Intro Flashcards

1
Q

Ownership

A

The right to share in a firm’s profits

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2
Q

Control

A

The right to directly manage or elect management of a firm

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3
Q

Personal liability

A

The responsibility to pay a firm’s financial obligations using personal assets when the firm cannot

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4
Q

Limited liability

A

A limit that the owner can only lose the value of their investment when the firm cannot pay its financial obligations

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5
Q

Sole trader

A
  • Biz owned and controlled by a single person
  • Sole trader is personally liable for firm’s debts
  • Business ceases existence with death or withdrawal of the sole trader
  • Profits taxed at a personal level
  • Also known as sole proprietships
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6
Q

Partnership

A
  • Biz owned by several partners
    > General partners:
    Ownership, control and personal liability
    > Limited partners:
    Ownership, no control and limited liability
  • Profits taxed @ personal liability
  • Biz ceases to exist w death or withdrawal of a single general partner unless other provisions are made
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7
Q

Comparison: sole trader v partnership v limited

A

-

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8
Q

Corporation organisational structure

A
  1. Board of directors
    - Each director is elected by the firm’s owners
    - Hires the chief executive officer
    - Monitors firm and sets high level strategy
    - Objective is to maximise
  2. Chief Executive Officer (CEO)
    - Everyday manager of firm
    - Implements rules and policies set by board
    - Advised by high level executives
    - Objective is to maximise firm value

3, Chief Financial Officer

  • Evaluates investment decisions for the firm
  • Evaluates financing decisions for the firm
  • Objective is to maximise firm value
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9
Q

Key features corporation

A
  • own legal entity, distinct from owners

- separation b/w ownership and management

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10
Q

Agency costs

A

Definition

  • We assume that employees have their own personal objectives
  • Personal objectives may not always agree w the value maximising objectives of the firm’s owners
  • An agency cost arises when an employee takes an action that serves their own interests instead of maximising firm value

Eg

  • A CEO may not invest in a profitable, but risky project if they are afraid of getting fired should the project fail
  • An employee may outsource their job, netting profit
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11
Q

Corporations

A

Advantages over partnerships and sole traders

  • Limited liability for the owners
  • Taxation (in jurisdictions w “classical” tax systems)
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12
Q

Ownership comparison: sole trader v partnership v limited partnership v corporation

A

-

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