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Flashcards in Topic 1 Deck (14):
1

Sole Proprietorship

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

2

Partnership

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

3

Corporation

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

4

Type 1 Agency Problems

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

5

Type 2 Agency Problems

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

6

Stakeholder

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

7

Primary market

Direct sale of securities to owners

8

Secondary market

Securities traded between owners/creditors

9

Auction markets

Market matches buyers and sellers

10

Dealer markets

Buying and selling done by dealer

11

Most appropriate goal for financial management

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

12

Difference between general and limited partners in a partnership

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

13

Most appropriate goal for financial management

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

14

Difference between general and limited partners in a partnership

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