HKDSE Economics in Life – Microeconomics 1 (2nd Edition)

Chapter 3 Ownership of Firms

Revision Exercise & DRQ Level-up

Chapter 3 Ownership of Firms

Revision Exercise

Multiple Choice Questions

Choose the best answer.

1. Which of the following descriptions about public enterprises is CORRECT?

A. Public enterprises do not face competition from private enterprises.
B. Not all public enterprises aim at profit maximisation.
C. Public enterprises earn higher profit than private enterprises.
D. All public enterprises issue shares to raise funds.

2. Chris runs an optical shop in the form of a sole proprietorship. Later, his friends
join him to run the shop together and the shop turns into a partnership. Which of
the following is most likely the motive of the action?
A. to enjoy limited liability
B. to have more flexibility in decision-making
C. to obtain independent legal status
D. to expand the sources of capital

3. Which of the following are the advantages of turning a sole proprietorship into a
private limited company?
(1) The firm can enjoy better continuity.
(2) The firm can have wider sources of capital.
(3) The average cost of production can be lower.
(4) The firm can have a tighter control over its ownership.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (4) only
D. (3) and (4) only

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HKDSE Economics in Life – Microeconomics 1 (2nd Edition)
Chapter 3 Ownership of Firms
Revision Exercise & DRQ Level-up

5. Mavis, George and Amanda are the owners of XYZ Entertainment Limited in
Hong Kong. Later, they turn their firm into a partnership. Which of the following
statements is CORRECT?
A. The firm has a higher risk of being taken over.
B. The liability of the owners is still confined to their investment in the firm.
C. The firm can still exist if one of the owners withdraws.
D. The firm pays a lower profits tax rate than before.

6. A Hong Kong chain snack store turns from a private limited company into a
listed company. After listing,
A. the company needs to pay a higher profits tax rate.
B. the upper limit of the number of shareholders is 50.
C. the company is at a greater risk of being taken over.
D. less accounting information is required to be disclosed to the public.

7. If a firm has to disclose its financial statements to its shareholders only and the
firm itself can be sued by another firm, the firm is a _____ .
A. private limited company
B. public limited company
C. sole proprietorship
D. partnership

8. Miss Chow’s boutique winds up. She does not need to use her personal assets to
settle the boutique’s outstanding debts. Miss Chow’s boutique is a _____ .
A. a partnership
B. a sole proprietorship
C. a sole proprietorship or a private limited company
D. a private limited company or a public limited company

9. After switching the firm’s form of business ownership, firm A has to pay a higher
profits tax rate and is exposed to a higher risk of being taken over.

We can conclude that firm A may have changed from a _____to a _____ .
A. sole proprietorship … public limited company
B. partnership … private limited company
C. private limited company … public limited company
D. public limited company … partnership

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HKDSE Economics in Life – Microeconomics 1 (2nd Edition)
Chapter 3 Ownership of Firms
Revision Exercise & DRQ Level-up

10. Study the following information about firm A and firm B in Hong Kong.

Firm A Firm B
Number of owners 2 15
Legal status a legal entity not a legal entity
needs the consent of
Transfer of ownership freely transferable
other owners

According to the above information, firm A is a _____ and firm B is a _____ .

A. public limited company … private limited company
B. public limited company … partnership
C. partnership … public limited company
D. private limited company… partnership

11.
Firm A Firm B
Number of owners 3 20
Liability limited unlimited
Disclosure of financial
to its owners only to its owners only
information

According to the above information, which of the following descriptions of firm

A and firm B in Hong Kong is CORRECT?
A. Firm A has no upper limit on its number of owners while firm B has.
B. Firm A is subject to a higher profits tax rate than firm B.
C. Firm A is not a legal entity while firm B is.
D. Firm A can be listed while firm B cannot.

12. Which of the following about issuing bonds and shares to raise capital is
CORRECT?
A. The bondholders will dilute the existing shareholders’ control because they
are the creditors of the firm.
B. It is necessary for the company to pay a dividend to shareholders.
C. If the company winds up, shareholders can get repayment prior to bondholders.
D. Even if the company does not turn a profit, it still has to pay interest to
bondholders.

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HKDSE Economics in Life – Microeconomics 1 (2nd Edition)
Chapter 3 Ownership of Firms
Revision Exercise & DRQ Level-up

13. For the existing shareholders of a public limited company, which of the
following is a disadvantage of issuing bonds instead of shares?
A. There will be an interest burden for the company.
B. Bondholders will interfere in the company’s policies.
C. The interest rate on bonds is higher than the dividend rate on shares.
D. The company is obliged to repay the principal to bondholders whenever they
wish.

14. The board of directors of a listed company decides to issue bonds instead of
shares to raise capital. The most likely reason is that
(1) issuing bonds can strengthen existing shareholders’ control over the company.
(2) issuing bonds would not increase the company’s risk of being taken over.
(3) issuing bonds has no redemption obligation.
A. (1) only
B. (2) only
C. (3) only
D. (1), (2) and (3)

15. From the point of view of investors in general, which of the following is a
disadvantage of buying bonds over shares?
A. Bondholders do not have voting rights in annual general meetings while
shareholders do.
B. Bondholders are the last to claim repayment if the company winds up.
C. Bondholders may not receive interest if the company suffers a loss.
D. The return from bonds is lower than that from shares.

16. Ms. Lam is a small investor. From her viewpoint, which of the following is NOT
an advantage of buying bonds over shares?
A. If the company winds up, she can claim repayment prior to shareholders.
B. The rate of return is more certain.
C. She can receive interest regularly.
D. She has voting rights in the company’s decision-making.

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HKDSE Economics in Life – Microeconomics 1 (2nd Edition)
Chapter 3 Ownership of Firms
Revision Exercise & DRQ Level-up

Short Questions

1. The Hong Kong Housing Authority is a public enterprise and is responsible for
formulating and implementing public housing programmes.
(a) Give TWO features of a public enterprise. (2 marks)
(b) What is/are the source(s) of capital for the Hong Kong Housing Authority?
(1 mark)
(c) Suggest another example of a public enterprise in Hong Kong. (1 mark)

2. Peter worked in a law firm for years as a lawyer. Later, he set up his own law
firm. He must bear all legal responsibilities for the firm.
(a) What type of business ownership does Peter’s firm belong to? (1 mark)
(b) List TWO features of this type of business ownership. (2 marks)
(c) Suggest TWO ways of raising capital to Peter. (2 marks)

3. Mr. Chan ran a restaurant in the form of a sole proprietorship. Later, he and his
friend turned the restaurant from a sole proprietorship into a partnership.
(a) State ONE advantage and ONE disadvantage of turning a restaurant from a
sole proprietorship into a partnership. (2 marks)
(b) If Mr. Chan’s friend goes bankrupt, can the restaurant continue to run?
Explain. (2 marks)

4. XYZ Company is a private limited company in Hong Kong. The owners chose to
set up their firm in the form of a private limited company, not a partnership. List
TWO advantages and TWO disadvantages of being a private limited company
instead of a partnership. (4 marks)

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HKDSE Economics in Life – Microeconomics 1 (2nd Edition)
Chapter 3 Ownership of Firms
Revision Exercise & DRQ Level-up

5.

Firm A Firm B
Number of owners 15 30
If an owner goes If an owner goes
Continuity bankrupt, the firm can bankrupt, the firm has
still exist. to be dissolved.
Issuance of shares and
Not allowed Not allowed
bonds to the public

(a) What types of ownership do firm A and firm B belong to respectively?

(2 marks)
(b) Explain the differences between the above two types of ownership in (a) in
terms of
(i) legal status.
(ii) liability. (4 marks)

6. The table below shows the information of the Hong Kong stock market on a
certain day.

Code Bank Closing price of shares ($)

3988 Bank of China 3.620
1398 ICBC 5.510

3328 Bank of Communications 5.790

(a) To what type of business ownership do the above banks belong? (1 mark)
(b) Give TWO advantages and TWO disadvantages to owners of this type of
ownership over partnership. (4 marks)

7. A large property developer in Hong Kong issued shares to the public to raise
capital.
(a) Name the type of ownership of the above property developer. List TWO
features of this type of business ownership. (3 marks)
(b) Explain ONE advantage of issuing shares over bonds from the viewpoint of
existing shareholders. (2 marks)

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HKDSE Economics in Life – Microeconomics 1 (2nd Edition)
Chapter 3 Ownership of Firms
Revision Exercise & DRQ Level-up

8. Jessica is planning to buy either the shares or the bonds of a listed company.
Would you suggest that she buy shares or bonds in the following situations?
Explain.
(a) Jessica would like to be involved in the company’s decision-making.
(2 marks)
(b) Jessica would like to have a more stable return. (2 marks)

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HKDSE Economics in Life – Microeconomics 1 (2nd Edition)
Chapter 3 Ownership of Firms
Revision Exercise & DRQ Level-up

Long Questions

1. Sam is running a firm with Jessica and Eva. All of them are legally responsible
for contracts signed by any one of them.
(a) What type of business ownership does the above firm belong to? List TWO
features of this type of business ownership. (3 marks)
(b) Later, they expand their business by forming a public limited company.
They are now no longer subject to unlimited liability.
(i) What does unlimited liability mean? (2 marks)
(ii) They choose to form a public limited company instead of a private
limited company to expand their business. Explain the difference
between the two types of ownership in terms of transfer of ownership
and disclosure of accounting information. (4 marks)
(iii) The company can now issue shares and bonds to raise capital. From the
viewpoint of the company, explain ONE advantage and ONE
disadvantage of issuing shares over bonds. (4 marks)

2. Mr. and Mrs. Choi run a restaurant together. The restaurant is a legal entity and
the ownership of the restaurant cannot be freely transferred.
(a) What kind of ownership does their restaurant belong to? (1 mark)
(b) If the restaurant goes bankrupt, do Mr. and Mrs. Choi need to use their
personal assets to repay the restaurant’s outstanding debts? Explain.
(2 marks)
(c) Later, Mr. and Mrs. Choi turn the restaurant into a public limited company.
(i) Explain the difference between the two types of ownership in terms of
the sources of capital. (2 marks)
(ii) If the board of directors prefers not to increase the company’s interest
burden, should the restaurant issue shares or bonds to raise capital?
Explain. (2 marks)

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HKDSE Economics in Life – Microeconomics 1 (2nd Edition)
Chapter 3 Ownership of Firms
Revision Exercise & DRQ Level-up

DRQ Level-up

Read the information and answer the questions that follow.

‘Start-ups’ or ‘start-up companies’ refer to businesses that have just started to develop.
In recent years, quite a few start-ups have set up in Hong Kong. Many of them are in
businesses related to technology.

Source A: Extracts of a Profits Tax return form submitted by ShareToy, a Hong Kong
technology start-up, after their second year of business

Source B: Information about the profits tax regime in Hong Kong implemented from
the year of assessment 2018/19 onwards

(Source: Inland Revenue Department)

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HKDSE Economics in Life – Microeconomics 1 (2nd Edition)
Chapter 3 Ownership of Firms
Revision Exercise & DRQ Level-up

Source C: Extract of a news report about ShareToy in their fifth year of business

Questions

(a) (i) With reference to Source A, what type of business ownership did ShareToy
belong to? (1 mark)
(ii) State TWO features of this type of business ownership illustrated in
Sources A and B, and ONE other feature. (3 marks)
(b) (i) With reference to Source C, what type of business ownership did ShareToy
change to? (1 mark)
(ii) Suggest ONE disadvantage of this change in the form of ownership. (1 mark)
(iii) With reference to Source C, explain TWO advantages and ONE
disadvantage for ShareToy of issuing shares to the angel investor. (6 marks)

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