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MaxMark_CH04_edited - MenuItem 4(Topic 4)Non-bank financial...

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MenuItem 4: (Topic 4)Non-bank financial institutions Question 1: An ordinary share represents a claim to a fraction of the profits of the company that issued the share. An additional distinguishing feature of ordinary shares can be described as follows: A: shares represent an ownership interest in the issuing company B: shareholders have the right to vote in the election of directors C: shareholders can vote on resolutions at a general meeting of the company D*: all of the above Feedback: Ordinary shares are a form of equity so shareholders have an ownership interest in the company that issued the share. As part owners of a company, shareholders also have voting rights, so A, B and C are all valid making D the correct answer. MORE: Financial Institutions, Instruments and Markets 5/e, p. 173. Shares have an additional dimension that distinguishes them from other financial claims. As equity, they represent a share in the ownership of the corporation, and provide the shareholder with a right to vote in the affairs of the corporation. In particular, a shareholder has the right to vote for members of the board of directors of the company. The shareholder can also vote on resolutions put to a general meeting of the company. Question 2: The corporation differs from other forms of business organisation in ways that can be very important. Which of the following is not a valid difference between the corporation and other organisational forms? A: a corporation’s ownership claims are freely transferable B: shareholders do not have a right to participate directly in the operation and management of the business C: shareholders are protected by limited liability D*: operating through a company structure reduces the income tax payable on company profits Feedback: In contrast to other organisational forms such as sole proprietorships and partnerships, a corporation’s ownership claims (shares) are freely transferable and can be held by many investors who have no role in managing the business. Sole proprietors and partners manage their businesses but, unlike shareholders, are fully liable for any debts of the business. In summary, A, B and C outline valid differences between the corporation and other organisational forms. MORE: Financial Institutions, Instruments and Markets 5/e , p. 174. A corporation differs from other forms of business organisation, such as a sole proprietorship or a partnership, in three very important respects: First, ownership is generally widely dispersed among a large number of shareholders. Also, shares in a company can be readily bought and sold in the market without directly affecting the continuing existence of the business. Second, shareholders, as owners of a company, do not have a right to participate directly in the day-to-day operation and management of the business. The objectives and policies of a corporation are determined by a board of directors, the members of which are elected at a general meeting of shareholders. Directors have a legal responsibility to ensure that the corporation operates in the best interests of the shareholders of the business. The
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