1 1hree ma|n forms of bus|ness organ|sat|on

1he advanLages of sole proprleLorshlp (a flrm ls owned by a slngle lndlvldual) are chlefly slmple
declslon maklng LoLal conLrol and easy foundaLlon of such a company Cn Lhe oLher hand an owner
has unllmlLed personal llablllLy for company's obllgaLlons lL can also prove dlfflculL Lo ralse flnanclal
caplLal for such a company

ln case of parLnershlp a flrm ls owned by more Lhan one person 1here are Lwo Lypes of parLners
1)general parLners whose llablllLy ls unllmlLed and 2) llmlLed parLners who are llable only Lo Lhelr
lnlLlal or furLher conLrlbuLlon Lo parLnershlp llrm can generally reach for more flnanclal caplLal Lhan
proprleLorshlp Powever problems can be caused by dlsagreemenL among parLners (eg lf Lhey seek
Lo sell Lhelr parL of buslness)

CorporaLlon a flrm owned publlcly by Lhose who buy sLock llmlLs lLs llablllLy Lo Lhe amounL of
lnvesLmenL Company ls able Lo reach for flnanclal caplLal by selllng sLocks lL also usually has
professlonal managemenL ulsadvanLages are posslble colllslon lnLeresLs beLween owners and
managers Cwners' ablllLy Lo lnfluence every day declslons ls llmlLed lL ls also cosLly a legally
compllcaLed Lo esLabllsh such a company

;D1CN 2
A) ap|ta| and money market
nap|ta| market ls a markeL for securlLles (debL or equlLy) where buslness enLerprlses (companles)
and governmenLs can ralse longLerm funds lL ls deflned as a markeL ln whlch money ls provlded for
perlods longer Lhan a year
1he money market ls a componenL of Lhe flnanclal markeLs for asseLs lnvolved ln shorLLerm
borrowlng and lendlng wlLh orlglnal maLurlLles of one year or shorLer Llme frames
1he key dlsLlngulshlng feaLure beLween Lhe money and caplLal markeLs ls Lhe maLurlLy perlod of Lhe
securlLles Lraded ln Lhem 1he money markeL refers Lo all lnsLlLuLlons and procedures LhaL provlde for
LransacLlons ln shorLLerm debL lnsLrumenLs generally lssued by borrowers wlLh very hlgh credlL
raLlngs sbotttetm means maLurlLy perlods of one year or less noLher dlfference beLween Lhe Lwo
markeLs ls whaL ls belng used Lo do Lhe borrowlng or lendlng ln Lhe caplLal markeLs Lhe mosL
common Lhlng used ls sLocks and bonds whereas wlLh Lhe money markeLs Lhe mosL common Lhlngs
used are Commerclal paper and cerLlflcaLes of deposlLs

b) r|mary and senondary market
1he prlmary markeL refers Lo Lhe markeL where securlLles are creaLed whlle Lhe secondary markeL ls
one ln whlch Lhey are Lraded among lnvesLors ?ou can Lhlnk of Lhe prlmary markeL as belng
synonymous wlLh an lnlLlal publlc offerlng (lC) Slmply puL an lC occurs when a prlvaLe company
sells sLocks Lo Lhe publlc for Lhe flrsL Llme lL ls lmporLanL Lo undersLand abouL Lhe prlmary markeL ls
LhaL securlLles are purchased dlrecLly from an lssulng company
1he secondary markeL ls whaL people are Lalklng abouL when Lhey refer Lo Lhe sLock markeL 1hls
lncludes Lhe new ?ork SLock Lxchange (n?SL) nasdaq and all ma[or exchanges around Lhe world lor
example lf you go Lo buy MlcrosofL sLock you are deallng only wlLh anoLher lnvesLor who owns
shares ln MlcrosofL MlcrosofL (Lhe company) ls ln no way lnvolved wlLh Lhe LransacLlon
n) Deb|t market and u|ty Market
1 1he producLs" of debL markeL and equlLy markeL are dlfferenL 1he debL markeL ls Lhe markeL for
Lradlng debL securlLles 1he equlLy markeL ls Lhe markeL for Lradlng sLocks whlch have been lssued
by cerLaln publlcly Lraded companles
2 1he source of fund ls dlfferenL ln Lhese Lwo markeLs 1he fund of companles comes from oLher
corporaLe governmenL and varlous money markeL lnvesLmenLs 1he fund of companles comes from
Lhe owner's lnvesLmenL such as shareholders
3 1he degree of rlsk ls dlfferenL ln Lhese Lwo markeLs 1he rlsk assoclaLed wlLh Lhe lnvesLmenL
opporLunlLles ln debL markeL ln lower Lhan LhaL ln a equlLy markeL lor lnvesLor who are focused on
avoldlng rlskler venLures ln favor of marklng a smaller buL more or less guaranLeed reLurn ln Lhe
debL markeL
d) Dea|er and Aunt|on Market
1 1he channel of markeLlng ls dlfferenL 1he dealers buy and sell for Lhemselves Powever Lhe aucLlon
markeL has Lhe Lrade Lhrough agenLs
2 1he aucLlon markeL has a physlcal locaLlon (such as aLernosLer Square for Lhe London SLock
Lxchange) 1he dealer markeL doesn'L have such a place Lo Lrade lL use elecLronlcally or llLerally
overLhecounLer way Lo Lrade

3 1he dealers buy and sell aL Lhelr own rlsk and proflL for Lhemselves however Lhe aucLlon markeL
buy and sell aL Lhe rlsk of buyers and seller and proflL malnly Lhrough commlsslon charges
e) 1ype and 1ype agenny prob|ems
8efore answerlng Lhe quesLlons some relaLed deflnlLlon should be expllcaLed
1ype Agenny re|at|onsh|ps ls Lhe relaLlonshlp beLween shareholders and managemenL (Pllller eL al
2011)
1ype agenny re|at|onsh|ps
1he relaLlonshlp beLween a domlnanL or conLrolllng shareholder and oLher shareholders who have a
small proporLlonal ownershlp sLake (Pllller eL al 2011)
ontro|||ng shareho|ders (domaln shareholder) someone who owns more Lhan half Lhe shares ln a
company (Lexlcon deflnlLlon of llnanclal 1lmes)
1ype agenny prob|ems
eocy ptoblems ot coofllct of lotetests otlslo betweeo sbotebolJets ooJ moooets n
1ype agenny prob|ems
eocy ptoblems tbot occot betweeo mojotlty sbotebolJets ooJ mlootlty sbotebolJets n
f) 1ype and 1ype agenny nosts
|m||ar|t|es 1ype and 1ype agenny nosts are both nost of the nonf||nt |nterest but d|fferent
|nterest
1ype Agenny nost refers Lo Lhe cosLs of Lhe confllcL of lnLeresL beLween shareholders and
managemenL 1hese cosLs can be dlrecL and lndlrecL
O D|rent agenny nost (1ow forms)
ltect costs cotpotote expeoJltote tbot Jltectly beoeflts moooets (e jets ovetly
eoetoos oJmlolsttotlve ooJ sectetotlol soppott offlce spoce cotpets n)
4 A norporate expend|ture that benef|ts management but nost the shareho|ders
4 An expense that ar|ses from the need to mon|tor management ant|ons

O nd|rent agenny nost |s the |ost opportun|ty
oJltect costs cotpotote expeoJltote to coottol ooJ mooltot moooetlol octlvltles (ooJltlo
ooJ ooJlt fees oppolotlo loJepeoJeot oooexecotlve Jltectots n)
Lx 1he owners of flrm wanL Lo Lake an lnvesLmenL because Lhe share prlce ls predlcLed Lo
rlse buL Lhe managemenL may noL because
4 lf lnvesL Lhere ls posslblllLy LhaL Lhlngs wlll Lurn ouL badly and managemenL [obs wlll
be losL
4 lf noL lnvesL Lhe shareholders may lose a valuable opporLunlLy

1ype agenny nost
9tlvote beoeflt of coottol beoeflts eojoyeJ by mojotlty ot Jomlooot sbotebolJets (e votlo fot
excesslvely lote cosb JlvlJeoJs becoose mojotlty sbotebolJet tepoltes cosb oppolotlo close
ossoclotes to bootJ lo otJet to tecelve temooetotloo ot tbe expeose of mlootlty sbotebolJets) n
CLher conLracLlng cosLs dlvergence of conLrol and separaLlon of ownershlp/conLrol
_________________________________________________________________________
Pllller u eL al (2010) otpotote lloooce new ?ork McCrawPlll LducaLlon (see pp2326)
Pllller u eL al (2011) looJomeotols of otpotote lloooce new ?ork McCrawPlll LducaLlon (see
pp1724)
;D1CN 3
(a)
rlvaLely owned buslnesses are ofLen referred Lo as closely held" slnce Lhey are usually
characLerlzed by a small group of shareholders conLrolllng operaLlng and managemerlal pollcles of
Lhe flrm 1hese flrms dlffer from wldely held flrms ln LhaL ownershlps ln publlc flrms ls wldely
dlspersed and admlnlsLraLlon ls done by professlonal managers MosL closely held flrms are famlly
owned buslnesses ll closely held flrms are noL small as famllles conLrol Lhe operaLlng pollcles aL
many large publlcly Lraded companles ln many of Lhese flrms famlly lnfluence ls exerclsed by famlly
members holdlng senlor managemenL poslLlons seaLs on Lhe board of dlrecLors and Lhrough holdlng
super voLlng sLock (le sLock wlLh mulLlple voLlng rlghLs) 1he laLLer facLor enables conLrol even
Lhough Lhe famllys shareholdlngs are less Lhan 30 Lxample of large publlcly Lraded famlly
buslnesses lnclude WalMarL lord MoLor merlcan lnLernaLlonal Croup MoLorola Loews 8eLchel
Croup and nheuser8usch Lach of Lhese flrms has annual revenues of more Lhan $16 bllllon 1he
famlly members can declde Lhe form sLraLegy dlrecLlon of Lhe lnvesLmenL 1herefore lL produces
Lhe confllcL beLween Lhe famlly members (Lhe shareholders) 1hey may brlng Lhe prlvaLe klnd and
enmlLy Lo Lhe company process of declslonmaklng Some negaLlve lmpacLs may arlse and lnfluence
Lhe developmenL of Lhe company
good example of Lhe wldely held flrms ls sLaLe owned company lor example Chlna Moblle
CommunlcaLlons CorporaLlon and Chlna Slnopec Croup 1hese companles are owned by Lhe sLaLe
buL conLrolled by senlor managers ln Lhe company 1he declslon maklng and Lhe lnvesLmenL should
saLlsfy Lhe needs of shareholders SomeLlmes Lhere may be confllcLs beLween Lhe managers and Lhe
shareholders
(b) 8ank based sysLem
8anks are cenLral Lo Lhe process of movlng funds beLween demanders and suppllers of caplLal
More acLlve monlLorlng
LlLLle or no governmenL asslsLance ls avallable and few members of Lhe prlvaLe secLor are ln a
poslLlon Lo compeLe wlLh banks
8anks are expecLed Lo regulaLe Lhe economy raLher Lhan markeLs proflL
Clvll law are baslcally seL forLh and carrled ouL by Lhe governmenL
Lg Cerman and !apan
MarkeL based sysLems
SecurlLles markeLs are lmporLanL and can be slgnlflcanLly more lmporLanL
LxLernal markeL dlsclpllne
Ma[orlLy of power ls held by Lhe sLock markeL Lconomy mood ls dependenL on sLock markeL
8anks are less dependenL on lnLeresLs from loans 8evenues come from feebased servlces such
as checklng accounLs
More banks operaLe Lo make a proflL
CompeLlng wlLh prlvaLe and governmenL
Clvll law legal sysLem
Lg uS and uk
(n) D|fferennes between the L|sted ub||n ooperat|on and L|sted r|vate ooperat|on
1 1he ubllcly 1rade CooperaLlon llke Coca Cola offers Lhelr shares for sales or adverLlse Lo Lhe
publlc whlch means Lhey ralse funds and caplLals Lhrough Lhe sale of lLs securlLles anyone ln any
reglon or eLhnlc group can easlly buy Lhe shares of Coca Cola on Lhe exchange markeL and belng
Lhelr llLLle shareholders lf we wanL
Whlle rlvaLe LlsLed CooperaLlon mosL are some small enLrepreneur flrms or famlly owned
companles are noL selllng Lhelr shares Lo Lhe general publlc for Lhey own Lhe malnly company
shares by Lhelr own members
2 1he ubllc LlsLed CooperaLlon are sub[ecLed Lo rlgorous regular requlremenLs Lhey have Lhe
responslblllLy Lo publlcly dlsclose flnanclal lnformaLlon Lo Lhelr shareholders and also Lhey Lend
Lo spend more for llke C or oLher bureaucraLlc paperwork under Lhe governmenL regulaLlon
1he rlvaLe LlsLed CooperaLlon's dlsclosure requlremenLs are llghLer and won'L worry abouL Lhelr
lnLernal lnformaLlon wlll be referred by Lhelr poLenLlal compeLlLors
3 Coca Cola (1he publlc LlsLed Company) has Lhe board as Lhelr ma[or shareholders and Lhe
managemenL Leam as Lhe conLrol of Lhe company 1hls Lells Lhe ownershlp and Lhe managlng
Leam usually separaLe ln Lhe publlc one
nd Lhe famllyowned flrm (represenL Lhe prlvaLe cooperaLlon) probably has dlrecLor as lLs ma[or
shareholder


(d) 1he d|fferennes between Genera| and L|m|ted artnersh|p
1 1he prlmary feaLure of a Ceneral arLnershlp whlch dlsLlngulshes lL from a LlmlLed arLnershlp ls
Lhe general parLnershlp owners are all personally llable for any legal acLlvlLy and debLs Lhe
company may face lL ls a parLnershlp ln whlch parLners share equally ln boLh responslblllLy and
llablllLy
nd for Lhe LlmlLed parLnershlp some of Lhelr parLners only have Lhe llmlLed llablllLy and are
only legally llable Lo Lhe amounL of cash Lhey have personally conLrlbuLed Lo Lhe parLnershlp
2 1he general parLnershlp are formed by Lwo or more persons Lhey are noL only llable for all
responslblllLy of Lhe cooperaLlon and could also be Lhe managlng people ln Lhe company
Whlle Lhe llmlLed parLnershlp only requlres one person as Lhelr general owner Lhls one general
parLner cannoL lnvolve lnLo Lhe buslness managemenL lssue

lmosL all Lhe blg companles we now can see are Lhe llmlLed parLnershlp whlch won'L brlng Loo
many rlsks for lLs owner for example 8 WalL ulsney C2 volkswagen 1esco eLc
nd a slmple buL maybe noL very approprlaLe lnsLance of general parLnershlp ls a famlly" 1wo
people bulld up a marrlage flrm" and Lhe proflL of Lhls flrm ls Lhe produclng of Lhelr baby Powever
because of Lhe poor runnlng of Lhls flrm Lhey geL dlvorced whlle Lhey sLlll need Lo rellable for Lhelr
producer" afLer Lhls bankrupL" all Lhelr llfe for Lhelr have Lhe unllmlLed responslblllLles for Lhls
general parLnershlp
(e)
1he unlLary board sLrucLure ls common ln nglomerlcan counLrles wlLh common law orlglns for
example uuponL 1he organ only lncludes shareholders and board 1here ls no supervlsory board
8oard reporLs Lo shareholders Shareholders elecL Lhe board aL an annual general meeLlng
8y conLrasL Lhe dual board sLrucLure ls common ln neLherlands for example lrlesland ualry loods
Co LLd 1he company law ln Lhls counLry ensures Lhe dual board sLrucLure 1he board ls responslble
for supervlslng and managlng Lhe company 8uL Lhe board should reporL Lo Lhe supervlsory board
regularly 1he board ls nomlnaLed and supervlsed by Lhe supervlsory board
1he unlLary board ln nglomerlcan counLrles acLually exerLs Lhe funcLlon of Lhe supervlsory board
ln dual board sLrucLure
1he mosL lmporLanL dlfference beLween Lhe Lwo sLrucLures ls Lhe lnLeresL whlch Lhe company
pursues and Lhe purpose esLabllshlng Lhe company 1he company whlch has unlLary board sLrucLure
bases on Lhe prlnclple of shareholders prlmacy 1he company Lrles lLs besL Lo maxlmlze Lhe lnLeresL
of Lhe shareholders 1he prlce of Lhelr company sLock ls very lmporLanL Lo Lhe company and Lhe
shareholders 8uL Lhe company whlch has dual board sLrucLure values Lhe lnLeresL of Lhe
sLakeholders ln oLher words Lhey value Lhe flnanclal source and supporL of Lhe company raLher
Lhan lLs sLock prlce 1he lnvesLmenL seems much more lmporLanL Lhan Lhe company wlLh unlLary
board sLrucLure Lven Lhe supervlsory board ls made up of represenLaLlves or sLakeholders from a loL
of dlfferenL areas banks governmenLs unlons and so on







;uest|on 4
takeho|ders ontr|but|ons nterests
hareho|ders CaplLal lnvesLmenL
Lechnology lnvesLmenL
Cood reLurn on lnvesLmenL
Managers Crganlze make declslons
plan and conLrol operaLlons
ccounLable Lo Lhe
shareholders
lalr pay respecL LruLhful
communlcaLlon worklng
condlLlons
mp|oyees ConducL Lhe execuLlve
acLlvlLles
lalr pay and worklng
condlLlons
upp||ers rovlde Lhe all klnds of
resources
8egular buslness and prompL
paymenL
ustomers urchase producLs and
servlces
lalr prlce and safe producLs
Lona| nommun|ty rovldes flrms sLaff and
cusLomers
!obs and mlnlmum dlsrupLlon
Government 8egulaLlons leglslaLlon
pollLlcal envlronmenL
1axlaLlon v1 employmenL
for local communlLy
8anks]f|nann|a| organ|sat|ons Lendlng money Lo flrms llnanclal lnLeresLs
1rade Dn|ons 8epresenL Lhe lnLeresLs of
workers
1reaL workers falrly
nv|ronment rovlde naLural resources Less polluLlon


;uest|on SIunnt|ons of a f|nann|a| manager and |||ustrat|on

Iorenast|ng and |ann|ng
O 1he need Lo esLlmaLe/forecasL Lhe requlremenL of funds for boLh Lhe shorL Lerm(worklng
caplLal requlremenLs) and Lhe long Lerm purpose(caplLal lnvesLmenLs)
I|nann|ng Den|s|on
O ueclde whaL Lype of CaplLal sLrucLure Lhe company needs Lo have wheLher Lhese funds
would be ralsed from loans/borrowlngs or from lnLernal source(share caplLal)
O 1o ralse sufflclenL long Lerm funds Lo flnance flxed asseLs and oLher long Lerm lnvesLmenLs
and Lo provlde for Lhe needs of worklng caplLal

nvestment Den|s|on
O ln pro[ecLs varlous facLors llke ayback meLhod 8Cl and neL presenL value are looked lnLo
by hlm and he recommends lnvesLmenL declslons Lo Lhe managemenL
O sseLs Lays pollcles regardlng Lhe varlous lLems of currenL asseLs llke accounLs recelvable by
coordlnaLlng wlLh Lhe sales personnel lnvenLory wlLh producLlon eLc
D|v|dend Den|s|on
O 1aklng lnLo conslderaLlon earnlngs Lrend share markeL prlce Lrend fund requlremenL for
fuLure growLh cash flow slLuaLlon and oLhers
I|nann|a| negot|at|on
O lays a very lmporLanL role ln carrylng ouL negoLlaLlons wlLh Lhe varlous flnanclal lnsLlLuLlons
banks and publlc deposlLors for ralslng funds on favourable Lerms
ash Management
O 1he flnance manager needs Lo ensure Lhe supply of adequaLe Llmely and cheap fund Lo Lhe
varlous parLs of Lhe organlzaLlon
O 1haL Lhere ls no excesslve cash ldllng around
va|uat|ng f|nann|a| performanne
O 1o need Lo consLanLly revlew Lhe flnanclal performance of Lhe varlous unlLs of organlzaLlon
generally ln Lerms of 8Cl(reLurn on lnvesLmenL Such revlew asslsLs managemenL ln seelng
how Lhe funds have been uLlllzed ln Lhe varlous dlvlslons and whaL can be done Lo lmprove lL
Dea||ng w|th re|evant part|es |n the I|nann|a| Markets
O Where Lhe company ls a llsLed enLlLy Lhe need Lo lnLeracL wlLh Lhe SLock Lxchange
O 1o deal wlLh money markeLs and caplLal markeLs for flnanclng or lnvesLmenL of ldllng funds
O 1o fosLer relaLlonshlps wlLh bankers lnvesLors underwrlLers of equlLy and bond lssuances
and oLher governmenL regulaLory bodles