38 Questions
What is the primary focus of financial management in corporations?
Making investment decisions
How do corporations typically finance their investments?
Through borrowing, selling equity shares, or retained earnings
What happens to the cash raised by a firm from selling securities?
It is used to acquire assets
Who are the primary providers of capital in an economy?
Households
What is the role of financial corporations in the economy?
They are both borrowers and investors
What is the typical scenario for governments in terms of capital?
They are net borrowers
What is capital in the context of the economy?
The aggregate balance sheets of firms and households
What is the ultimate goal of financial management in a corporation?
To make financial decisions that achieve business goals
What is a major advantage of a sole proprietorship?
Ease of formation
What is a major disadvantage of a sole proprietorship?
Unlimited liability
What is a common issue in partnerships?
Conflicts among partners
Why do small firms often incorporate?
To avoid unlimited liability
What is the main purpose of an Initial Public Offering (IPO)?
To raise capital for the firm
What often leads to the separation of ownership and control?
A large number of shareholders
In which type of business structure is the life of the business tied to the life of the owner?
Sole proprietorship
Under what law are corporations formed in the United States?
State law
What is a major advantage of a corporation?
Limited liability
What is a potential drawback of the separation of ownership and control in large, publicly traded corporations?
Conflicts between managers and shareholders
What is the primary objective of a firm according to economic theory?
Maximize current-period profits
What type of firms are Rolex, Benetton, Fiat, and the Swatch Group?
Closely-held firms
What is the purpose of corporate governance?
To control agency problems
What is an advantage of unlimited life in a corporation?
Easier succession planning
What is a disadvantage of a corporation?
Double taxation of income and dividends
What is the purpose of incentives in corporate governance?
To control agency problems
What happens to employment in firms that make managers into owners?
It increases
Which type of economy tends to have higher consumer welfare?
Market-oriented economy
What characteristic do Fortune's most admired firms tend to have?
High-quality products and happy employees
Why should corporations behave ethically?
Because they are legally considered persons with moral responsibilities
What is the relationship between shareholders and society?
Shareholders are a subset of society
What is the implication of corporations having no responsibilities to society?
Weaker moral standards
What is the main priority of companies in Japan?
Balancing the interests of customers, employees, and shareholders
What is the first principle of Asahi Breweries' corporate philosophy?
Consumer Orientation
What is a common characteristic of conglomerates in emerging markets?
They operate in a variety of unrelated industries
What is a primary goal of State-Owned Enterprises (SOEs)?
Pursuing commercial activities on behalf of the government
What is a characteristic of conglomerates in developing countries?
They are intended to overcome institutional voids
What is a common feature of State-Owned Enterprises (SOEs)?
They have multiple, sometimes conflicting objectives
What is not mentioned as a principle of Asahi Breweries' corporate philosophy?
Maximizing Shareholder Wealth
What is a key difference between companies in Japan and those in other countries?
Japanese companies prioritize customers and employees alongside shareholders
Study Notes
Advantages and Disadvantages of a Corporation
- Advantages: unlimited life, limited liability, ease of raising capital
- Disadvantages: double taxation of income and dividends, costs of setting up and reporting, public scrutiny, succession problems
Agency Problems and Corporate Governance
- Agency problems: managers may act in their own interests, not on behalf of shareholders
- Corporate governance: rules that control a company's behavior towards stakeholders, including directors, managers, employees, shareholders, creditors, customers, competitors, and community
- Properly constructed incentives can help control agency problems
Closely-Held Firms
- Most large firms in the US are widely-held public corporations
- In other countries, large companies may be privately held or closely held by a few investors
- Examples: Rolex, Benetton, Fiat, Porsche, and Swatch Group
Objective of the Firm
- In economic theory, the firm maximizes current-period profits
- However, some companies prioritize other goals, such as consumer welfare or social responsibility
Financial Management
- Course objective: understand how corporations make financial decisions
- Corporations invest in assets that generate cash flows, financed through retained earnings, borrowing, or selling additional equity shares
- Cash flows: raised from investors, used to acquire assets, generated from assets, reinvested in the firm, and returned to investors
Providers and Users of Capital
- Households: net savers (providers of capital)
- Non-financial corporations: net users of capital (borrowers)
- Governments: usually net borrowers
- Financial corporations: both borrowers and investors
Capital
- Aggregate balance sheets of firms and households in the economy
Sole Proprietorship
- Advantages: ease of formation, few regulations, no corporate income taxes
- Disadvantages: limited life, unlimited liability, difficult to raise capital
Partnerships
- Similar advantages and disadvantages to sole proprietorship
- Conflicts may arise among partners if roles and responsibilities are not defined
Going Public
- Initial Public Offering (IPO) raises capital and allows founders to "harvest" wealth
- Recent IPOs occur later in a firm's history, allowing owners to delay sharing wealth with outsiders
Corporate Philosophy
- Asahi Breweries' philosophy prioritizes consumer orientation, quality, respect for human values, true partnership, cooperation, and social responsibility
- No mention of maximizing shareholder wealth
Conglomerates
- Durable form of business organization in emerging markets
- Operate in various unrelated industries
- Can overcome institutional voids, inefficient financial markets, and unstable environments
State-Owned Enterprises (SOEs)
- Legal entities that undertake commercial activities on behalf of the government
- Can be wholly or partially owned by the government
- Multiple, sometimes conflicting objectives
Maximizing Shareholder Wealth
- Can be beneficial for society, employees, and customers
- Employment growth is higher in firms that prioritize maximizing stock price
- Consumer welfare is higher in market-oriented economies
Corporate Ethics
- Corporations should behave ethically, as they are subject to the same moral standards as individuals
- Note that shareholders are also members of society
This quiz covers the benefits and drawbacks of a corporation in financial management, including unlimited life, limited liability, and ease of raising capital as advantages, and double taxation, setup costs, and public scrutiny as disadvantages.
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