Synopsis: Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle DellaTorre, a professional tennis player who has just come to the United States from Chile. DellaTorre is a highly ranked tennis player who would like to start a company to produce and market apparel that she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. DellaTorre is also very bright, and, therefore, she would like to understand, in general terms, what will happen to her money. Your boss has developed the following set of questions which you must ask and ...view middle of the document...
Individuals can also become part of a corporation in which several different options are available (a) professional corporation (PC), (b) professional association (PA), and (c) S corporation (Brigham, et al., 2014).
There are three key advantages when starting a proprietorship, first, a proprietorship is easy and cost less to form; second, the company will have to follow a small number of regulations imposed by the government; and third, a proprietorship will never pay corporate income taxes. Unfortunately, the disadvantages of operating a proprietorship must be considered as well; first this form of business have a difficult time obtaining enough capital to function effectively; second, the debts of a proprietorship will become unlimited resulting in money loss than what was invested, and finally, a proprietorship has limited business life being primary to the sole proprietor or the individual who created the company (Brigham, et al., 2014).
A partnership has some advantages and disadvantages that both parties must consider before taking on this venture. The advantages of a partnership are nearly the same as a proprietorship; so another advantage is the different degrees of formality. The disadvantages of a partnership include the partners loose all personal assets. Finally, forming a corporation business owners obtain four key advantages (1) unlimited life, (2) transferability of ownership into stock shares and (3) the corporation looses actual funds - limited liability, and (4) ease of increasing the capital. The disadvantages of a corporation include (a) earnings are double taxed at corporate level and stockholder level; and (b) charters must be prepared according to the bylaws and filed accurately according to state and federal guidelines (Brigham, et al., 2014).
C. How do corporations go public and continue to grow? What are agency problems? What is corporate governance?
The overall goal of a company is to grow and sustain on the market; therefore, a corporation can go public via outside financing such as an IPO (initial public offering). The initial public offering permits anyone to purchase company shares on the stock exchange. Their continual growth increases value via cash flow generation and lower the capital costs. On the other hand, an agency problem such as a conflict between management and stakeholders means that the company will have to place strategies to prevent anyone from acting on their own interests. Managers are hired as agents to act on behalf of the owners; instead they look out for themselves. Corporate governance is defined as a “set of rules that control the company’s behavior towards its directors, managers, employees, shareholders, creditors, customers, competitors, and community.” (Brigham, et al., 2014, p. 9).
D. What should be the primary objective of managers?
As a manager their primary goal begins with maximize the value of wealth for shareholders. In this case, each manager should...