Question

TIME: 2 HOURS Answer Booklet. TION 1 (13 Marks) Discuss THREE (3) primary disadvantages and advantages of the sole proprietorship? a, (6 marks) b. Who owns a corporation? Describe the process whereby the owners control the firm's management. What is the main reason that an agency relationship exists in the corporation form of organization? (3 marks) Discuss how the management managing their managers to solve the problem between agency and the owner. c. (4 marks) QUESTION 2 (21 Marks)

Answer 1

A.  Advantages of sole proprietorship :

(1) Less paper work

(2) Easy banking

(3) Quick decision making

(4) Personal touch with customers

(5) Easier tax set up

Disadvantages of sole proprietorship

(1) Difficulty in raising capital

(2) Unlimited personal liability

(3) Limited expansion

(4) Lake of managerial expertise

(5) Lack of continuity

B. (I) Shareholders are the owners of corporation. They have the voting rights to elect directors and they can get the dividends if corporation earns profit.

(II) Shareholders elect the board of directors, who are in charge of appointing the firm's management .

(III) There is a clear distinction between ownership and management of the corporation . Owners are appointing management to look after the smooth operations of the corporation . So, here management is working as an agent of the shareholders  and due to that their getting paid.

C. Actually the board of directors helps to solve the agency problem between shareholders and CEO. If mangers pay arrangements are well designed then this problem may get solved. A correct designed compensation system secure shareholders interest as well as motivate managers to maximise shareholders wealth . Incentive should be based on maximizing shareholders wealth.