FINANCIAL MARKETS AND INSTITUTIONS.

INVESTMENT BANKING
& CORPORATE FINANCE

1. EXPLAIN THE TERM CORPORATION and the advantages of a

corporation as a form of business organization
-

A corporation is a legal entity

IN THE VIEW OF TE LAW :
It is a legal person that is owned by its shareholders.
As a legal person , te corporation can :
MAKE CONTRACTS
CARRRY ON BUSINESS
BORROW/ LEND MONEY
SUE/ be SUED
One corporation can make a takeover bid for another and merge the two business
They PAY TAXES but cannot vote

In most of the countries, like US, corporations are formed unde state law, based on articles of
incorporation that set out the purpose of the business and how it is to be gouverned and operated

ADVANTAGES OF A CORPORATION AS A FORM OF BUSINESS ORGANIZATION

A corporation it is owned by its shareholders but LEGALLY it is DISTINCT from them

THE SHAREHOLDERS have LIMITED LIABILITY => which means that shareholders cannot
be held responsible for the corportaions debt
EXEMPLE : when Lehman Brothers faild in 2008, no one demended that is stockholders put up
more money to cover Lehmans ,massive debts\
THE ONLY CONSEQUENCE : it is that shareholders/stockholders can lose THEIR ENTIRE
INVESTMENT

Difrence between CLOSELY HELD and PUBLIC COMPANIES

Firstly, when a company it is established, the shares can be privatey heldby a small group of
investors and in this case the shares are not publicly traded
After the company grows and the shareholders need additional capital, they issue new shares
to be traded on markets such NYSE

CONTROL OF THE COMPANY

If we are facing with a big company, which has lots of shareholders we will face a separation
between ownership and managers. But sometimes this separation can come with some kind
of disadvantages because, in a certain moment of time, managers can act in their own
interest, rather than in the shareholds interest and so we will face a so called AGENCY
PROBLEM.

ADVANTAGES

Organizing a business in corporate form allows a company to function indeplendently from the
owners
Privides owners with personal asset protection when a business incorporates, its owners have
limited liability protection against companys debts and obligations
For example : creditors of the corporation cannot persue the business owners personal assets in
an attempt to recover business liabilities and obligations
The owners are liabile fo business losses and debts up to theis investment in the corporation

- It is easier to raise money

Incorporating allows a company to issue STOCK in an effort to raise money
Can attract more investors who are willing to buy shares in that company
- Easier to transfer owenership
o May be sold or assingned by transferring the companys stock certificate to another
shareholder
o Investors may be more likely to invest ina corporation due to the limited liability protection
given to its owners
o Sometimes the company can have a buy-sell agreement
- Increases the credibility of the company
- Has unlimited life
The corporation can be in existence well beyond the lifespan of its original owners in
conpartion with other types of companies which are dissolved or cancelled when
shareholders die or withdraw from the company

FIRSTLY :
- A company may be organized in any of three ways :
1. A sole proprietorship
2. A partnership
3. A corporation
EXAMPLES : Microsoft, IBM
-

.V

A corporation is better suited to raising capital than is a proprietorship or a partnership.

All companies can raise funds by operating at a profit or by borrowing.
However, attracting equity capital is easier for a corporation.
Because corporations sell ownership interest in the form of shares of stock, ownership rights are
easily transferred.
An investor can sell his/her ownership interest at any time and without affecting the corporation or its
operations.
INVESTOR : favorable aspect of investing in a corporation is the lack of mutual agency.
shareholders' participation in the affairs of a corporation is limited to voting at shareholders' meetings
DISADVANTAGES :
-

Subject to expensive governmental regulation

DOUBLE TAXATION : corporation first pay income taxes on their earnings after that whem those
earnings are distributed as cas dividends shareholders pay personal income taxes on the previously
taxed earnings

Not-for-profit
corporations may
be owned:
.

1. By the public
sector.
2. By a
governmental
unit.
Corporations
organized for
profit may be:

1. Publicly held
and traded:
a. On an
exchange.
b. Over-thecounter.
2. Privately
held.
44.Briefly explain the term "web of contracts" in the context of a corporation

Answer: A corporation is a complex organization. All the claimants to the value of a corporation are called
stakeholders of a corporation. They are; shareholders, bondholders, employees, managers, suppliers, customers,
government and the community. A complex set interrelated contracts governs their relationships. These contracts

could be formal or informal. This complex set of contracts can be thought of as "web of contracts."
Type: Medium
Page: 8
Explain the term "corporation."

Answer: A corporation is a legal entity and has an existence of its own. Generally, large businesses are organized
as corporations.
Type: Easy
Page: 4

38. Briefly explain the advantages of a corporation as a form of business organization.

Answer:

Corporations have infinite life.

Corporations have very many owners called shareholders and therefore corporations can raise
funds more easily than other forms of business.

There is a separation of ownership and management that is helpful in running the corporation
on a day-to-day basis.

It is very easy to transfer ownership in a corporation.

Corporations have limited liability.

Type: Medium
Page: 4

39. Briefly explain the term limited liability.

Answer: The shareholders of a corporation cannot be held personally responsible for the debt of the corporation.
This is called limited liability. Hence a shareholder's loss is limited to the amount he or she has invested in a
corporation. This is an attractive feature for the investors.

Type: Medium
Page: 4

Briefly explain the sequence flow of cash between financial markets and the firm.

Answer:

Cash is raised by selling financial assets to investors.

Cash is invested in the firm's operation and used to purchase real assets.

Cash is generated by the firm's operations.

Cash is reinvested or returned to investors.

Type: Medium
Page: 6