Problem set 1

Forcefield Energy Inc. is a public corporation registered in the State of Ohio to provide heavy-duty and aeroderivative gas turbines for utilities, independent power producers, and industrial applications for customers in the United States. The primary goal of the company is to maximize stockholder wealth by making financial and investment decisions that would increase cash flows and stock price. Last year, the company’s stock price fell by 12% because of cash flow uncertainties, competitive markets, and unethical actions. The board of directors of the company has hired Joseph Sabatino, MBA to head the corporate finance department. Sabatino graduated from UC in 2016 with a master’s degree in Strategic management. He has worked in the energy sector for 5 years and has experience in capital markets and financial institutions. To achieve the stated wealth maximization goal of Forcefield Energy, Sabatino has suggested to the board of directors of the company to expand its operations outside the United States to diversify risk, increase market share, and improve free cash flows. Forcefield Energy wants you to help them answer the following questions:

1.  Explain free cash flow and its relevance to Forcefield Energy.

2. Explain to the board three properties of the company’s cash flows that would likely help to increase the firm’s value.

3. Forcefield Energy Inc. is a corporate legal entity created under Ohio laws, separate and distinct from its owners. List three advantages and two disadvantages of a corporation as a form of business organization.

4. Agency problems and conflict of interest occur in corporations. What is an agency problem? What is corporate governance?

5. Is the primary goal of maximizing stockholder wealth good or bad for the society at large? Explain.

6. List four examples of unethical actions that could harm the stock value maximization goal of a business organization.

7. Identify three attributes that Forcefield Energy Inc. should have to be successful as a corporation.

8. i). Why is corporate finance important to the success of Forcefield Energy?

   ii). What financial skills should Sabatino have to help Forcefield Energy achieve its stated goals?

9. Joseph Sabatino, the head of the corporate finance department, is planning to raise $10 million from the financial market to expand the business operations. Identify four major financial instruments that can be used to raise the needed long-term capital.

10. Explain to the board of directors four economic conditions that can affect the cost of money raised from the financial market.

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