36. What general factors may influence the decision of whether to organize as a sole proprietorship, a partnership, or a corporation? Factors that may influence the decision concerning organizational form would include: amount of capital needed in relation to amount of capital that can be raised, estimated sales volume, the extent of managerial expertise, the willingness to share profits, the importance of limited liability, a desire for the permanence of the organization, the issue of double taxation.
37. Discuss why corporations typically exhibit separation of ownership and management, as distinguished from sole proprietorships or partnerships. One reason corporations typically exhibit a separation of ownership and management is that ownership often includes a diverse amount of relatively small investors. Thus, it would be nearly impossible to coordinate these owners into decision makers. Also, many small investors are pleased in being relieved of management responsibilities. Therefore, the quality of management is likely to be better if those managers have been hired specifically for that function. Finally, the separation minimizes managerial disruptions that would occur with changing or deceased investors. Most sole proprietorships and partnerships are smaller firms that do not need, may not be able to afford, and may not desire even if they could afford, the existence of a separate management.
38. Why is limited liability such an important aspect to investors? Many investors would not be willing to commit their investment funds into projects if it were known they were risking more than those specific funds. Specifically in the case of separated ownership and management, shareholders may be unwilling to remain liable for decisions they did not have a hand in making. With the aversion to risk that is witnessed in general for many investors, it is questionable whether investors would direct their funds into financial assets that did not offer limited liability. Thus, the existence of limited liability may greatly affect the demand for corporate shares.
39. Distinguish between a firm's capital budgeting decision and financing decision. Examples of the capital budgeting decision for a firm could include: a decision to replace all of the firm's personal computers, a decision to expand the size of the production facility, a decision to buy a corporate jet, a decision to expand production into two new product lines, et cetera. Examples of the financing decision for a firm could include: a decision to issue corporate bonds rather than expand a bank loan, a decision to float a new issue of common stock, a decision to denominate a loan in Japanese yen rather than U.S. dollars, a decision to roll over short-term financing rather than borrow for a longer term, et cetera.
40. Discuss the interrelationship between a firm's financing and capital structure decisions. Although the capital budgeting decision considers what to invest in and specifically how much to invest, this decision is importantly related to how the necessary funds should be raised. For example, if many other firms of similar risk have recently issued bonds, the supply of loanable funds may be low, which could affect the interest rate on such funds. Or, the current market value of common stock may be so low that management would prefer not to issue additional shares at this time. Alternatively, the existence of loan or bond covenants could restrict certain forms of borrowing. Finally, although certain forms of financing may appear attractive, they may not represent the targeted capital structure. Thus, elements of the financing decision need to be considered simultaneously with the capital budgeting decision.
41. Who are the financial managers in large corporations? The treasurer is responsible for looking after the firm's cash, raising new capital, and maintaining relationships with banks and other investors who hold the firm's securities. Larger corporations usually also have a controller, who prepares the financial statements, manages the firm's internal budgets and accounting, and looks after its tax affairs. Large corporations often appoint a chief financial officer (CFO) to oversee both the treasurer's and the controller's work.
42. What does "real asset" mean? Real assets include all assets used in the production or sale of the firms' products or services. Real assets can be tangible (plant and equipment, for example) or intangible (patents or trademarks, for example).
43. Who is the financial manager? Almost all managers are involved to some degree in investment decisions, but some managers specialize in finance, for example, the treasurer, controller, and CFO.
44. Why does it make sense for corporations to maximize their market value? Value maximization is the natural financial goal of the firm. Maximizing value maximizes the wealth of the firm's owners, its shareholders. Shareholders can invest or consume that wealth as they wish.
45. Is value maximization always ethical? Modern finance does not condone attempts to pump up stock price by unethical means. But there need be no conflict between ethics and value maximization. The surest route to maximum value starts with products and services that satisfy customers. A good reputation with customers, employees, and other stakeholders is also important for the firms' long-run profitability and value.