Topic 1

Question 1

Sole Proprietorship

Answer 1

Business owned by single individual
Advantages
•easy and simple to form
•owner keeps all profits
Disadvantages
•owner has unlimited liability
•ownership difficult to transfer

Question 2

Partnership

Answer 2

Business formed by two or more individuals/entities
Advantages
•easy and simple to form
•partners keep profits
Disadvantages
•general partners have unlimited liab.
•ownership difficult to transfer

Question 3

Corporation

Answer 3

Advantages
•ease of transferring ownership
•limited liab. for business debts
•unlimited life of business
Disadvantages
•corporate governance becomes an issue
-how corporations are controlled
-

Question 4

Type 1 Agency Problems

Answer 4

The relationship between shareholders and management.
•principle hires agent to perform a task
•interests of principle and agent may differ
-profitable but risky
-owner in favour, management not over fear of losing job

Question 5

Type 2 Agency Problems

Answer 5

The relationship between a dominant or controlling shareholder and other (smaller) shareholders with a small proportional stake.
•shareholder goals differ
-controlling shareholder does not simply wish to maximise value

Question 6

Stakeholder

Answer 6

A stakeholder is someone, other than a shareholder or creditor, who potentially has a claim on the cash flows of the firm.
Eg. •employees

Question 7

Primary market

Answer 7

Direct sale of securities to owners

Question 8

Secondary market

Answer 8

Securities traded between owners/creditors

Question 9

Auction markets

Answer 9

Market matches buyers and sellers

Question 10

Dealer markets

Answer 10

Buying and selling done by dealer

Question 11

Most appropriate goal for financial management

Answer 11

• maximise profits
• maximise market share
• survive
• maximise shareholder value

Question 12

Difference between general and limited partners in a partnership

Answer 12

•general partners have unlimited liability
-lose all their money
•limited partners lose only what they put it
-limited liability

Question 13

Most appropriate goal for financial management

Answer 13

• maximise profits
• maximise market share
• survive
• maximise shareholder value

Question 14

Difference between general and limited partners in a partnership

Answer 14

•general partners have unlimited liability
-lose all their money
•limited partners lose only what they put it
-limited liability