Fi515 Chapter 1 Mini Case - 2299 Words

MINI CASE a. Why is corporate finance important to all managers? Corporate finance is important to all managers because it provides managers the skills needed to identify and select the corporate strategies and individual projects that add value to their firm and forecast the funding requirements of their company and devise strategies for acquiring those funds. 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. The organizational forms a company might have as it evolves from a start-up to a major corporation are proprietorship, partnership, or corporation. The advantages of a proprietorship are: †¢ Easy and†¦show more content†¦Failure to handle these situations properly can lead to huge product liability suits and even bankruptcy. e. What three aspects of cash flows affect the value of any investment? The three aspects of cash flows the affect the value of any investment are the amount of expected cash flows, the timing of the cash flow stream, and the risk of the cash flows. f. What are free cash flows? Free cash flows are the monies available for distribution to all investors after paying current expenses, taxes, and making the investments necessary for growth. g. What is the weighted average cost of capital? The weighted average cost of capital is the rate that a company is expected to pay on average to all its security holders to finance its assets. h. How do free cash flows and the weighted average cost of capital interact to determine a firm’s value? Free Cash Flow = Sales Revenues – Operating Costs and Taxes – Required Investments in Operating Capital. Weighted Average Cost of Capital (WACC) is affected by market interest rates, market risk aversion, cost of debt, cost of equity, firm’s debt/equity mix, and firm’s business risk. Therefore, free cash flows and the weighted average cost of capital interact to determine a firm’s value by the following equation: Value = FCF1 + FCF2 + †¦ + FCF00 (1 + WACC)1 (1 + WACC)2 (1 + WACC)00 i. Who are the providers (savers) and users (borrowers) of capital? How is capital