Intro

Question 1

Ownership

Answer 1

The right to share in a firm’s profits

Question 2

Control

Answer 2

The right to directly manage or elect management of a firm

Question 3

Personal liability

Answer 3

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

Question 4

Limited liability

Answer 4

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

Question 5

Sole trader

Answer 5

• 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

Question 6

Partnership

Answer 6

• 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

Question 7

Comparison: sole trader v partnership v limited

Answer 7

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Question 8

Corporation organisational structure

Answer 8

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

Question 9

Key features corporation

Answer 9

• own legal entity, distinct from owners

- separation b/w ownership and management

Question 10

Agency costs

Answer 10

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

Question 11

Corporations

Answer 11

Advantages over partnerships and sole traders

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

Question 12

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

Answer 12

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