Ownership of firms: Practice Questions

Which of the following is a characteristic of bonds issued by a public limited company?

Which of the following statements regarding the liquidity of ownership is correct?

Ms. Lee currently operates a Sole Proprietorship. She has developed an innovative, high-risk product and requires a large external investment of HK$100 million for mass production. She needs to change her firm's ownership structure.

Ms. Lee has two main objectives:

I. Protecting her personal assets from the potential failure of the high-risk project.

II. Securing the necessary HK$100 million while retaining majority control over the firm's strategic decisions (i.e., retaining the majority of voting rights).

Which ownership structure and funding method provides the optimal trade-off to achieve both objectives?

One advantage of a private limited company over a partnership is:

If the majority shareholder of a public limited company sells all their shares, the company's daily operations are typically unaffected. This is primarily because:

What specific consequence does unlimited liability impose on the owner of a firm if the firm incurs excessive debts?

Suppose a firm is currently a partnership but decides to convert into a private limited company. Explain how this change affects the owners in terms of legal status and financial liability for the firm's debts.

Suppose a public limited company decides to raise capital by issuing debentures rather than new ordinary shares. Explain how this choice affects the firm's financial risk and why the existing major shareholders might prefer this method to preserve their control over the firm.

Ms. Wong runs a popular tailoring shop, 'StyleCraft', as a sole proprietorship. She plans a major expansion that requires substantial funding and is considering converting her business into a private limited company.

(a) Besides the difference in the legal liability of the owners, identify and explain ONE key difference in the source of capital available between a sole proprietorship and a private limited company.

(b) Explain why a private limited company often faces less difficulty than a sole proprietorship in maintaining continuous existence.

TechGiant Ltd. is a very large and successful private limited company planning a massive infrastructure project requiring billions in capital. To fund this, they decide to convert the company into a public limited company (PLC) and launch an Initial Public Offering (IPO) on the stock exchange.

(a) Explain TWO key differences in the features relating to shares between TechGiant when it was a private limited company (Ltd) and after it converts to a public limited company (PLC).

(b) After the conversion, TechGiant experiences significant growth, which is largely attributed to capital accumulated from the IPO. Explain how the issuance of shares by TechGiant PLC facilitated the process of capital accumulation in the economy.