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QUESTIONS 1(a) DESCRIBE THE VARIOUS TYPES OF BUSINESS OWNERSHIP, EXPLAINING THEIR RESPECTIVE ADVANTAGES AND DISADVANTAGES.
SOLE PROPRIETORSHIP With this type of business organization, you are the sole owner, and fully responsible for all debts and obligations related to your business. All profits are yours to keep. Because you are personally liable, a creditor can make a claim against your personal assets as well as your business assets in order to satisfy any debts. Advantages: ✓ Easy and inexpensive to register Regulatory burden is generally light ✓ You have direct control of decision making ✓ Minimal working capital required for start-up ✓ Some tax advantages if your business is not doing well (for example, deducting your losses from your personal income, and a lower tax bracket when profits are low) ✓ All profits go to you directly Disadvantages: ✓ (^) Unlimited liability (if you have business debts, claims can be made against your ✓ personal assets to pay them off) ✓ Income is taxable at your personal rate and, if your business is profitable, this could ✓ put you in a higher tax bracket ✓ Lack of continuity for your business if you are unavailable ✓ Can be difficult to raise capital on your own
PARTNERSHIP A partnership is a non-incorporated business that is created between two or more people. In a partnership, your financial resources are combined with those of your business partner (s), and put into the business. You and your partner(s) would then share in the profits of the business according to any legal agreement you have drawn up. In a general partnership, each partner is jointly liable for the debts of the partnership. In a limited partnership, a person can contribute to the business without being involved in its operations. A limited liability partnership is usually only available to a group of professionals, such as lawyers, accountants or doctors.
When establishing a partnership, you should have a partnership agreement in place. This is important because it establishes the terms of the partnership and can help you avoid disputes later on. Hiring a lawyer or other legal professional to help you draw up a partnership agreement will save you time and protect your interests. Advantages: ✓ Fairly easy and inexpensive to form a partnership ✓ Start-up costs are shared equally with you and your partner(s) ✓ Equal share in the management, profits and assets ✓ Tax advantage — if income from the partnership is low or loses money (you and ✓ your partner(s) include your shares of the partnership in your individual tax returns) Disadvantages: ✓ There is no legal difference between you and your business ✓ Unlimited liability (if you have business debts, personal assets can be used to pay off the debt) ✓ Can be difficult to find a suitable partner ✓ Possible development of conflict between you and your partner(s) ✓ (^) You are held financially responsible for business decisions made by your partner(s); for example, contracts that are broken CORPORATION Another type of business structure is a corporation. Incorporation can be done at the federal or provincial/territorial level. When you incorporate your business, it is considered to be a legal entity that is separate from its shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation. It is always wise to seek legal advice before incorporating. Advantages: ✓ Limited liability Ownership is transferable ✓ Continuous existence ✓ Separate legal entity ✓ Easier to raise capital than it might be with other business structures ✓ Possible tax advantage as taxes may be lower for an incorporated business Disadvantages:
SOURCES OF CAPITAL FOR A SOLE PROPRIETORSHIP
✓ Personal Funds: the owner and operator of a sole proprietorship has the greatest personal and financial stake in his company, so it is natural for him to use personal funds such as savings to start and build his business. When a sole proprietorship invest in his own enterprises, he takes the greatest risk for financial losses, but he allows himself virtually unlimited freedom for using and paying back the investment ✓ Friends and Relatives: friends and rlatives are common source of investment for sole proprietorships are so closely owned and managed, individuals who know the owner well and believe in her vision are likely sources of funding. Investments and loans from friends and relatives tend to have relatively low interest rates because the lender makes the investment out of confidence in the individual and belief in her vision rather than a desire to make money. ✓ Credit cards: Sole proprietor may invest in his business by sung a personal or business. Credit cards provide funds either through cash advances or by covering the cost of expenditures. If a sole proprietor’s credit score is good, a credit card is a relatively easy sources of business funding to receive and generally does not require collateral or a stringent repayment schedule. However, interest rates on credit cards tend to be higher than on any other sources of business funding. ✓ Bank Loans: When a sole proprietor applies for a bank loan to invest funds in her business, the bank uses her personal assets and credit score as t8he basis for determining the credit worthiness of her business. Most banks require that a sole proprietor have collateral, or personal resources that she can pledge as a guarantee against a loan.
SOURCES OF CAPITAL FOR A CORPORATION i. Government Financial Grants: the government makes budgetary provisions for the government department and financial grants to the statutory corporations. These grants are often in the form of subsidies. ii. Loans from Banks: Public corporations, boards and councils are empowered o negotiate and raise loans from the local banks to execute certain projects. iii. Internally generated revenue: statutory corporations, boards and authorities utilize their internally generated revenue to finance part of their operations
SOURCES OF CAPITAL FOR A CORPORATION:
The major aim of establishing them is not to make profit, although the ones that have purely commercial functions are required nowadays to generate enough funds to cover their services and make profit for the government. The three sources of capital that can be identified in the financing of public enterprises are government financial grants, banks loans and internally generated revenue. i. Internally generated revenue : - Authorities and board of directors often use the fund generated within the corporation to finance the operations ii. Loans from Banks: - Like other business ownerships, public corporation also relies on banks to source for funds iii. Government Financial Grants: In most cases, there is a budgetary provision for public corporation. Subsidies is a primary instrument in financing corporations
SOURCES OF CAPITAL FOR A COOPERATIVES The greater the amount of capital held by the cooperative, the greater its ability to purchase more efficient technology, invest in staff training and education and make other improvement to the running of the business. Capital for the operation and improvement of the cooperative business can come from three main sources i. Directly from members themselves: members help finance the operations and growth of the cooperative through:
- One-time or annual membership fees
- Member contributions with no individuals ownership attached, such as service fees
- Member share capital
- (^) Individual member deposits with the cooperarive which may be used for business
- Differed payment to members for part or all of their produce delivered to the cooperative ii. From retained surpluses generated by the cooperative business: Funds created through the retention of cooperative business surpluses that are not directly allocated to members are another important source of cooperative capital. This is a long term
It is imperative to state that capital market is a market for long-term fund in the sense that is a market where the financial instructions mobilize the savings of the people and lend then for long-term period for raising new capital in a country.
3(a) Describe each of the respective sources of Short Term Funds, explaining the merits and the demerits.
i. Treasury Bill: - These are short-dated bills, usually of ninety-one day maturity. Its main purpose is to provide the government with short-term funds. There are issued weekly. In Nigeria, they were introduced in 1960. ii. Treasury Certificate : - These are bills of longer-term maturity. They were introduced in Nigeria in 1968. Their maturities range from 12 to 24 months iii. Banker’s Acceptance iv. Purchase Agreement
(3b) Discuss the instruments and the market that could be used to obtain/source for short term funds.
The suitable market to raise or source fund for short-term funds is money market. The money market is used for buying and selling of financial instruments with original maturities with a period of one year. The transaction in money market is carried out over the counter and is on wholesale basis. 4(a) What is a dividend and what is its significance to the business firm and the shareholders respectively? In a simplest term, a dividend is a payment made by a corporation to its shareholders, it is inform of profit distributions. Shareholders receive dividend whenever a corporation earns a profit or surplus. It is worth noting therefore that dividend carries along with it, a benefit to shareholders is that a dividend is allocated as a fixed amount per share, which enables shareholders receive a dividend in percentage to their shares. Dividends also help lessen the potential fall of a company’s stock price, thereby reducing volatility
(4b) In what forms can dividend be paid and why?
Cash Dividends: - This is the most common form of payment and are paid out currency, usually via electronic funds transfer or a printed paper check. Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid. Stock Scrip Dividends: - are those paid out in the form of additional stock shares of the issuing corporation, or another corporation (such as its subsidiary corporation). They are usually issued in proportion to shares owned Stock dividend Distribution: - are issues of new shares made to limited partners by a partnership in the form of additional shares. Nothing is split these shares increase the market capitalization and total value of t8he company at the same time reducing the original cost basis per share. Property Dividends: - are those paid out in the form of assets from he isusing corporation or another corporation, such as subsidiary corporation
(c) Explain the key factors that a firm should consider in its decision to distribute dividends to the owners. A dividend that is declared must be approved by a company’s board of directors before it is paid to the owners. For firms, four factors are relevant regarding dividends. Firms that choose to reinvest all of their earnings, instead of issuing dividends, may also be thinking about the high potential expense of issuing new stock. To avoid the risk of needing to raise money this way, they choose to keep all of their earnings. However, for a mature company that doesn't need to reinvest as much in itself, and that has stable earnings, there are several reasons why issuing dividends can be a good idea. Many investors like the steady income associated with dividends, so they will be more likely to buy that company's stock. Similarly, companies may want to retain a part of their profits for strengthening their financial position. The income may be conserved for meeting the increased requirements of working capital or of future expansion. Small companies usually find difficulties in raising finance for their needs of increased working capital for expansion programmes. They having no other alternative, use their ploughed back profits. Thus, such Companies distribute dividend at low rates and retain a big part of profits.
As we have market for commodities so also there is market for raising funds and this is referred to as the money market. It is a customary to distinguish the various financial markets from one another by the term of the loan. Thus the money market can be defined as the market for long-term loans, and the capital market as the market for long-term loans. To be more precise, the money market is the market for call money or very short loans whereas, the capital market is the market for short-term, medium-term, long-term and permanent loans to industry and trade.
QUESTION 5E
Instruments firms can use to source from money markets are: i. Sales of bonds and share: - (i.e. shares or stocks) that is borrow the money from the public or selling equities, that is by increasing the number of people who have a share in the ownership of the firm ii. Borrowings from banks and other financial houses: - Borrowings from financial houses such as Hire Purchase companies, and Insurance companies banks, etc
Instruments to source fund for capital market
- Public issue : - In a capital market, companies borrow funds from pricing market by way of public issue of share and debenture. To manage its issue, a company taxes the help of merchant bankers. The cost of raising fund through public issue is high.
- Right issues: - in capital market, right issue means selling securities in primary market by issuing shares to existing shareholders
- Private placement: - The capital issue is sold directly to a small group of investors. Mainly institutional investors like insurance companies, banks, mutual funds, few private investors, etc
- Offer for sale: - in a capital market, the company sells the entire issue of shares or debentures to an issue house or merchant banker at an agreed price, which is
normal below the value. The shares or debentures are then resold by issue house/ merchant banker to the public.
- Venture capital: - it is an important source of fund for technology based industries and new projects that find it difficult to raise funds directly from capital market
