Ch3 Ownership of firms

A. Firm
B. Ownership
I. Public ownership & private ownership
II. Public ownership: government department & public cooperation
- E.g. of public ownership in Hong Kong
III. Private ownership: unlimited company & limited company
IV. Unlimited company: sole proprietorship & partnership
V. Limited company: private limited company & public limited company
- Listed company as a type of public limited company
C. Share and bond
- Return of buying share and bond
I. Of buying share or bond (Investor)
II. Of issuing share or bond (Owners of firm)

A. Firm

l Firm is a unit that

regarding the of factors of production( ) and the
of goods and services( ).

i.e.
l Firm makes decision of turn input into output.

Ø Exercise/example
Identify the following case.
Case Firm?
A company decided to not produce anything this month

A taxi driver

Things that we needed to note:

è A production unit that is producing can also be regards as firm.
è Firm is not necessarily a company,
anything that make can be regards as firm.

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B. Ownership

l The ownership of firm refers to who is owning and how they are running the firm.

There are bigger and smaller group of division to the type of ownership,
we will learn from bigger group to smaller group and see what their difference is.

I. Public ownership & Private ownership

Public ownership and private ownership is the group of division,

Every firm will be classified into public ownership private ownership.

Ownership

Public Private
Ownership Ownership

Which,
n Public ownership = the firm is owned by .
n Private ownership = the firm is owned by individuals

Ø E.g./exercise:
Identify the ownership of the following firm.
Firm Ownership
Fire Services Department

Parknshop

A subsidized secondary school

Note:
The key is who the firm but not how it is operated.

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Comparison between public ownership and private ownership:

Due to the difference in owners, the concern of the company and the source of information
will be .

Concern of the company:

Public ownership → concern more ___________ interest.
Private ownership → concern on making ____________.
→ better managerial efficiency & incentive to ___________ cost.

Source of information:
Public ownership → more information from the ________________.

Next, let’s have a closer look on the public ownership.

II. Public ownership: government department & public corporation

Now, we further classify the public ownership.

It can be separate into

1. Government department
2. Public corporation

Government Public
department cooperation

Which,
Government = operate by
department
Public = operate by government directors.
corporation ( ü / û operate by government)

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« E.g. of government department and public cooperation in HK:

l The example of government department and public cooperation in Hong

Kong is thing that we should remember inside the HKDSE syllabus.

Ù E.g of government department in Hong Kong.

Let’s write down some famous public cooperation in Hong Kong.

l ____________________________
l ____________________________
l ____________________________

Ù E.g. of public corporation

l Public cooperation in Hong Kong refer to the firm that is owned, but NOT
managed by the Hong Kong government.
l They are generally running on a self-financing(自負盈虧) base.

List of public cooperation:

Let’s write down some famous public cooperation in Hong Kong.

l ____________________________
l ____________________________
l ____________________________

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 Ø E.g./exercise:
Identify the ownership of the following firm.
Firm Ownership
Fire Services Department Government department
Hong Kong Examination and Public corporation
Assessment Authority
Social Welfare Department

Comparison between government department and public cooperation:

Due to the difference in , the of the company and

the of information will be different.

Concern of the company:

Public cooperation → focus more on maintaining an financial account.

Source of information:
Government department → more information from the ________________.

We have finished the public ownership, next we will focus on private ownership now.

III. Private ownership: unlimited company & limited company

l Private ownership refers to the firms that is owned by private individuals

It can be separate into

1. Unlimited company
2. Limited company

Unlimited Limited
company company

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Which,
Unlimited company = The firm is ü / û a legal entity
Limited company = The firm is ü / û a legal entity

Legal entity = ______________________________

→ Owner ü / û responsible for decisions of the firm.

Comparison between unlimited company and limited company:

The company is legal entity or not will lead to the following different between
unlimited company and limited company.

Unlimited company Limited company

Owners’ liability
Lasting continuality
Set up procedure
Tax rate

Let’s see what is inside the unlimited company.

IV. Unlimited company: sole proprietorship & partnership

l Unlimited company means the firm is not a legal entity.

There are 2 types of unlimited company.

1. Sole proprietorship
2. Partnership

Sole proprietorship Partnership

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Which,
Sole proprietorship = There is only 1 owner
Partnership = There is more than 1 owner in the firm

Comparison between sole proprietorship and partnership:

The different in number of owners of the 2 ownerships will lead to different in source
of talent, source of capital and decision-making time inside the company.

Source of talent & source of capital:

Partnership → ____________ owner than sole proprietorship
→ ____________ source of talent and capital

Decision making time:

Sole proprietorship → ____________ owner than partnership
→ ____________ time in coming up an agreement
→ ____________ decision made

V. Limited company: Private limited company & Public limited company

l Limited company means the firm is a legal entity.

l There are 2 types of limited company.
I. Private limited company
II. Public limited company

Private Public
limited company limited company

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Comparison between private limited company and public limited company:

Financial information needed Transfer of ownership need

to be disclosed to public? consent of existing owner?
Private
limited company
Public
limited company

Ù Listed company as a type of public limited company

The public limited companies have the right to choose and apply for their share(股票)
to be listed on the (股票市場).
If their application is success, they will be regarded as listed company(上市公司).

Private Public
limited company limited company

Listed company

Comparison between listed company and other company:

As only listed company can sell their share to raise capital through the Hong Kong
stock exchange,
→ Listed company has ___________ source of capital.

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Exercise on identify and comparison among different ownership:

1. In firm A, owners’ lability to the firm is limited. Which of the following can be the
type of ownership of firm A?
(1) Listed company
(2) Public limited company
(3) Private limited company
A. (2) only
B. (1) and (2) only
C. (2) and (3) only
D. (1), (2) and (3)

2. The following table shows the number of owners and profit tax rate of firm A and B.
Number of owners Tax rate
Firm A 10 15%
Firm B 1 10%
Firm A is___, firm B is___.
A. partnership, limited company
B. partnership, listed company
C. limited company, sole proprietorship
D. listed company, sole proprietorship

3. Some people would prefer to open a sole proprietorship rather than partnership.
Which of the following is/are NOT possible reason of it?
(1) a lower tax rate
(2) more flexible decision making
(3) possibility to earn higher profit
(4) to enable faster response to market trend
A. (1) only
B. (2) only
C. (1) and (3) only
D. (2) and (4) only

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4. Limited company has a _____ when compared to unlimited company. Public
limited company has a _____ when compared to private limited company.
A. lower tax rate, larger scale
B. lower tax rate, wider source of capital
C. higher tax rate, larger scale
D. higher tax rate, wider source of capital

5. If a limited company decided to no longer list its share on the stock exchange,
(1) It will face a lower interest rate
(2) The source of capital of the company will decrease
(3) The financial information of the company can keep private now
A. (2) only
B. (1) and (2) only
C. (1) and (3) only
D. (2) and (3) only

1. Tom is the sole owner of a restaurant. Recently, he decided to open another

restaurant with his friend, Tim. Suppose Tim needed to bear unlimited liability for
both restaurants.
(a) Explain ONE advantage and ONE disadvantage of the type of ownership of
the new restaurant over the type of ownership of the old restaurant. (4 marks)
(b) Explain the different between the above type of ownership and limited
company in term of
(i) Business continuity
(ii) Transfer of ownership (4 marks)

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2. Below are the changes of ownership in Company A.

Previous Now
Owners bear unlimited liability Owners bear limited liabilities
Explain TWO advantages of the above changes in ownership despite limited liability.
(4 marks)

3. Explain the TWO differences between partnership and public cooperation. (4

marks)

C. Share and bond

l Share and bond are financial asset that can be issue by .

l And can be bought by .

Which,
Share (股票) = Share a part of the ;
i.e. holders of share are regarded as company .
Bond (債券) = Money is lent(借) to the ;
i.e. the company own(欠) money to .

Return of holding share and bond:

As mentioned, share and bond are financial asset.

Therefore, storing share and bond will receives returns.

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Let’s see one by one.

F Share
l The return of share is called dividend(股息).

∵ Shareholders are the of the company,

∴ Dividend they receive will (變化)with company’s profit.

Which, it can be when the company is not making

profit/losing money.

F Bond
l The return of bond is called interest(利息).

∵ The bondholders lend money to bank

∴ They will receive the fixed interest.

Conclusion on the name and nature of return:

Name of return Nature of return
Share
Bond

By knowing what is the different between share and bond,

l Public can make their choice whether they prefer to buy share or bond to store wealth
l Firm can make their decision on issuing share or bond to raise capital

I. Of buying share or bond (Investor)

Investor can choose to buy share or bond to store their wealth and get .

Here, we will focus on the different in the and of

buy and hold share and bond.

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 From previous discussion,
Return of share → ___________
Return of bond → ___________

∴
Advantage of share over bond → return more ____________.
Advantage of bond over share → return more ____________.

Beside the different in nature of and ,

we also needed to remember advantage from the nature of share and bond.

From previous discussion,

Share → _____________ of the company
Bond → the company _____________ money to bond holders

∴
Advantage of holding share over bond → have voting right
Advantage of holding bond over share → have redemption obligation

Which,
redemption obligation
= can get back the invested money first when the company bankrupt (破產)

Conclusion on the advantage to investor:

Advantages: Disadvantages:
Share • Possibility of getting a higher • Less stable return
return • No redemption obligation
• Have voting rights
Bond • More stable return • No possibility of getting a
• Have redemption obligation higher return
• No voting rights

Note: Advantage of share over bond = Disadvantage of bond over share, right versa.

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II. Of issuing share or bond (Owners of firm)

The owner of firm issue share and bond to raise capital, while they needed to
the dividend and interest to the investors.

So, the investor will focus on the and incur.

From previous discussion,

Return of share → ___________
Return of bond → ___________

∵
interest → __________, while
dividend of share ü / û need to pay when the company not making profit

∴
Advantage of share over bond → no interest burden

Also, recall that bond has redemption obligation.

∵
Redemption obligation → ______________________________

∴
In the view of owners:
Advantage of issue share over bond → ü / û redemption obligation.

The owners of firm will also concern will there be risk of losing control to the company.

From previous discussion,

Share → _____________ of the company

∴
Disadvantage of issuing share over bond
→ controlling power on the company being ______________.
→ ü / û risk of being taken over

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 In opposite,
Advantage of bond over share:
→ ü / û controlling power on the company being ________________.
→ ü / û risk of being taken over

Conclusion on the advantage to owner(existing shareholders):

Advantages: Disadvantages:
Share • No interest burden • Weaken in controlling power
• No redemption obligation • Have risk of being taken over
Bond • No weaken in controlling • Have interest burden
power • Have redemption obligation
• No risk of being taken over

Exercises:

1. Which of the following the advantage of issuing share over bond to existing
shareholder?
A. Possibility of getting a higher return
B. Increase in amount of voters in the share holder meeting
C. Bond holders have redemption obligation
D. Reduce of risk of being taken over

2. May, a small investor, recently brought a share of Company X on the stock

market. What is the type of ownership of Company X, and the motivation of May
to buy share but not bond?
A. listed company, to have redemption obligation
B. listed company, maintaining her controlling power
C. public limited company, to gamble for higher return
D. public limited company, to promote growth of wealth

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1. In order to have further expansion, Company A had applied to be listed on the HK
stock exchange and successfully become a listed company at Jan 2019.

In-order to raise fund, Company A has also issue bond to the public.

(b) (i) Explain TWO advantages of investing in bond over shares for investor.
(ii) Explain TWO disadvantages of issuing bond over shares to existing shareholders.

2. Jam is one of the co-owner of a video game store in Mong Kok. They have
recently opened a new store in Mei Foo.

Jam and his partner want to raise fund for further expansion, they are considered
to issue either share or bond.
(a) (i) Explain ONE advantage of issue share over bond to company owners. (2 marks)
(ii) Explain ONE disadvantage of issue share over bond to investors. (2 marks)

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