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Chapter 12 Organization and Operation of Corporations
Chapter Opening Critical Thinking Challenge Questions*
Why might a company stay private?
The owner(s) in a private corporation have control over the decisions being made whereas in a public company, the Board of Directors, who are representatives of the shareholders, oversee the organization.
Why might a private company go public?
A private company might go public to increase financing opportunities necessary for growth. By going public, ownership is inevitably diluted.
*The Chapter 12 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of Chapter 12 to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students on Connect.
Concept Review Questions
1. The board of directors of a corporation is responsible for directing the corporation’s affairs.
2. Organization costs (also referred to as start-up costs) are incurred in creating a corporation. Examples include: legal fees, promoters’ fees, accountants’ fees, costs of printing share certificates, and fees paid to the provincial legal jurisdiction to obtain a corporate charter. Organization costs are expensed when incurred.
3. The general rights of common shareholders include: (1) the right to vote in shareholders’ meetings, (2) the right to sell or otherwise dispose of shares, (3) the pre-emptive right, (4) the right to share proportionately in dividends, and (5) the right to share proportionately in assets remaining after the creditors are paid if the corporation is liquidated. In addition, shareholders have the right to receive timely and useful financial reports that describe the corporation’s financial position and the results of its activities.
4. The pre-emptive right of common shareholders is the right to maintain their relative ownership interests in the corporation by having the first opportunity to purchase their proportionate share of any additional common shares issued by the corporation.
5. The call price is the amount that a corporation must pay if it exercises the option to buy back and retire callable shares.
6. Convertible preferred shares are attractive because they offer the safety of a regular return as well as the opportunity to share in the increased value of the issuer’s common shares.
7. Indigo had dividends paid in 2013 of $11,119,000 and in 2014, $8,348,000.
8. On the consolidated Statements of Cash Flows the Dividends paid appear under the heading, CASH FLOWS FROM FINANCIAL ACTIVITIES.
9. In Note 13, SHARE CAPITAL, page 48 of Indigo Financial Statements the distributed dividends per share for fiscal year 2014 was $0.33, and for 2013, $0.44.
10. The main difference between a private and a public corporation access to capital. A public company has the ability to issue shares to generate capital for expansion and other purposes. A private company is largely reliant on debt financing or targeted private equity investors. Stock exchange regulators require public companies to report audited financial statements on an annual basis as well as quarterly reviews. Private companies do not have this requirement. It is important to note that size does not signal public vs private status. Although many large companies are public, private companies can be very large too. Zara, Dole Foods, Lego, Toys R Us, and PWC (PricewaterhouseCoopers) are all examples of privately held companies.
QUICK STUDY
Quick Study 12-1 (5 minutes)
a and d
Quick Study 12-2 (10 minutes)
LTD.
Quick Study 12-3 (5 minutes)
Quick Study 12-4 (20 minutes)
ORGANIZATION
