BUSI
NESSFI
NANCE[
Quest
ionsandAnswer
s]
1.Compare and cont
rastthe posi
ti
on ofa shar
ehol
deri
n a cor
por
ati
on,
par
tner
shi
psandsoletrader
?
Thesol epropriet
orhasunl imitedli
abil
ityformat t
ersr elati
ngt othebusi ness.
Thesol epr opri
etorist hereforeresponsiblef oral ltheobl i
gati
onsoft he
busi
ness,ev eni fthoseobl igati
onsexceedt heamountt hepr oprietorhas
i
nvestedi nt hebusiness.Eachpar tnerinapar tnershipisusual lyl
iabl eforthe
acti
vi
ties oft he partnership as a whol e.Howev er,i nal imited liabil
it
y
part
ner shi
patl eastoneoft hepartnershasl i
mi t
edl i
ability
.Acor por ati
onisa
l
egalent it
yt hatisli
ablef orit
sownact ivi
ti
es.Stockhol ders,thecor porati
on's
owners, havel i
mitedli
abilit
yforthecor porat
ion'sact ivi
ties.Theycannotl ose
morethant heamountt heypaidtobuyt hecor poration’sshar es.
2.Expl
ainhowshareholder
s’objecti
vesmayconf l
ictwit
hthegoalsofcompany
managers?Expl
ainanyrecentcasewherethismayhav ecausedthecompany
tocol
lapseand/
ortheshareholdershav
elosttheiri
nvest
ment?
Corporat
e(orowners’)obj
ect
ives(e.g.maxi
miseshareholderweal
th)ar
enot
cl
oselyali
gnedtomanagersobject
ives(e.
g.maximisesal
ar y
,empir
ebuil
ding)
.
Managersmayhav eshort
-t
ermv i
ews( earnsalar
iesandbonuses,abuseof
companybenef i
ts)forthecompanyand mayj eopar
dizef ut
urecompany
per
formance(notmaxi mi
zi
ngshareholderweal
th).
3.Whydoespr of
itmaxi
misat
ionnotnecessari
lyleadtosharehol
der
’sweal
th
maxi
misat
ion?Youcanuseanumeri
calil
lust
rati
ontoexpl
ain.
Obj
ect
ive ofmaximisi
ng pr
ofi
tavail
abl
et o shar
eholder
sOR obj
ect
ive of
maxi
misi
ngprof
itavail
abl
etoshar
ehol
dersperordi
naryshare.
Managersmayincreaseshort
-t
erm pr
ofi
tsatt
heexpenseofl
ong-
ter
m pr
ofi
ts,
i
.e.r
educeoper
atingexpenses
4. Whatf
act
orscani
nfl
uencet
hev
alueofaf
ir
m?
, Thethr
eeoveral
lfact
orst
hataf
fectt
hev
alueofaf
ir
m'sst
ockpr
icear
ecashf
low,
ti
ming,
andr
isk.
TheImportanceofCashFl ow:I
nbusiness,cashiswhatpay sthebil
lsandalsowhat
thefir
mr eceivesinexchangefori
tspr oductsandser vi
ces.Cashi sther
ef or
eof
ult
imateimpor t
ance,
(Cashnotprof
itiskingprinci
ple)
,andt heexpect
ati
ont hatthe
fi
rm wil
lgeneratecashi
nthefut
urei
soneoft hefact
orsthatgivest
hefir
mi t
sv al
ue.
TheEf f
ectofTimingonCashFl ows:Ownersandpot enti
ali
nvest
orslookatwhen
fi
rmscanexpecttorecei
vecashandwhent heycanexpecttopayoutcash.Allot
her
fact
orsbeingequal,
thesoonercompani
esexpectt orecei
vecashandthelat
erthey
expecttopayoutcash,t
hemor eval
uabl
ethef i
rm andthehigheri
tsst
ockpricewil
l
be.
TheI nfl
uenceofRi sk:Riskaffectsv al
uebecauset hel
esscertain ownersand
i
nvestorsareaboutaf i
rm'sexpectedfuturecashf l
ows,thel
owertheywi l
lv al
uethe
company .Themorecer t
ainownersandi nvestorsareaboutafir
m'sexpect edfut
ure
cashf l
ows,thehighert heywil
lv al
uet hecompany .Gener
all
y,compani eswhose
expectedfuturecashf l
owsar edoubt fulwil
lhav el owerval
uest hancompani es
whoseexpect edf
uturecashfl
owsar emor ecertain.
5.I
nli
newitht
heagencypr
obl
em,
howcansoci
ety
’si
nter
est
sinf
luencef
inanci
al
manager
sdeci
si
ons?
Somet i
mest heinterestsofabusi nessf ir
m'sowner sarenott hesameast he
i
nterestsofsoci ety.Fori nstance,t hecostofpr operlydisposingoftoxic
wastecanbesohi ght hatcompani esmaybet emptedtosimpl ydumpt hei
r
wasteinnear byr i
vers.Insodoi ng,t hecompani escankeepcost slow and
profi
tshi gh,and dr ivet hei rstockpr i
ceshi gher(iftheyar enotcaught )
.
Howev er,manypeopl esuf ferfrom t hepollut
edenv i
ronment .Thi
siswhywe
haveenv ironment alandot hersi mi l
arl aws:Sot hatsociet
y'sbestinter
ests
takeprecedenceov erthei nterestsofi ndivi
dualcompanyowner s.
Onanot hernote,whenbusi nessest akeal ong-ter
mv i
ew,t heinter
estsofthe
owners and society often (butnotal ways)coi ncide.When compani es
encouragerecycli
ng,sponsorpr ogramsf ordisadvantagedy oungpeople,run
mediacampai gnspr omot i
ngt heresponsi bl
euseofal cohol,andcontri
bute
moneyt owor t
hwhilecivi
ccauses, thegoodwi llgeneratedasar esul
tofthese
acti
vi
tiescauseslong-t
ermi ncreasesi nthefir
m' ssalesandcashf l
ows,which
cantranslat
eintoaddit
ionalweal t
hfort hefir
m' sowner s.
NESSFI
NANCE[
Quest
ionsandAnswer
s]
1.Compare and cont
rastthe posi
ti
on ofa shar
ehol
deri
n a cor
por
ati
on,
par
tner
shi
psandsoletrader
?
Thesol epropriet
orhasunl imitedli
abil
ityformat t
ersr elati
ngt othebusi ness.
Thesol epr opri
etorist hereforeresponsiblef oral ltheobl i
gati
onsoft he
busi
ness,ev eni fthoseobl igati
onsexceedt heamountt hepr oprietorhas
i
nvestedi nt hebusiness.Eachpar tnerinapar tnershipisusual lyl
iabl eforthe
acti
vi
ties oft he partnership as a whol e.Howev er,i nal imited liabil
it
y
part
ner shi
patl eastoneoft hepartnershasl i
mi t
edl i
ability
.Acor por ati
onisa
l
egalent it
yt hatisli
ablef orit
sownact ivi
ti
es.Stockhol ders,thecor porati
on's
owners, havel i
mitedli
abilit
yforthecor porat
ion'sact ivi
ties.Theycannotl ose
morethant heamountt heypaidtobuyt hecor poration’sshar es.
2.Expl
ainhowshareholder
s’objecti
vesmayconf l
ictwit
hthegoalsofcompany
managers?Expl
ainanyrecentcasewherethismayhav ecausedthecompany
tocol
lapseand/
ortheshareholdershav
elosttheiri
nvest
ment?
Corporat
e(orowners’)obj
ect
ives(e.g.maxi
miseshareholderweal
th)ar
enot
cl
oselyali
gnedtomanagersobject
ives(e.
g.maximisesal
ar y
,empir
ebuil
ding)
.
Managersmayhav eshort
-t
ermv i
ews( earnsalar
iesandbonuses,abuseof
companybenef i
ts)forthecompanyand mayj eopar
dizef ut
urecompany
per
formance(notmaxi mi
zi
ngshareholderweal
th).
3.Whydoespr of
itmaxi
misat
ionnotnecessari
lyleadtosharehol
der
’sweal
th
maxi
misat
ion?Youcanuseanumeri
calil
lust
rati
ontoexpl
ain.
Obj
ect
ive ofmaximisi
ng pr
ofi
tavail
abl
et o shar
eholder
sOR obj
ect
ive of
maxi
misi
ngprof
itavail
abl
etoshar
ehol
dersperordi
naryshare.
Managersmayincreaseshort
-t
erm pr
ofi
tsatt
heexpenseofl
ong-
ter
m pr
ofi
ts,
i
.e.r
educeoper
atingexpenses
4. Whatf
act
orscani
nfl
uencet
hev
alueofaf
ir
m?
, Thethr
eeoveral
lfact
orst
hataf
fectt
hev
alueofaf
ir
m'sst
ockpr
icear
ecashf
low,
ti
ming,
andr
isk.
TheImportanceofCashFl ow:I
nbusiness,cashiswhatpay sthebil
lsandalsowhat
thefir
mr eceivesinexchangefori
tspr oductsandser vi
ces.Cashi sther
ef or
eof
ult
imateimpor t
ance,
(Cashnotprof
itiskingprinci
ple)
,andt heexpect
ati
ont hatthe
fi
rm wil
lgeneratecashi
nthefut
urei
soneoft hefact
orsthatgivest
hefir
mi t
sv al
ue.
TheEf f
ectofTimingonCashFl ows:Ownersandpot enti
ali
nvest
orslookatwhen
fi
rmscanexpecttorecei
vecashandwhent heycanexpecttopayoutcash.Allot
her
fact
orsbeingequal,
thesoonercompani
esexpectt orecei
vecashandthelat
erthey
expecttopayoutcash,t
hemor eval
uabl
ethef i
rm andthehigheri
tsst
ockpricewil
l
be.
TheI nfl
uenceofRi sk:Riskaffectsv al
uebecauset hel
esscertain ownersand
i
nvestorsareaboutaf i
rm'sexpectedfuturecashf l
ows,thel
owertheywi l
lv al
uethe
company .Themorecer t
ainownersandi nvestorsareaboutafir
m'sexpect edfut
ure
cashf l
ows,thehighert heywil
lv al
uet hecompany .Gener
all
y,compani eswhose
expectedfuturecashf l
owsar edoubt fulwil
lhav el owerval
uest hancompani es
whoseexpect edf
uturecashfl
owsar emor ecertain.
5.I
nli
newitht
heagencypr
obl
em,
howcansoci
ety
’si
nter
est
sinf
luencef
inanci
al
manager
sdeci
si
ons?
Somet i
mest heinterestsofabusi nessf ir
m'sowner sarenott hesameast he
i
nterestsofsoci ety.Fori nstance,t hecostofpr operlydisposingoftoxic
wastecanbesohi ght hatcompani esmaybet emptedtosimpl ydumpt hei
r
wasteinnear byr i
vers.Insodoi ng,t hecompani escankeepcost slow and
profi
tshi gh,and dr ivet hei rstockpr i
ceshi gher(iftheyar enotcaught )
.
Howev er,manypeopl esuf ferfrom t hepollut
edenv i
ronment .Thi
siswhywe
haveenv ironment alandot hersi mi l
arl aws:Sot hatsociet
y'sbestinter
ests
takeprecedenceov erthei nterestsofi ndivi
dualcompanyowner s.
Onanot hernote,whenbusi nessest akeal ong-ter
mv i
ew,t heinter
estsofthe
owners and society often (butnotal ways)coi ncide.When compani es
encouragerecycli
ng,sponsorpr ogramsf ordisadvantagedy oungpeople,run
mediacampai gnspr omot i
ngt heresponsi bl
euseofal cohol,andcontri
bute
moneyt owor t
hwhilecivi
ccauses, thegoodwi llgeneratedasar esul
tofthese
acti
vi
tiescauseslong-t
ermi ncreasesi nthefir
m' ssalesandcashf l
ows,which
cantranslat
eintoaddit
ionalweal t
hfort hefir
m' sowner s.
