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UGB231 Financial Management

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Tutorial 1

1-1. What advantages does a sole proprietorship offer? What is a major drawback
of this type of organization?

1-2. What form of partnership allows some of the investors to limit their liability?
Explain briefly.

1-3. In a corporation, what group has the ultimate responsibility for protecting and
managing the stockholders' interests?

1-4. What issue does agency theory examine? Why is it important in a public
corporation rather than in a sole proprietorship?

1-5. Why are institutional investors important in today's business world?

1-6. Why is profit maximization, by itself, an inappropriate goal? What is meant by

the goal of maximization of shareholder wealth?

1-7. Ann and Jack have been partners for several years. Their firm, A&J Tax
Preparation, has been very successful, as the pair agreed on most business
related questions. One disagreement, however, concerns the legal form of
their business. Ann has tried for the past 2 years to get Jack to agree to
incorporate. She believes that there is no down side to incorporating and see
only benefits. Jack strongly disagrees; he thinks that the business should
remain a partnership forever. First, take Ann’s side and explain the positive
side to incorporating the business. Next, take Jack’s side and state the
advantages to remaining partnership. Lastly, what information would you
want if you were asked to make the decision for Ann and Jack?

1-8. Which type of organization is more likely to be shareholder wealth

maximization – one with wide ownership and no owners directly involved in
the firm’s management or one that is closely - held where the owners are
actively involved in managing the firm?

1-9. What are some of the ways in which manager-shareholder conflicts may be
controlled?

1-10. Is the shareholder wealth maximization goal a short or long term goal?
Explain your answer.

Prepared by B.K. Lim, Deric