of managers is to maximize the current value of the investment of the shareholders. a) They have it at large. But they are not charity.

b) It is good. There is a request for more resources. Maximizes the wealth, which is for everybody. It keeps equilibrium. And it is the way to maximize the wealth of the firm. c) Yes, it is profitable to be ethic.

e) What three aspects of cash flow affect the value of any investment? * Risk
* Timing of Cash Flow
* Amount of Cash Flow

f) What are free cash flows?
* Cash flows generated by the operation of the corporation on a defined period, after taxes, after changes in working capital and fixed assets. * Cash flows available to attend the stockholders.

NOPAT = EBIT (1-Tx) = EBIT - Tx (Operative)
Free Cash Flow = NOPAT + Depreciation & Amortization - ∆Working Capital - ∆Gross Fixed Assets Net Operative Working Capital = Activo Circulante (Assets) - Pasivo a Corto Plazo (short-term assets) ∆Gross Fixed Assets = ∆Net Fixed Assets + Depreciation

Free Cash Flow = NOPAT + Dep - ∆NOWC - ∆Net Fixed Assets + Dep FCF = NOPAT - ∆(NOWC + Net Fixed Assets)
FCF = NOPAT - ∆Operating Capital

g) What is weighted average cost of capital?
The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. Costo ponderado del total de recursos con costo...

Bibliography: Fundamentals of Corporate Finance, Brealey, 5th Edition
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