Finance - chapter 2

  • Created by: jmf00632
  • Created on: 08-10-19 10:46
What are the 3 forms of business organisation?
Sole trader, partnership, and limited corporation
1 of 53
What are the main disadvantages of sole trader?
Owner has unlimited liability for business debts
2 of 53
There can be both limited and unlimited liability partners
3 of 53
limited corporation?
Shareholders have limited liability for business debts.
4 of 53
What is the difference between a limited and general partnership?ip?
A limited partnership is a relationship where one or more partners are not involved in the day-to-day management of the business. ... A general partner may invest money into the company.
5 of 53
Why is the corporate form superior when it comes to rasing cash?
Easy to transfer ownership, limited life for business debts, and the unlimited life of the business
6 of 53
What is an agency relationship?
a conflict of interest between a company's management and the company's stockholders.
7 of 53
What are agency problems?
look at notes
8 of 53
Type 1 agency problem
the possibility of conflict of interest between the shareholders and managment of a firm
9 of 53
cumilitave voting
this is when a shareholder may cast all votes for one member of the board of directors
10 of 53
straight voting
this is when a shareholder may cast all votes for each member of the board of directors
11 of 53
when a shareholder gives someone else permission to vote his or her shares
12 of 53
Type II agency problem
the possibility of conflict of interest between controlling and minority shareholders
13 of 53
Why are professional firms, such as accountants and lawyers, more likely to have a partnership form rather than a sole ownership or limited company structure?
partners can keep and grow their own clients and have the benefit of paying for a share of admin resources, overheads and assets.
14 of 53
corporate behaviour is different in bank based systems and makret based systems. why?
the nature of financing in the 2 systems is different. bank - companies will strive to meet their chief financers objectives. banks are a major source of funding so influene risky behaviour and encourage invesmtnt
15 of 53
what is corporate behaviour like in a market based system?
must satisfy the needs of the investing public, who naturally focus on share price performance
16 of 53
what is the most important issue in corporate governance if you are a minority shareholder?
. if you are a minority shareholder, you would be concerned with how the majority or controlling shareholders engage with management and whether they are able to abuse their power.
17 of 53
What is the most important issue in corporate governance if you are If you are an international investor?
If you are an international investor, then country-level corporate governance would be more important.
18 of 53
Explain why should corporate governance of a sole proprietorship be different from a partnership?
In a sole proprietorship there is no need for goerment structures since all business activities are concentrated on one individual. A partnership however, consists of semi-formal corporate governance structures, such as a Partnership Agreement.
19 of 53
why are these there?
to ensure that each partner carries out his or her duties as expected.
20 of 53
why is there no single code of corporate governance applied to all the coutries in the world?
While a corporation’s goal remains the same (maximization of share value), different institutional, economic, legal, financial, and cultural characteristics means that the corporate governance environment will vary across countries.
21 of 53
Sole proprietorship is the most common type of business throughout the world. why?
they are the easiest to set up. in most countries you do not need to complete any forms or registration to set up a sole properitiship
22 of 53
What is a stakeholder and examples?
A stakeholder is any party which has an interest in the operations of the company, either directly or indirectly. Examples include shareholders, employees, creditors, customers, suppliers, normal citizens, etc
23 of 53
How are stakeholders represented in two tier board structures?
In a 2 tier board system, the board structure is divided into 2 parts - the supervisory and executive board. The supervisory board is composed of outside shareholders and other stakeholders, such as employee groups (trade unions) and banks (cap prov)
24 of 53
what is a good example of a supervisory board?
A good example of a supervisory board is DaimlerChrysler AG, which was comprised of 20 members - half of which were elected by shareholders at the Annual Meeting. The other half comprises members elected by the company’s employees who work in Germany
25 of 53
who owns a corporation?
In the corporate form of ownership, the shareholders are the owners of the firm.
26 of 53
describe the process whereby the owners control the firms management
The shareholders elect the directors of the corporation, who in turn appoint the firm’s management
27 of 53
where does the speration of control happen, which then causes the agency problem?
problems can be caused when the directors hire the managers. the maangers can start doing things for personal gain rather for the good of the business and shareholders
28 of 53
Is it possible to improve one aspect of corporate governance in a firm but weaken another at the same time?
Yes, it is possible to improve one aspect of a corporate governance principle and weaken another. For example, if you improve the rights of shareholders, it may weaken the rights of other stakeholders such as employees and communities.
29 of 53
sometimes governments take control of banks through buying their shares. how does this impact the lending culture of these banks? Is this consistent with shareholder maximization?
Governments have different objectives to shareholders. Whereas shareholders wish to maximize the value of their own investment, governments are more concerned with maximising social welfare.
30 of 53
For example, several governments purchased the shares of financially stricken banks in 2008. Shortly afterwards, they put pressure on the banks to lend to smaller companies and give mortgages, even though the banks felt that the lending decisions
31 of 53
were not value maximising
32 of 53
The current share price is £25. a company wants to buy your company, and will pay £35 per share to acquire all the outstanding shares. Your company’s management begins fighting off this hostile bid. Is managemt being selfish?
managers have many agendas including job safety. they may feel that the bidding company will not be good for the business.
33 of 53
What is a real life example of this?
when Ryanair submitted a higher bid for Aer Lingus. In the end, the bid was unsuccessful because the major shareholders did not believe that the takeover was good for the company.
34 of 53
Do you think agency problems are likely to be more or less severe in Germany and Japan than in the United States?
We would expect agency problems to be less severe in countries with a relatively small percentage of individual ownership. The high % of institutional ownership might lead to more agreement between owners and managers on decisions concerning projects
35 of 53
examples of large financial institutions?
mutual funds and pension funds
36 of 53
Large financial instiutions have been becoming the dominant owners of shares in the UK, and these institutions are becoming more active in corporate affairs. how could this be a problem for agency problems and corporate control?
may lead to a reduction in agency problems for U.K. corporations and a more efficient market for corporate control.
37 of 53
Critics have charged that compensation to top managers in the banking sector is simply too high and should be cut back. Opinion?
there is a market for executives just as there is for all types of labour. Executive compensation is the price that clears the market. The same is true for athletes and performers. - PERSONALLY, i think it is a BIT much - workers should get paid more
38 of 53
In the Middle East, many companies have a Sharia Supervisory Board to which the board of directors report. should this approach to governance be in other countries where the supervisory board guides on ethical, social or environmental matters.
Supervisory boards, like the Sharia board, can be of use when the objectives of a firm are tied to social, environmental or ethical issues. The purpose of this board is to guide executives in making the correct decisions with respect to the company.
39 of 53
Example of a supervisory board?
football teams. The supervisory board would consist of fan representatives and they would guide the executive board on football decisions. Other areas include firms with where public oversight is required, such as the banking sector
40 of 53
What are regulators in finance?
this is people put in place by the goverment to oversee and regulate financial markets- duties and resp
41 of 53
why would regulators prefer more or less involvement of institutions in the running of corporations
The main reason why institutions are important in corporate governance is because they are normally the largest shareholders in the firm. As representatives of their investee base, they should take the role of owners in monitoring firms.
42 of 53
What is the corporate governance code?
The Corporate Governance Code sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit, and relations with shareholders.
43 of 53
Differences between uk and US corporate gov (US)
in the US, shareholders interests are their prioirty - the theory that if shareholder interest is protected, the interests of other stakeholders will be protected by default.
44 of 53
here is no employee representation on UK Boards, but there is movement towards greater engagement with wider stakeholders,- stronger emphasis on the Board’s engagement with the workforce and wider corporate stakeholders, alongside their duty to S.H.
45 of 53
If John and Beverly remain a sole proprietorship, what is their biggest risk if the business does not succeed and the firm becomes bankrupt?
Unlimited liability - This means that the debtors of their company can go after both the business assets of Glindebourne Wines and personal assets if they go bankcrupt
46 of 53
If John and Beverly decide to become a corporation, what documents would they need?
will need articles of incorporation - contains information regarding the company name, business purpose, intended life and number of shares. and a memorandum of association which sets out the process for electing directors and other rules and proced
47 of 53
If John and Beverly decide to set up a limited partnership, is it easy to pass the business onto their children in the future, is a limited partnership the best structure?
No. a limited partnership is not a good corporate structure, as the transfer of ownership in a partnership is problematic and requires a new partnership to be formed.
48 of 53
yo jess
remember to check the tutorial questions for each week too and the review questions that may not be on here
49 of 53
• how can a board maintain the control of a firm even if they only own 20 percent?
• by issuing shares with very few rights – this means tht existing shareholders still have the right to make deicsions without being foreshaowed by new shareholders
50 of 53
when should a companies board structure change?
• 1. to meet any new req by the gov 2. as a firm gets bigger, an attracts new invesotrs, the need for accountability comes greater 3.have a transparent culture
51 of 53
• what processes should be put in place to ensure that all shareholders have some say in the companies strategy? how should foreign shareholders be dealt with?
• shareholders can control the companies direction, policies and activites by electing the directors. cumlitive and proxy voting should be used
52 of 53
• how can directors be farly compensated?
• incenctive – based compensation sould be used to ensure that board objectives are consistent and fair to shareholders
53 of 53

Other cards in this set

Card 2


What are the main disadvantages of sole trader?


Owner has unlimited liability for business debts

Card 3




Preview of the front of card 3

Card 4


limited corporation?


Preview of the front of card 4

Card 5


What is the difference between a limited and general partnership?ip?


Preview of the front of card 5
View more cards


No comments have yet been made

Similar Business Management resources:

See all Business Management resources »See all Finance resources »