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 firms 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 she designs. She also expects to invest substantial amounts of

money through Balik and Kiefer. DellaTorre is very bright, and she would like to understand

in general terms what will happen to her money. Your boss has developed the

following set of questions you must answer to explain the U.S. financial system to

DellaTorre.

a. Why is corporate finance important to all managers?

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.

c. How do corporations go public and continue to grow? What are agency problems?

What is corporate governance?

d. What should be the primary objective of managers?

(1) Do firms have any responsibilities to society at large?

(2) Is stock price maximization good or bad for society?

(3) Should firms behave ethically?

e. What three aspects of cash flows affect the value of any investment?

f. What are free cash flows?

g. What is the weighted average cost of capital?

h. How do free cash flows and the weighted average cost of capital interact to determine

a firms value?

48 Part 1 The Company and Its Environment

9781305539952, Financial Management: Theory & Practice, fourteenth Edition, Brigham/Ehrhardt - Cengage Learning. All rights reserved. No distribution allowed without express authorization. Distributed by Grand Canyon University.

i. Who are the providers (savers) and users (borrowers) of capital? How is capital

transferred between savers and borrowers?

j. What do we call the price that a borrower must pay for debt capital? What is the

price of equity capital? What are the four most fundamental factors that affect the

cost of money, or the general level of interest rates, in the economy?

k. What are some economic conditions (including international aspects) that affect the

cost of money?

l. What are financial securities? Describe some financial instruments.

m. List some financial institutions.

n. What are some different types of markets?

o. How are secondary markets organized?

(1) List some physical location markets and some computer/telephone networks.

(2) Explain the differences between open outcry auctions, dealer markets, and

electronic communications networks (ECNs).

p. Briefly explain mortgage securitization and how it contributed to the global economic

crisis.