UNIT 200910: FINANCING ENTERPRISES

WEEK 1: TUTORIAL Answers

The following set of exercises to be discussed in Week 2

1. Forms of Business Ownership: The Right Fit

Corporate Social Responsibility
1. Define sole trader and explain the five advantages of this ownership model.
A Sole Trader is a business owned by a single person. The five advantage of a sole trader
are:

Simplicity: sole trader is easy to establish and requires far less paperwork than other
structures. About the only legal requirement for establishing a sole trader is obtaining an
Australian Business number and registering for goods and services tax (GST) if the
annual GST turnover is $75,000 or more.

Single layer of taxation: Income tax is a straightforward matter for sole traders. The
federal government doesnt recognize the company as a taxable entity; all profit flows
through to the owner, where it is treated as personal income and taxed accordingly.

Privacy: Beyond filing tax returns and certain other government reports that may apply
to specific businesses, sole traders generally arent required to report anything to
anyone. Your business is your business.

Fewer limitations on personal income: As a sole trader, you keep all the after-tax
profits the business generates; if the business does extremely well, you do extremely
well. Of course, if the business doesnt generate any income, you dont get a paycheck.

Personal satisfaction: For many sole traders, the main advantage is the satisfaction of
working for themselvesof taking the risks and enjoying the rewards.

Flexibility and control: As a sole trader, you arent required to get approval from a
business partner, your boss, or a board of directors to change any aspect of your
business strategy or tactics. You can make your own decisions, from setting your own
hours to deciding how much of the work youll do yourself and how much youll assign to
employees. Its all up to you!

2. Define corporation and explain the four advantages of this ownership model.
A Corporation is a legal entity, distinct from any individual persons, that has the power to
own property and conduct business. A corporation is owned by shareholders. The four
advantages od a Corporation are:

Ability to raise capital: The ability to pool money by selling shares and bonds to
outside investors is the reason corporations first came into existence and remains one of
the key advantages of this structure. The potential for raising vast amounts gives
corporations an unmatched ability to invest in research, marketing, facilities,
acquisitions, and other growth strategies.

Liquidity: The shares of publicly traded companies have a high degree of liquidity,
which means that investors can easily and quickly convert their shares into cash by
selling them on the open market.
Liquidity helps make corporate shares an attractive investment, which increases the
number of people and institutions willing to invest in such companies.

Longevity: Liquidity also helps give corporations a long life span; when shareholders
sell their shares, ownership simply passes to a new generation, so to speak.

Limited liability: A corporation itself has unlimited liability, but the various shareholders
who own the corporation face only limited liabilitytheir maximum potential loss is only
as great as the amount they have invested in the company.

3. What is a No Liability company, and why do some companies choose this

form of ownership?
In Australia, this form of corporation is restricted to mining and resources companies. The
reason for that has to do with the high level of risk shareholders face when investing in
those companies. Shares issued by a no liability company are commonly on a partly paid
basis. Shareholders have no liability to pay any future calls on their partly paid shares.
However, by doing so they forfeit such shares.

4. Explain the concept of corporate governance and identify the three groups
responsible for ensuring good governance.
The term corporate governance can be used in a broad sense to describe all the policies,
procedures, relationships, and systems in place to oversee the successful and legal
operation of the enterprise.
The three groups responsible for ensuring good governance are shareholders, board of
directors and corporate officers.

End of chapter question

1-3 (p.19): What is the role of a shareholder in a corporation?
Shareholders play an important part in corporate governance. They can attend the annual
general meeting and vote on key issues.

1-4 (p.19): What is the difference between a merger and an acquisition?

A merger is when two companies join together to become a single entity. Acquisitions occur
when one company buys a controlling interest in the voting share of another company.

1-5 (p.19): What are the key advantages of operating as a sole trader?
Students could talk about simplicity, a single layer of taxation, privacy, flexibility and control,
fewer limitations on personal income, and personal satisfaction.

1-7 (p.19): What is the role of a companys board of directors?

Representing the shareholders, the board of directors is responsible for guiding corporate
affairs and selecting corporate officers. Increasingly, boards are becoming involved in
corporate strategy, management succession, evaluation of executives, and other crucial
issues. To accomplish this, many companies seek outside directors who own large shares in
the company. Evidence shows that companies with directors who own large shares and take
active roles usually outperform companies with more passive boards.

1-8 (p.19): What are the different forms of partnership? Explain how these differ
from one another.
General partnerships exist when all partners have joint authority to make decisions for the
firm and joint liability for the firms financial obligations. Limited partnerships exist when some
partners have a limited liability and do not participate in running the business, while the
general partners run the business and have the same unlimited liability as sole traders.
Limited partnerships offer each partner protection from major mistakes committed by the
general partners.

1-9 (p.19): To what extent do shareholders control the activities of a corporation?

The shareholders are owners of a corporation so, in theory, they are the ultimate governing
body of the organization. However, in practice, they have very little control over the day-today activities of the firmthese activities rest with the management. Shareholders are able to
influence the firm by electing directors. However, unless an individual owns a large number
of common shares, or unless the corporation allows cumulative voting, no single shareholder
carries much influence in an election.

1-11 (p.19): Why might two companies choose to form a strategic alliance rather
than pursuing a merger or acquisition?
Two companies might choose to form a strategic alliance rather than pursue a merger or
acquisition because the former allows the companies to maintain their own individual identity
and culture. According to recent studies, underestimating the power of culture clash was the
major factor in most failed mergers. In many mergers, the acquiring companies impose their
values and systems on the acquired companies without any regard to what had been working

well there previously. In addition, mergers can create immense burdens of high-risk corporate
debt, can divert investment from productive assets, and can distract managers attention from
day-to-day operations.

1-13 (p.19): Suppose you and some friends want to start a business to take
tourists on wilderness backpacking expeditions. None of you has much extra
money, so your plan is to start small. However, if you are successful, you would
like to expand into other types of outdoor tours and perhaps even open up
branches in other locations. What form of ownership should your new enterprise
take, and why?
Because there are multiple owners, a sole trader is out of the question. Because of the
potential danger inherent to wilderness expeditions, a general partnership could expose the
owners to too much financial risk (i.e., a client might sue for injuries sustained on an
expedition). Moreover, due to the limited financial resources of all of the owners, a limited
partnership is not an optimal option either. If the owners didnt anticipate remaining in the
business for a long time, a limited partnership might be the best option, as it would allow
them to pay taxes as though they were partners while limiting their liability to their investment
in the company. However, because the owners have goals to expand the company, the best
form of ownership would be a corporation. This will limit their liability and enable them to raise
expansion capital by selling shares and bonds.

Additional Reading- Corporate Social Responsibility (Ferrell

et al. 2015-Pages 35-42)
1. Discuss the arguments for and against social responsibility by business.
Arguments for social responsibility include:
(1) business helped create problems and should help to solve them;
(2) business has the financial and technical resources to help solve problems;
(3) as a member of society, business should do its fair share to help others;
(4) social responsibility can help prevent increased government regulation; and
(5) social responsibility helps to ensure economic survival.
Arguments against social responsibility include:
(1) social responsibility detracts from the profit-making objectives of business;
(2) participation in social responsibility programs gives business power at the
expense of other segments of society;
(3) business may not have the expertise to solve social problems; and
(4) social problems are the responsibility of government agencies.
Students may be able to offer additional arguments for or against being socially responsible.

2. What are the four dimensions of social responsibility?

Economic, legal, ethical, and voluntary concerns represent the four dimensions of social
responsibility. Earning profits is the foundation of these dimensions and complying with the
law is the next step. A business whose sole objective is to maximize profits is not likely to
consider its social responsibility, although its activities will probably be legal. Voluntary
responsibilities are additional activities that may not be required, but they promote human
welfare or goodwill.

3. Discuss the sustainability issues that managers must confront in dealing with
social responsibility issues.
Managers today must consider the consequences of their actions on the environment as a
part of their social responsibility. Business practices that harm endangered wildlife and their
habitats are another environmental issue. Businesses must also be concerned with their
contributions to air, water, and land pollution as a result of their operations. In response to
these concerns, many firms are trying to eliminate wasteful practices, the emission of
pollutants, and/or the use of harmful chemicals from their manufacturing processes.

Multiple Choice Exercises:

1) Which of the following statements is TRUE of the liability of investors in a
corporation?
A) Majority investors are personally liable, whereas minority investors are not
personally liable.
B) Investors have personal liability for the business transactions in corporations.
C) Investor's liability is limited to the amount invested in the corporation.
D) Investors are personally liable for transactions, whereas their property is not liable.
E) Investors' property is liable for the business transactions but investors are not
personally liable.
Answer: C
Explanation: Investor's liability is limited to the amount of his or her investment in a
corporation.
2) In a sole trader, the owner ________.
A) obtains limited liability protection on the business's actions
B) is taxed more than once for the income generated
C) and the business are legally inseparable
D) has lesser responsibility compared to other forms
E) does not have personal liability for the transactions of the business
Answer: C
Explanation: In a sole trader, the owner and the business are legally inseparable, which
gives the owner unlimited liability. Any legal damages or debts incurred by the business
are the owner's personal responsibility.
3) In a(n) ________, two companies join to form a single entity either by pooling
their resources or by one company purchasing the assets of the other.
A) limited partnership
B) acquisition
C) merger
D) joint venture
E) strategic alliance
Answer: C
Explanation: In a merger, two companies join to form a single entity. Companies can
merge either by pooling their resources or by one company purchasing the assets of the
other.

4) A ________ merger occurs when different companies at the same stage or level
merge.
A) standardised
B) horizontal
C) conglomerate
D) vertical
E) operational
Answer: B
Explanation:
A horizontal merger occurs when different companies at the same stage or level merge.
5) Water and soil pollution from oil and gas drilling is primarily related to ____.
A) consumer relations
B) sustainability issues
C) community relations
D) employee relations
E) relations with shareholders
Answer: B
Explanation:
One area of environmental concern is pollution of water and soil from business
activities. Sustainability refers to conducting activities in such a way as to provide for the
long-term well-being of the natural environment, including all biological entities.