Difficulty: Hard
Topic: 01-03 Capital Structure
35. How can shareholders attempt to control managerial behavior to match shareholder interest?
Vote for directors with shareholder's interest to select management.
Provide incentive contracts; performance shares or options.
Outside threat of takeover, (Board should not be willing to launch poison pills.)
Managerial labor market.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Topic: 01-04 The Financial Manager
36. Do you think agency problems arise in sole proprietorships and/or partnerships?
Agency conflicts typically arise when there is a separation of ownership and management of a business. In a sole proprietorship and a small partnership, such separation is not likely to exist to the degree it does in a corporation. However, there is still potential for agency conflicts. For example, as employees are hired to represent the firm, there is once again a separation of ownership and management.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Topic: 01-04 The Financial Manager
37. If the corporate form of business organization has so many advantages over the sole proprietorship, why is it so common for small businesses to initially be formed as sole proprietorships?
A significant advantage of the sole proprietorship is that it is cheap and easy to form. If the sole proprietor has limited capital to start with, it may not be desirable to spend part of that capital forming a corporation. Also, limited liability for business debts may not be a significant advantage if the proprietor has limited capital, most of which is tied up in the business anyway. Finally, for a typical small business, the heart and soul of the business is the person who founded it, so the life of the business may effectively be limited to the life of the founder during its early years.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Topic: 01-03 Capital Structure
38. One thing lenders sometimes require when loaning money to a small corporation is an assignment of the common stock as collateral on the loan. Then, if the business fails to repay its loan, the ownership of the stock certificates can be transferred directly to the lender. Why might a lender want such an assignment? What advantage of the corporate form of organization comes into play here?
In the event of a loan default, a lender may wish to liquidate the business. Often it is time consuming and difficult to take title of all of the business assets individually. By taking control of the stock, the lender is able to sell the business simply by reselling the stock in the business. This illustrates the ease of transfer of ownership of a corporation.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Topic: 01-03 Capital Structure