ASSIGNMENT 2

Group 6:
- Cherryll Heryono (2021220039)
- Jeremy Michael (2021220008)
- Kazuyoshi Tanimoto (2021220038)

MATCHING
Part A: Match the items below by entering the appropriate code letter in the space provided.

A. Share capital G. Liquidating dividend

B. Retained earnings H. Return on ordinary shareholders’ equity
C. Par value shares I. Cash dividend
D. Treasury shares J. Declaration date
E. Cumulative dividend K. Share dividend
F. Deficit L. Share split

__B__ 1. Net income retained in the corporation.

__H__ 2. Shows how many currency units of net income were earned for each euro invested by the
owners.

__E__ 3. Preference shareholders have a right to receive current and unpaid prior-year dividends
before ordinary shareholders receive any dividends.

__J__ 4. The date the board of directors formally declares the dividend and announces it to
shareholders.

__L__ 5. The issuance of additional shares to shareholders accompanied by a reduction in the par or
stated value per share.

__C__ 6. Capital shares that have been assigned a value per share in the corporate charter.

__A__ 7. Cash paid into the corporation by shareholders in exchange for shares.

__F__ 8. A debit balance in retained earnings.

__D__ 9. Corporation's own shares that have been reacquired by the corporation but not retired.

__K__10. A pro rata distribution of the corporation's own shares to shareholders.

__G__11. A dividend declared out of share capital or share premium.

__I__ 12. A pro rata distribution of cash to shareholders.
Part B
S-A E 320
Identify at least six characteristics of the corporate form of business organization. Contrast each one with
the partnership form of organization.
- Corporation must pay federal income taxes on their income while partnership is not subject to
federal income tax.
- Corporation has separate legal identity while partnership only has one legal identity.
- Corporation has limited liability while partnership has unlimited liability.
- In a corporation, stockholders control the corporation by electing a board of directors while a
partnership controlled by multiple owners
- In comparison to forming a corporation, forming a partnership is much easier. In comparison to a
partnership, which can be immediately recognized as legitimate, forming and administering a
corporation is more difficult.
- Corporation provides better liability protection and tax flexibility. However, the company's
management structure and state rules may tip the balances in favor of a partnership.

S-A E 322
Companies frequently issue both preference shares and ordinary shares. What are the major differences in
the rights of shareholders between these two classes of shares?
- Preference Shares
1. The dividend is given to them before dividends to common shareholders are distributed
2. They are unable to vote in the firm for directors or general issues
3. In the event of a liquidation dividend, they get preference over common stockholders
4. Every period, they get a dividend based on the company’s earnings

- Ordinary Shares
1. Common shares are equity interests in the corporation, meaning they have the ability to vote
on general and important issues as well as elect directors.
2. They receive dividends based on the company's success, and after preference shareholders
receive dividends.
3. They have the ability to sell their shares to other people
S-A E 326 (Ethics)
Mark Ludwig, the president and CEO of Earth Systems, Inc., a waste management firm, was recently
hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his hospitalization,
Earth Systems had experienced a sharp decline in its share price, and trading activity became almost
nonexistent. The primary reason for this was concern expressed in the media over a new untested waste
management system implemented by the company. Mr. Ludwig had been unwilling to submit the
procedure to testing before implementation, but he reluctantly agreed to limited tests after the system was
operational. No problems have been identified by the tests to date.

The other members of management called a meeting to determine what they should do. Dick Markley, the
marketing manager, suggested that the company purchase a large number of treasury shares. In that way,
investors might notice that activity had picked up, and might decide to buy some more shares. This plan
would use up most of the company's available cash, so that there will be no money available for a cash
dividend. Earth Systems has paid cash dividends every quarter for over ten years.

Required:
1. Is Mr. Markley's suggestion ethical? Explain.
- In our opinion, there is no definite answer whether Mr. Markley is ethical. There are several
points that could be made that can attest to the ethicality of Mr. Markley. First, the transaction is a
major transaction that will be carried out without the presence of the CEO. The transaction will be
made entirely to boost the share price, but it's unclear what the long-term benefits will be for the
company, even if it works. We conclude that large purchases of treasury shares using most of the
available cash may be unethical because the potential for damage to the company is quite large,
without being accompanied by substantial potential rewards. On the other hand, a company can
profit by keeping its share price high by issuing additional shares to finance future expansion, so
Mr. Markley could be declared ethical. In the end, the concept that the legality of an action is not
the only determinant of ethical or not an action.
2. Is it ethical to discontinue the cash dividend? Explain.
- Basically, companies can stop their dividends whenever they want. Common shareholders must
be informed that they are not entitled to dividends (including if the company does not earn
profits), even when dividends have been declared and paid annually. There is no express or
implied contract to pay dividends to common shareholders, so we think discontinuing dividends
to common shareholders is ethical. However, the company is likely to lose more of its share price
by forgoing long-term dividends than if the profits were used to buy large treasury shares.
Part C: BONDS
Match the items below by entering the appropriate code letter in the space provided.

A. Bonds G. Straight-line method of amortization

B. Debenture bonds H. Lease
C. Bond indenture I. Debt to assets ratio
D. Premium (on a bond) J. Non-current liabilities
E. Discount (on a bond)
F. Effective-interest method of amortization

__J__ 1. Obligations expected to be paid more than one year in the future.

__C__ 2. A legal document that sets forth the terms of a bond issue.

__E__ 3. Occurs when the contractual interest rate is less than the market interest rate.

__F__ a4. Produces a periodic interest expense equal to a constant percentage of the carrying value of
the bonds.

__I__ 5. A solvency measure that indicates the percentage of assets provided by creditors.

__A__ 6. A form of interest-bearing notes payable.

__D__ 7. Occurs when the contractual interest rate is greater than the market interest rate.

__B__ 8. Unsecured bonds issued against the general credit of the borrower.

__H__ 9. A contractual agreement between a lessor and a lessee.

__G__a10. Produces a periodic interest expense that is the same amount each interest period.