CHAPTER 4

REVIEW QUESTIONS

3. Growing a business really requires effective decision making. As in the case of a founder
of a firm, in wanting to grow the firm quickly, more capital is required. In early years of firm
operations, equity capital is the mere available. In line with this, the founder may decide to
offer a certain portion of the firm by giving up his ownership to other investors. Until it happens
that the founder no longer holds ownership in the majority of the firm. In order for this not to
happen, raising sufficient capital before establishing his prospective business is a good move,
rather than growing a business with no sufficient fund yet to support operations.

9. The compensation packages must be sufficient to attract and retain employees, such as
CEOs. An attractive and adequate one would motivate them to perform their duties and
responsibilities at best which will also positively affect the company’s profitability. Therefore,
choosing between compensation which is affixed peso amount and based on the firm’s
performance, it would be great to choose the compensation which rewards the CEO on the
basis of the performance of the firm’s stocks – the compensation which depends on how well
the firm performs. Moreover, it is easier to measure performance by the growth rate in reported
profits since this information is easier to generate than the growth rate in the stock’s intrinsic
value.

CASE STUDY

1. One of the advantages of shifting from sole proprietorship to a limited partnership is

having a limited liability. This is because in the sole proprietorship, you are personally liable
to the liability of the firm, while in limited partnership, your personal assets will be protected
as you will be held liable only to the extent of your personal contributions. Another is, there
would be more sources of capital. In sole proprietorship, your fund-raising ability is limited.
Resources may be limited to the assets of the owner and growth may depend on his or her
ability to borrow money.
On the other hand, the disadvantage of shifting from sole proprietorship is that, shifting
to limited partnership extinguishes the owner to have the full control over the company.
Because in limited partnership, the owner would be dealing with other partners with regard
to the control of the company.
2. The number one advantage of changing the company organization from sole
proprietorship to a corporation is that the organization will enjoy the benefit of having a
limited liability. Because in a corporation, shareholders are liable only to the extent of their
investment in the corporation. Another, the organization that they established would have
perpetual existence even if the time comes that they died, their legacy of making these
cakes would not yet end. They will also enjoy the ease in transferring ownership, which will
provide their organization a stronger financial base and the capital needed for expansion
without affecting their legal form of business organization. Lastly, they are able to raise
more capital than what they can provide in sole proprietorship through the sale of securities
such as bonds to investors who are lending money to the corporations and equity securities
such as common stock to investor who are the owners.
However, shifting into a corporation will subject the organization to taxes, since
corporations pay taxes on income they have earned unlike in sole proprietorship where the
owner can generate tax savings.

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3. I would suggest to shift to a corporation since it is more advantageous. They can grow
their business more without insufficiency in capital raised and it’s a plus being able to
maintain your organization into existence even without your presence in the organization.
Another, they could choose the proposal of the national supermarket chain to put its cakes
in all of the chain’s stores rather than the other proposal. It’s because the proposal of the
national restaurant chain would not allow the brand and company to be known to its
buyers.

MULTIPLE CHOICE

1. A
2. A
3. D