ACC1024 Foundations of Finance
Tutorial 1 (Week 2)
A) Textbook - End of Chapter 1 “Introduction” Questions
Q1. Distinguish between investment decisions and financing decisions.
An investment decision revolves around spending capital on assets that will yield the highest
return for the company over a desired time period. In other words, the decision is about what to
buy so that the company will gain the most value.
All functions of a company need to be paid for one way or another. It is up to the finance
department to figure out how to pay for them through the process of financing. There are two
ways to finance an investment: using a company's own money or by raising money from
external funders.
Investment decisions is the decision of making money while financing decision is the
raising of money.
Investment decisions revolve around how to best allocate capital to maximize their
value while Financing decisions revolve around how to pay for investments and
expenses. Companies can use existing capital, borrow, or sell equity.
- What is investment? Making money with the money raised
- What is finance – raising money
- Source of financing – financing method
o Internal – retained earnings/profits
o External (hybrid securities)
Debt (private – loans, publics – bonds
Equity
- How one relates to the other? Investors provides $ to companies
Q3. Outline the advantages and disadvantages of a sole proprietorship.
A sole proprietorship is an unincorporated business that one person owns and manages. As the
business and the owner are not legally separate, it is the simplest form of business structure. It
is also known as individual entrepreneurship, sole trader, or simply proprietorship.
Advantages Disadvantages
Easy to create and manage (do not Unlimited personal liability – all
need a lot of money to start up the debts and obligations is under the
business) – start-up fee is low proprietor (people can force you to
o Only one owner – if you have sell your asset to pay back your
any ideas you can just use it debts)
Few government rules and laws – Limited capital (they have to bare
they have to keep proper record, file their own resources when going into
and pay taxes on the business income business)
Full management control of the Limited life (once the person has
, business – in which they have the passed on, the business will stopped)
degree of freedom – if the owner cannot or does not
No legal separation – owner gets want to continue, the business will
100% of the profits stop – unless before the owner dies
and pass on to someone else
Limited size (scale of operation will
not be very big)
The owner must make “good enough”
decision in all business areas – if do
not have enough skills and
knowledge, the decision will be
flawed
Q4. Outline the advantages and disadvantages of a partnership.
A partnership is a form of business organization in which owners have unlimited personal
liability for the actions of the business. The owners of a partnership have invested their own
funds and time in the business, and share proportionally in any profits earned by it.
Advantages Disadvantages
Easy to create Loss of autonomy: Cannot make
Can combine the wealth and talents decision on your own (need to
of several individuals discuss with your business partner
Work can be divided to help out with before making the decision)
all the business tasks Emotional conflict: Might have
More capital for the business – less disagreement/ conflict
financial burden (split cost for the o Disputes between partners
expenses) can affect operations
Better work/life balance Profit will be split
Different perspective which can bring Liability for the debts of the business
in more ideas and possibilities o The partners are personally
liable for the debts of the
partnership
Can be difficult for partners to
withdraw their investment
Q5. What advantages does a company have over a sole proprietorship and a partnership?
Liability protection: Shareholders do not risk losing personal assets because of
company’s debt as company are considered separate legal entities from people who own
them whereas for partnership and sole proprietorships are held responsibility for all
company debts and legal responsibilities which subjected to losing personal assets if
company goes bankrupt
Access to funds: Company can easily raise funds compared to other forms of businesses
because they can sell stock to raise money for business expenses or cover debts. On the
other hand, for partnership and sole proprietorship, they must try to come up with
funds on their own or turn to loans or credit to raise money (Company will have an
advantage as they will be able to save time and take less effort to raise money by selling
stocks)
Tax benefits: Company will need to file taxes separately from the shareholders (owners
of the company will pay taxes on any salaries, bonuses and dividends earned from the
company). Also, corporate tax are usually lower than personal income tax rate.
Tutorial 1 (Week 2)
A) Textbook - End of Chapter 1 “Introduction” Questions
Q1. Distinguish between investment decisions and financing decisions.
An investment decision revolves around spending capital on assets that will yield the highest
return for the company over a desired time period. In other words, the decision is about what to
buy so that the company will gain the most value.
All functions of a company need to be paid for one way or another. It is up to the finance
department to figure out how to pay for them through the process of financing. There are two
ways to finance an investment: using a company's own money or by raising money from
external funders.
Investment decisions is the decision of making money while financing decision is the
raising of money.
Investment decisions revolve around how to best allocate capital to maximize their
value while Financing decisions revolve around how to pay for investments and
expenses. Companies can use existing capital, borrow, or sell equity.
- What is investment? Making money with the money raised
- What is finance – raising money
- Source of financing – financing method
o Internal – retained earnings/profits
o External (hybrid securities)
Debt (private – loans, publics – bonds
Equity
- How one relates to the other? Investors provides $ to companies
Q3. Outline the advantages and disadvantages of a sole proprietorship.
A sole proprietorship is an unincorporated business that one person owns and manages. As the
business and the owner are not legally separate, it is the simplest form of business structure. It
is also known as individual entrepreneurship, sole trader, or simply proprietorship.
Advantages Disadvantages
Easy to create and manage (do not Unlimited personal liability – all
need a lot of money to start up the debts and obligations is under the
business) – start-up fee is low proprietor (people can force you to
o Only one owner – if you have sell your asset to pay back your
any ideas you can just use it debts)
Few government rules and laws – Limited capital (they have to bare
they have to keep proper record, file their own resources when going into
and pay taxes on the business income business)
Full management control of the Limited life (once the person has
, business – in which they have the passed on, the business will stopped)
degree of freedom – if the owner cannot or does not
No legal separation – owner gets want to continue, the business will
100% of the profits stop – unless before the owner dies
and pass on to someone else
Limited size (scale of operation will
not be very big)
The owner must make “good enough”
decision in all business areas – if do
not have enough skills and
knowledge, the decision will be
flawed
Q4. Outline the advantages and disadvantages of a partnership.
A partnership is a form of business organization in which owners have unlimited personal
liability for the actions of the business. The owners of a partnership have invested their own
funds and time in the business, and share proportionally in any profits earned by it.
Advantages Disadvantages
Easy to create Loss of autonomy: Cannot make
Can combine the wealth and talents decision on your own (need to
of several individuals discuss with your business partner
Work can be divided to help out with before making the decision)
all the business tasks Emotional conflict: Might have
More capital for the business – less disagreement/ conflict
financial burden (split cost for the o Disputes between partners
expenses) can affect operations
Better work/life balance Profit will be split
Different perspective which can bring Liability for the debts of the business
in more ideas and possibilities o The partners are personally
liable for the debts of the
partnership
Can be difficult for partners to
withdraw their investment
Q5. What advantages does a company have over a sole proprietorship and a partnership?
Liability protection: Shareholders do not risk losing personal assets because of
company’s debt as company are considered separate legal entities from people who own
them whereas for partnership and sole proprietorships are held responsibility for all
company debts and legal responsibilities which subjected to losing personal assets if
company goes bankrupt
Access to funds: Company can easily raise funds compared to other forms of businesses
because they can sell stock to raise money for business expenses or cover debts. On the
other hand, for partnership and sole proprietorship, they must try to come up with
funds on their own or turn to loans or credit to raise money (Company will have an
advantage as they will be able to save time and take less effort to raise money by selling
stocks)
Tax benefits: Company will need to file taxes separately from the shareholders (owners
of the company will pay taxes on any salaries, bonuses and dividends earned from the
company). Also, corporate tax are usually lower than personal income tax rate.
