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midterm- SAQ- 2011.pdf

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Management (MGT)

MGTA03 - INTRODUCTION TO MANAGEMENT I Fall 2011 – Midterm Examination Professor Hugh Laurence and Bill McConkey Saturday, October 29, 2011 SHORT ANSWER QUESTIONS Family Name First (Please print) Lecture Student # Section: Mon Tue Thur(9:00-11Thur (3:00-5:00) 1. Please write all answers in PEN and as clearly and neatly as possible. If you need additional space, turn the pages over and write on the back of the sheet. 2. Make sure your name, student number and lecture section are correctly entered, above. 3. Failure to accurately follow instruction 2 will cost you 5 marks! 4. There are three (3) questions. 5. You have 90 minutes to write the exam. Do not write below – for marking purposes only. Question 1 / 8 Question 2 / 10 Question 3 / 7 SAQ Total /25 Question 1 Imagine that you wish to start your own business, but are worried about financing the new venture. You have been turned down for a loan by your bank. You remember hearing in your Intro to Management course that somehow your customers could help with your financial needs. Explain how this works. 2 marks This refers to gaining Trade Credit from your suppliers. Here, you may attempt to get companies that supply you with goods or services to bill you at a later date. So, you can gather the inventory that you require to get started, reserving much of your cash to look after other start-up costs, and pay for your inventory with some of your sales, typically 30 days after buying it from your suppliers. You are prepared to start the business by yourself, but are wondering about the legal structure you should use. Consider the legal structures that are available to you, and explain which one you would select as most appropriate. Justify your choice. 6 marks You could conduct the business as a sole proprietorship. (2 marks) Advantages: It is quick and easy to establish one, as there are no formal requirements. You just start the business. Disadvantages: You are personally liable for all of the debts and obligations of the business. You are the only legal entity involved, so all responsibilities are yours. Funding depends entirely on your own resources. You could conduct the business through a corporation. (2 marks) Advantages: You as the only shareholder of the corporation enjoy limited liability. You may lose your investment, but you cannot be sued personally for the debts and obligations of the corporation. If you need further funding, it may be easier to attract equity funding from other investors than to borrow on your own account. Small start-up corporations are offered a preferential tax rate on their earnings. If the business is one that might lead to large liabilities (large borrowings, large lawsuits if someone is injured or services are not provided properly) a corporation is a better choice. Otherwise either form is suitable. Students should give some rationale for their choice. (2 marks) Page 2 of 6 Question 2 Now, imagine that your business has been running and growing over the last three years. You see opportunity for further growth, but realize you need more capital to fund this growth. You think it is time to explore equity financing. Explain what this means, and list and describe two common sources of equity financing. 5 marks Equity financing refers to the sale of an ownership stake in your business to someone, and in exchange, you receive cash that can be used to finance the business. Equity financing can be either PRIVATE or PUBLIC. In the case of private financing, this refers to the purchase of shares in your company by either a person or company directly, that is, not through a public equity market. In contrast, public equity financing involves the creation of an
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