LM 1: Corporate Structure & Ownership

Question 1

What are the 3 types of organizations in a market economy?

Answer 1

1. government entities
2. non profit organizations
3. for-profit organizations

Question 2

What are 4 different business structures? SGLC

Answer 2

1. sole proprietorships
2. general partnerships
3. limited partnerships
4. corporations

Question 3

Who has operational control for sole proprietorship, general partnership, and limited partnership?

Answer 3

sole proprietorship = owner operated

general partnership = partner operated

limited partnership = operated by GP, not LP’s

Question 4

What kind of business liability do sole proprietorship, general partnership, and limited partnership have?

Answer 4

sole proprietorship = unlimited risk by owner

general partnership = unlimited risk of both partners

limited partnership = limited for limited partners (LP), unlimited for general partners (GP)

Question 5

Who gets business profits in sole proprietorship, general partnership, and limited partnership and how are they taxed?

Answer 5

sole proprietorship = all to owner, taxed as personal income

general partnership = profits shared, taxed as personal income

limited partnership = shared by partners, taxed as personal income

Question 6

Where do the sources of capital (funding) come from in sole proprietorship, general partnership, and limited partnership?

Answer 6

sole proprietorship = owners personal funds

general partnership = partners

limited partnership = partners

Question 7

What are limits to business growth in sole proprietorship, general partnership, and limited partnership?

Answer 7

sole proprietorship = owners capital and appetite for risk

general partnership = partners resources and appetite for risk

limited partnership = partners resources and appetite for risk, as well as GP’s competence & integrity

Question 8

What are 2 types of corporations?

Answer 8

1. non profit
2. for profit

Question 9

What are 3 difference between for profit and non profit corporations?

Answer 9

non profit corporations do not have shareholders, don’t distribute dividends, exempt from taxes

Question 10

What are the 5 key features of corporations? LOBCT

Answer 10

1. legal identity separate from owner
2. owner operator separation (shareholders have limited involvement)
3. business liability (can’t lose more than value of investment)
4. capital financing (can access equity investors and debt)
5. taxation (taxed on profits and double taxed on dividends)

Question 11

Whats the difference between public & private corporations?

Answer 11

public corporations are usually traded on a public exchange

Question 12

What is market capitalization and formula?

Answer 12

value of company’s equity

stock price * total shares outstanding

Question 13

What is enterprise value and formula?

Answer 13

total market value of corporation net of cash held by company

EV = total market value of a company - cash and short-term investments

Question 14

What is private placement memorandum (PPM)?

Answer 14

legal document used by private companies to raise capital

Question 15

What are 3 ways companies go public, describe them? IDA

Answer 15

1. IPO (investment bank facilities or agrees to buy shares, issuer receives proceeds)
2. Direct listing (no new capital, company’s shares listed on exchange)
3. Acquisition (acquire by public company and becomes public, or SPAC raise funds through IPO)

Question 16

What is a special purpose acquisition company?

Answer 16

shell company raises cash through an IPO with the intention of buying a private company and taking it public

cash raised is held in trust until used.

Question 17

What are the 4 life cycles of corporations? SGMD

Answer 17

1. start-up
2. growth
3. maturity
4. decline

Question 18

What are the revenues like in the start-up, growth, maturity, & decline life cycle stages?

Answer 18

start-up = low to none
growth = increasing
maturity = positive and predictable
decline = deteriorating

Question 19

What are the cash flows like in the start-up, growth, maturity, & decline life cycle stages?

Answer 19

start-up = negative
growth = increasing
maturity = positive & predictable
decline = deteriorating

Question 20

What is the business risk like in the start-up, growth, maturity, & decline life cycle stages?

Answer 20

start-up = high
growth = moderate
maturity = low
decline = increasing

Question 21

What is the financing needs like in the start-up, growth, maturity, & decline life cycle stages?

Answer 21

start-up = proof of concept
growth = scale
maturity = business as usual
decline = shortfalls

Question 22

What is the financing difficulties like in the start-up, growth, maturity, & decline life cycle stages?

Answer 22

start-up = very high
growth = very high to high
maturity = moderate to low
decline = increasing

Question 23

What are 2 strategies public companies become private companies?

Answer 23

1. leverage buyout
2. management buyout

Question 24

What are leveraged buyout and management buyouts?

Answer 24

when investors acquire all public shares and delist company from exchange involving borrowing debt to purchase.

Question 25

What is the upside potential for equity investors vs debt investors?

Answer 25

unlimited for equity, limited to contractural payments for debt investors

Question 26

What is the maximum loss for equity investors vs debt investors?

Answer 26

both equity and debt investors cannot lose more than the value of their investment

Question 27

What is the investment risk for equity investors vs debt investors?

Answer 27

higher for equity compared to debt, debt investors have high priority claim while equity just get residual value

Question 28

What is the investment interest for equity investors vs debt investors?

Answer 28

debt investors see timely repayment, while equity investors want maximize the value of assets

Question 29

Do GP’s receive more compensation than just the proportion of capital committed of profits for taking on more risk?

Answer 29

yes since the GP is personally liable for the debt they will get compensated for that

Question 30

What is a two tiered board structure?

Answer 30

corporation composed of two separate boards

supervisory board which oversees management board.

supervisory board contains non-executive directors and management board contains executive directors.