Corporate finance deals with an enterprise’s capital structure, from its funding to all the actions management takes to increase the firm’s value. Corporate finance is vital to all administrators as it helps them forecast the funding needs for their organizations and how best to acquire them (Tondhlana, 2017). It also helps managers identify and select best practice strategies to add value to the corporations (Tondhlana, 2017). Corporate finance, therefore, ensures that managers can make sound investment decisions that will help with capital structuring to increase the firm’s value.
A company may have to evolve over the following organizational forms as it progresses from being a startup to a major corporation. The company will have a sole proprietorship at its inception as it may be run by only one business owner (Tondhlana, 2017). The benefits of this type of organizational form include few regulations, no corporate income tax, and are easy to form. The disadvantages of a sole proprietorship are owners may; face difficulty in raising capital, have unlimited liability, and the business may have a limited life (Tondhlana, 2017). With time, it may evolve to a partnership where partners are two or more people who combine resources for the business to grow. The benefits and disadvantages of partnerships are similar to those of a sole proprietorship. However, with partnerships, organizations can have limited partnerships, which helps distinguish between the responsibility of partners (Tondhlana, 2017). With time, the firm may then evolve into a corporation that is a separate legal entity from its shareholders. The benefits of such an organizational form are ease of transfer of ownership and raising capital, limited liability, and unlimited life (Tondhlana, 2017). The disadvantages of corporations include report filing, double taxation, and the cost of setting-up can be expensive.
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Going public is a financial term that refers to private businesses selling their securities to the public. This occurs through an IPO, where the firm becomes a publicly traded and owned entity (Tondhlana, 2017). This is often done to raise additional capital that will help the business grow. Therefore, companies may go public by offering their stocks for sale to the public (Tondhlana, 2017). The firm will continue to grow if it demonstrates increasing value in the form of consistently decreasing the cost of capital or continued generation of cash flows. Agency problems result from a conflict of interest between shareholders and management (Tondhlana, 2017). Management may be interested in pursuing their interests, which may differ from those of the shareholders, thus the conflict of interest. Corporate governance is an essential element of any organization. It is the set of rules, processes, and practices that direct and controls an organization (Tondhlana, 2017).
The primary objective of managers should be to facilitate the maximization of stockholder’s wealth (Tondhlana, 2017). Therefore, managers should have the stockholder’s best interest and act accordingly, which will translate to their wealth maximization.
All firms are responsible to society at large because their actions impact everyone in society. Therefore, organizations must improve environmental sustainability through practices they undertake while also eliminating reliance on unethical labor practices (Tilt, 2016).
Stock price maximization is good for society as it helps in increasing the purchasing power of a nation while also increasing the standard of living for members of society (Tondhlana, 2017).
All firms ought to behave ethically as they are answerable to society. Firms that are unethical risk losing their brand equity, competitive advantage and may even go bankrupt once consumers become aware of their practices (Grigoropoulos, 2019).
Reference
Grigoropoulos, J. E. (2019). The Role of Ethics in 21st Century Organizations. International Journal of Progressive Education, 15(2), 167-175. https://files.eric.ed.gov/fulltext/EJ1219282.pdf
Tilt, C. A. (2016). Corporate social responsibility research: the importance of context. International journal of corporate social responsibility, 1(1), 1-9. https://jcsr.springeropen.com/articles/10.1186/s40991-016-0003-7
Tondhlana, A. (2017). Corporate finance module. Chinhoyi University of Technology. https://www.academia.edu/32390299/CORPORATE_FINANCE_MODULE_CUAC_207
