Ch2-Company Ownership

Question 1

What composes Business Entities?

Answer 1

1) Sole Trader
2) Partnerships
3. Limited Companies
4. Limited liability company
4. Private and public limited companies

Question 2

1. what is a sole trader?
2. what is a partnership?
3. what is a Limited company?
4. Limited liability partnership?
5. what are the differences between private and public limited companies?

Answer 2

1. a business that is owned by one person. it has an unlimited liability debt. no documentation is needed.
2. a company owned by more than one person. it is an unlimited company. partners are liable to the full extent of the personal estate for the deficiencies of the company. there is a partnership agreement.
3. it is a separate legal identity from the owners of the business. owners are called shareholders. it has a limited liability. limited companies must have have Memorandum of Association and Articles of Association. dividends are paid out in proportion to the number of shares each shareholder has.
4. it is a separate legal entity. the company is responsible for its assets and liabilities. the liabilities are limited. it is governed by partnership agreement
5. a public company is allowed to issue its shares in public. the name of the company ends with ‘PLC- public limited company’
   a private company is not allowed to issue its shares in public. the name of the company ends with ‘Limited-LTD’

Question 3

1 what are the advantages of a limited company?
2. what are the disadvantages of limited companies?

3. What is a social enterprise?

Answer 3

1. limited liability companies make it easier to raise capital. separation of ownership and management allows share ownership to change without interfering with the operation of the business. A large number of people can invest a small amount of money without checking the company’s prospects. investors are able to diversify.
2. people invest in shares without being concerned about the long-term needs of the company.
   the interests/aims of the shareholders and of the managers are different.
   there are also information asymmetries among shareholders, managers, and employees.
3. the social enterprise has a clear social or environmental mission. e.g provide low-cost capital for small farmers in poorer countries, low-cost private schools. they make most of their income from trading.

Question 4

What are the types of company capital?

Answer 4

1. Long term capital(debt, equity)
2. Medium-term company finance(credit sale, leasing, bank loans, private equity funds)
3. Short-term company finance(bank overdrafts, trade credits, factoring, bills of exchange, commercial paper)
4. Alternative methods of raising finance outside the regular banking finance(shadow banking, project finance, peer-peer lending, crowdfunding, microfinance)

Question 5

describing each type of the company capital.

discuss debt and equity capital.

Answer 5

1. Debt/ Loan Capital
   a company issues loan capital to raise money from investors. in return, the company pays the investor a stream of interest payments plus a return of capital. holders of loan capital are the creditors of the company. they do not have voting rights. the rights of a holder of loan capital will be set out on the loan agreement drawn up when the loan is issued.
2. Equities/ Ordinary shares
   Shareholders hold the equity interest since they receive earnings that are left over after the business has paid all its debts(profit after tax). Ordinary shares offer a high potential return for high risk. (risk of capital loss). ordinary shares are almost always irredeemable. Shareholders have the voting right in a proportion of the shares held. They rank after all creditors of the company. Companies are not allowed to issue shares below the par value. if the company makes losses the holders of the shares are the one’s who suffer first. they are the lowest ranking form of finance in a company

Question 6

Describe each type of MEDIUM-TERM finance

Answer 6

1. Credit sale
   is a normal sale that a good together with an agreement that regular payments will be made over a set period. the ownership transfers to the buyer.
2. Leasing
   a lease is an agreement an owner of an asset gives the lessee a right to use an asset in an exchange for regular payments. Legal ownership does not change hands.
   (a) Operating lease- the owner of the asset retains most risk.
   (b) Finance lease- the lessee takes most risks associated with the asset. The present value of the payments is shown twice on the lessee’s balance sheet. (an asset and a liability).
3. Bank loans
   the full amount is paid into the borrower’s current account and the borrower makes interest payments and capital payments to the bank. bank loans are secured on the borrower’s assets at a floating rate.
4. Private Equity Funds.
   Private companies may not want to deal with the expenses of the requirements for public listing. Bank and pension funds invest in private equity funds by providing loans or buying equity interest.

Question 7

Describe each type of Short-term finance.

Answer 7

1. Bank Overdrafts
   it is an agreement with a bank to withdraw more money than what’s in the current bank account. interest is paid on the overdrawn amount.
2. Trade credit
   an agreement between a company and a supplier to settle an amount for goods at a later date after they have been supplied. Discounts are offered.
3. Factoring
   non-recourse factoring= where the supplier sells its trade debt to a factor to obtain the funds to pay to their accounts.
   recourse factoring= provides early payments of invoices. a loan secured against the invoices. Credit risk remains with the supplier
4. Bills of exchange
   a claim to the amount owed by a purchaser of goods on credit and may be accepted by the bank. The bank pays the bill to whom it is owed. The bill can then be sold to raise short-term finance.
5. Commercial Paper
   Bearer documents for large denominations which are issued at a discount and redeemed at par.

Question 8

Describe alternative methods.

Answer 8

1. Shadow banking
   it is a non-financial institution that does not have a regulated system. They do not take deposits but borrow funds from the money market and lend these funds.
   not subject to capital requirements and reserve requirements. they cannot borrow funds from the central bank
2. Project Financing
   finances large infrastructure projects and requires large capital. it is high risk and long-term. includes-
   non-recourse financing- lenders rely upon repayment of the loan on the revenues. The project’s assets are held as collateral. Lenders expect a high return for the additional risk.
   Special Vehicle purpose- finance vehicle of the project.
   the advantage is that since SPV is the borrower, the liabilities of the project are kept off-balance sheet.
3. Peer-peer lending
   a technology platform where borrowers and lenders meet. loans include- unsecured personal loans, car loans, and small business loans. The Investors’ investment is matched with the percentages of a large number of
4. Crowdfunding
   The profile of a project is set up on a dedicated crowdfunding website and social media as well to raise funds. individuals decide what amount to contribute.
5. Microfinance
   small loans that are easier and faster to secure. No interest is paid on the loan. Usually used for a start-up. They are used by charities.