Ch.3 Types of Business Ownership

Question 1

Name the definition of firms.

Answer 1

it is a planning unit of production. It makes decisions regarding the employment of factors of production and the production of goods and services.

Question 2

What is a public enterprise?

Answer 2

It is a firm that is wholly owned, operated and managed by the government and its agencies.

Question 3

What are the types of public enterprises?

Answer 3

1. Government departments.
2. Public Corporations.

Question 4

Name the characteristics of government departments.

Answer 4

1. They are wholly owned, managed and operated by the government.
2. The staff are mostly civil servants.
3. Most of them are directly financed and operated directly by the government but some are self-financing running in the form of trading fund.
4. The government participates in the daily running of government corporation.
5. They do not have a separate legal existence.

Question 5

Name the characteristics of public corporations.

Answer 5

1. They are set up and wholly owned by the government.
2. They operate on commercial principles and are financially independent of the government.
3. An independent board of directors is appointed by the government to manage the corporations.
4. Most of their staff are not civil servants.

Question 6

Name some examples of government departments.

Answer 6

Fire Service Department, Water Supplies Department, Education Bureau.

Question 7

Name some examples of the government departments that are under trading fund.

Answer 7

Land Registry, Electrical and Mechanical Services Department, HongKong Post, Companies Registry

Question 8

Name some examples of public corporations.

Answer 8

Kowloon-Canton Railway, Hong Kong Examinations and Assessment Authority, Hospital Authority, The Airport Authority of Hong Kong

Question 9

What are the features of public enterprises?

Answer 9

1. Adequate and stable sources of capital.
2. Better access to information and statistical data.
3. Reliable supply of goods and services at lower prices.
4. Higher average production costs.

Question 10

What is the definition of a private enterprise?

Answer 10

A private enterprise is a firm that is privately owned.

Question 11

What are the features of a sole proprietorship?

Answer 11

1. It is not a legal entity. The personally owner is personally liable for all charges.
2. Unlimited liability. The owner bears unlimited liability and his or her liability is not confined to the amount of the initial investment.
3. Limited continuity. If the owner dies or goes bankrupt, the firm has to shut down. The lack of lasting continuity of the firm hinders long term planning and development.
4. Simple legal set-up procedure.
5. Lower profits tax rate than that for the limited companies.
6. Accounting information can be kept secret.
7. Closer relationship with employees and customers. It can help maintain morale and may help the firm better understand the needs of the customers.
   8.Limited source of capital.
8. Prompt decision making.
9. Stronger work incentive.

Question 12

What are the features of a limited company?

Answer 12

1. A legal entity.
2. Limited liability. The liability of shareholders is confined to the amount of their investment.
3. Lasting continuity.
4. High profit tax rate than that for sole proprietorship and partnership.
5. Separation of ownership and management. A limited company is usually managed by the board of directors. The board is appointed by shareholders at an annual general meeting. Although shareholders are the owners of the firm, they may not be directly involved in its management.
6. More complicated set-up procedures.
7. Wider sources of capital than sole proprietorships and partnerships.

Question 13

What are the differences between a private limited company and a public limited company?

Answer 13

1. Number of shareholders. 1-50 vs 1 to infinity.
2. Sources of capital. Private limited company cannot issue shares or bonds to the public vs A public limited company can issue shares and bonds to the public and listed on a stock exchange.
3. Transfer of ownership.
   a. The company’s shares can only be transferred with the consent of other shareholders vs the public can buy and sell the company’s shares without the consent of other shareholders.
   b. The shares cannot be freely traded on a stock exchange and existing shareholders have tighter control over ownership and it’s more difficult for the company to be taken over vs for a listed company, the shares can be freely traded on stock exchange. This increases the risk of company being taken over.
4. Disclosure of financial information. A private limited company has to disclose its accounting information to shareholders only vs a public limited company must disclose its accounting information to the public regularly. Investors and competitors may analyse the financial condition of the company.

Question 14

What are shares?

Answer 14

Shares are certificates of ownership which represent the ownership of shareholders in a limited company. They may receive dividends as a return on their investment.

Question 15

What are bonds?

Answer 15

Bonds are certificates of debt issued by a limited company to raise capital. Bondholders are the creditors of the company.

Question 16

State the differences between shares and bonds.

Answer 16

1. Status of holders: owners of the company vs creditors of the company.
2. Rate of return:
   a. Holders may receive dividends, depending on the company’s policy and profits of the year. vs Holders receive interest regularly from the company, regardless of whether the company makes a profit or not.
   b. The rates of dividends vary. Holders may enjoy a capital gain when there is a rise in the company’s share price. vs The rate of interest is usually fixed.

Question 17

What are the advantages of issuing shares to raise capitals from the view point of the company?

Answer 17

1. They have no interest burden since the firm does not have the obligation to pay dividends to shareholders.
2. No redemption obligation. The firm does not have the obligation to redeem the shares.
3. Lower debt to equity ratio. Issuing shares will not increase the debts of the company and will not affect the company’s ability to obtain new loans from banks.

Question 18

What are the disadvantages of issuing shares to raise capitals from the view point of the company?

Answer 18

1. Controlling power of existing shareholders may be diluted.
2. Higher risk of being taken.

Question 19

What are the advantages of issuing bonds to raise capitals from the view point of the company?

Answer 19

1. Controlling power over company of existing shareholders will not be diluted.
2. Lower risk of being taken over.

Question 20

What are the disadvantages of issuing bonds to raise capitals from the view point of the company?

Answer 20

1. Has interest burden. The firm has the obligation to pay interest to bondholders regularly no matter the firm makes a profit or a loss.
2. Has the redemption obligation. The firm has the obligation to redeem the bonds at maturity date.
3. Higher debt to equity ratio. Issuing bonds will increase the debts of the company, thus will affect the company’s ability to obtain new loans from bank.

Question 21

What are the advantages of issuing shares to raise capitals from the view point of the investors?

Answer 21

1. Shareholders may receive more dividend return or capital gain when company make huge profits.
2. Shareholders have voting rights in AGM as they are the owners of the company.

Question 22

What are the disadvantages of issuing shares to raise capitals from the view point of the investors ?

Answer 22

1. Shareholders may receive no dividend return no matter the company make a profit or loss according to the policies.
2. Shareholders are the last to claim repayment if the company winds up. The investment risk of buying shares is higher than that of buying bonds.

Question 23

What are the advantages of issuing bonds to raise capitals from the view point of the investors?

Answer 23

1. The rate of return from bonds is more certain because bonds have a fixed rate of interest irrespective of whether the company makes a profit or not.
2. Bondholders can claim repayment prior to shareholders when the company winds up. The investment risk of buying bonds is lower than that of buying shares.

Question 24

What are the disadvantages of issuing bonds to raise capitals from the view point of the investors ?

Answer 24

1. Since bondholders are not the owners of the company, they do not have voting rights at the AGM.
2. Bondholders cannot get extra returns even if the company makes a huge profit.