Ownership of Firms

Question 1

Firm

Answer 1

Planning unit of production
It takes place without a physical location (e.g. online store)

Question 2

Plant

Answer 2

It takes place with physical location

Question 3

Public enterprises

Answer 3

1.Owned by the government
2.Do not aim at profit maximisation

Question 4

Features of public enterprises

Answer 4

1. Reliable supply of goods at lower price
2. Adequate supply of capital
3. Better access to information

Question 5

Private entertprises

Answer 5

Refers to firms privately owned

Question 6

2 types of private enterprises

Answer 6

Unlimited company (sole proprietorship and partnership) and limited company ( private and public limited company)

Question 7

Sole proprietorship

Answer 7

1. Not a legal entity (bakery)
2. Unlimited liabitlity
3. Lower profit tax rate
4. Limited continuity
5. Simple set-up procedure
6. Accounting Information can be kept secret
7. Strong working incentive

Question 8

Partnership

Answer 8

1. Not a legal entity
2. Unlimited liability
3. Lower profit tax rate
4. Limited continuity
5. Simple set-up procedure
6. Information can be kept secret
7. Limited source of capital
8. Collective responsibility
9. 2 to infinity partner

Question 9

Common advantage of sole proprietorship and partnership

Answer 9

1. Lower profit tax rate
2. Easier to set-up
3. Accounting information can be kept secret to the public
4. Close relationship with employees and customers

Question 10

Common disadvantage of sole proprietorship and partnership

Answer 10

Unlimited liablity
Limited continuity
Limited source of capital

Question 11

Advantage of partnership over sole proprietorship

Answer 11

Wider source of capital
Wider scope of specialisation

Question 12

Disadvantage of partnership to sole propriertorship

Answer 12

Difficult to transfer business
Slower decision making

Question 13

Limited company

Answer 13

Limited liability
Lasting continuity
Legal entity
Separation of ownership and management
Higher profit tax rate
More complicated set up procedure ( business certificate)
Wider source of capital

Question 14

Public limited company

Answer 14

1.Can issue shares
2.Can have no restriction on the transfer of shares however the risk of company being taken over increase
3. Need to disclose financial information to the public
Listed company must be public limited company but not all public limited company are listed company

Question 15

Private limited company

Answer 15

Selling shares need the approval of the director
Need not to disclose financial information

Question 16

Advantage of limited company over a sole proprietorship and a partnership

Answer 16

Wider source of capital
Lasting continuity
Limited liability
Legal entity

Question 17

Disadvantage of limited company over a sole proprietorship

Answer 17

Accounting information cannot be kept secret (Public Ltd CO.)
Higher profit tax rate
More complicated set-up procedure
Weaker incentive to work efficiently

Question 18

Share

Answer 18

Is a certificate of ownership issued by a company

Question 19

Bond or debenture

Answer 19

Certificate of debt

Question 20

Shares

Answer 20

1.Owner of the company
2.Holders receive variable rate of dividend depending on the profit of the company
3. Holders have voting rights during AGM
4. No maturity dates

Question 21

Bonds

Answer 21

1. Creditor of the company
2. Holders receive fixed rate of interest regularly from the company
3. Holders do not have voting rights during AGM
4. Holders can claim repayment prior to shareholders
5. A fixed maturity date

Question 22

Advantage of issuing shares to small investors

Answer 22

1. Potentially higher rate of return than bonds if company earns huge profit
2. With voting rights in shareholders in AGM
3. No maturity date

Question 23

Advantage of issuing shares to the company

Answer 23

1. No interest burden
2. No redemption obligation as there is no maturity date for shares

Question 24

Disadvantage of issuing bonds to the investors

Answer 24

1. Potentially lower return than shares if the company earns huge profit
2. No voting rights in shareholders’ meeting
3. Maturity dates

Question 25

Disadvantage of issuing bonds to the company

Answer 25

1. Interest burden 2. With redemption obligation as there is maturity for the bonds

Question 26

Disadvantage of issuing shares to the small investors

Answer 26

1. Unstable return 2. Potentially have a lower return if company suffers losses 3. Lower priority in having capital refunds when company liquidates

Question 27

Disadvantage of issuing shares to the company

Answer 27

Higher risk of being taken over is incurred. Existing shareholder’s control over the company is diluted.

Question 28

Advantage of issuing bonds to small investors

Answer 28

1. Stable return 2. Potentially higher return than shares if company suffers from the loss 3. Higher priority in having capital refunds when the company liquidates

Question 29

Advantage of issuing bond for the company

Answer 29

No risk of being taken over is incurred as bond holders are only the creditor of the company

Question 30

Possible source of finance for a limited company

Answer 30

1. To issue shares/ bonds 2. To borrow money from a bank 3. To use the retained profit

Question 31

Advantage of private limited company over public limited company

Answer 31

Lower risk of being taken over Not required to disclose the company’s accounting information to the public

Question 32

Advantage of public limited company over private limited company

Answer 32

Easier transfer of its ownership More sources of capital