Corporations

• $tock$– Dividends: $ given back to stockholders from

profitable companies– 2 examples of quarterly dividends

• http://finance.yahoo.com/q?s=so (historical prices)• http://finance.yahoo.com/q?s=XOM

QUICK REVIEW—KEY WORDSWHAT IS (A)…

• BOND?• PRINCIPAL?• INTEREST?• LIMITED LIABILITY –

– the corporation itself, not its owners, is fully responsible for its debts and obligations

– How is limited liability an advantage for corporations?

• PROXY– A ballot that give stockholder’s representative the right to vote on corporate

matters

When a corporation wants to introduce a potentially

profitable but risky product, it frequently sets up a

separate company that has its own corporate structure.

WHY do you think the corporation does this?

In the U.S., states/cities will often try to attract a corporation to build its headquarters in their state by offering tax credits or

tax reduction.

Why?

HOW?

Another fun fact

• True or False:– Between 1998 and 2003, the United States’ share

of worldwide internet commerce INCREASED.

– In 1998, the US accounted for approx. 75% of all Internet-based commerce, compared with about 50% in 2003.

– What are some examples of U.S.-based companies that do business online?

• What type(s) of businesses are they?

Quick Questions

Which of the following bonds is better? WHY? How much did each BORROW by selling bonds?

Bond #1 Price: $5,000 Principal: $2,187,000 Interest Rate: 5.25% Yield per Bond: $262.50

Bond #2 Price: $1,000 Principal: $750,000 Interest Rate: 5.8% Yield per Bond: $58.00

Business Growth and Expansion

3.2

What are 2 Ways a Business Can Grow?

1. Reinvesting Profits (Cash Flows)

2. Engage in a Merger –a combination of 2 or more businesses to form a single firm

Key Terms:

• What is the difference between revenue (income), net income, and cash flow?– Net income – the dollar amount earned by subtracting total

expenses from revenues

• What are some all the expenses that a company might have?...– Cost of inventory, wages and salaries, interest payments,

and depreciation – a non-cash charge the firm takes for the general wear and tear on its capital goods

– the sum of net income and non-cash charges such as depreciation – it’s the bottom line, or real measure of profits

Why would a company choose to merge?

1. To grow faster• And desire to be the biggest2. To become more efficient – (How does merging

make a company more efficient?)• Cut their managerial costs in ½• Volume purchases bring costs down• More effective use of advertising3. To acquire or deliver a better product

– (AT&T bought cable TV firms to provide internet)– To give more access and freedom to customer

4. To eliminate a rival – Royal Caribbean bought Celebrity Cruise Lines

5. Change its image– Valujet merged with AirWays to form AirTran Holdings Corp.

• 1996 Everglades Crash

Types of Mergers

• Horizontal Merger – when 2 or more firms that produce the same kind of product join forces– Chase National and the Bank of Manhattan

• Vertical Merger – When firms involved in different steps of the manufacturing or marketing join together– Examples?– An automaker merging with a tire company– U.S Steel Corp. – at one time it mined its ore, shipped

it across the Great Lakes, smelted it, and made steel into different types of products

Who Wins in a Merger?

• Brokers• Investment

Bankers• Attorneys• Accountants• Managers

paid and released

• Who loses?

Conglomerates• A firm that has at least 4 businesses, each making

unrelated products (usually none of which is responsible for a majority of its sales)

• http://en.wikipedia.org/wiki/List_of_conglomerates • Diversification – major reason to conglomerate

– So as to avoid a calamity if one type of business fails, Conglomerates diversify to maintain a balanced and solid income

• Examples of calamities?• Bad weather, isolated economic situations, sudden change in

consumer tastes• “Don’t put all your eggs in one basket.”• 1970’s, 80’s - R.J. Reynolds owned Sea-Land (largest containerized

shipping firm in US), KFC, Del Monte, Heublein (2nd largest producer of wine)

• Think of 2 companies today that would be mutually improved if they merged

Don’t even think about it

ALL MY EGGS IN

=

CCU, a diversified beverage company of Chile

Multinationals• A corporation that has manufacturing

or service operations in a number of different countries.– Pay extra taxes– Subject to many different laws– Can easily move technology, resources,

goods, services across national borders– Effect on under-industrialized countries is

debated – Why?– Can demand tax, regulatory, and wage

concessions– Usually 2 types of employees:

management ($) and local workers. Sound familiar?

– General Motors, Nabisco, British Petroleum, Royal Dutch Shell, Mitsubishi, Sony

– “The World is Shrinking” – how does this apply to Multinationals?

VIDEOS

• Singapore: Attracting business (4:46)– Discovery Streaming, 1997

• Kerala—Protect small retail? – YouTube:

http://www.youtube.com/watch?v=fsQXw9eVh14

Alliances• Instead of merging, firms can make alliances

with other firms.

• McDonald’s allied with?: – Coca-Cola (sells it in their restaurants)– Disney (helps them promote films, happy meals;

Disney has allowed McD’s to open in their parks)– Wal-mart– Chevron (in their stations)