The Mid-Term Exam

WHAT IT ISN’T: Not Bluebook, Scantron, Lap-top, Open-Book or Open-Note

WHAT IT IS: Emphasizes Terminology and Applying Themes

Earn all the Points on Essay Questions

Clearly State Answer (Thesis) Explain Answer Why did you write what you wrote? Don’t repeat Question

The Mid-Term Exam

Bring several Pens or Pencils

Three Organizational

Forms

THREE BASIC FORMS OF BUSINESS ORGANIZATIONS

Corporation

Legislatively Created and Regulated Governance,

Ownership and Financial Structure

Which Form Best Fits the Needs of your Business?

Sole Proprietorshi

p

Any Business Owned and

Operated by an Individual

General Partnership

Two or More Persons Operating

a Business for a Profit

Determinants of Organizational Form

Owner’s Objectives: Control, Liability, Capital Needs, Distribution of Profits (Losses) and Taxes

Dealings with Outside World: Other Owners, Employees, Suppliers, Customers and Future Owners

Legislative Goals: Special-Purpose Entities subsidize Social Objective

THE AGENCY PROBLEM

Corporate Shareholders(Principal)

Investor: Maximum Returns

(High-Risk/High-Return)

Cannot operate Business

Liability is Limited: Can Lose only Investment

Occurs when (1) Goals of Principal (Owner) and Agent (Employee) Conflict and (2) Principal cannot Verify

what Agent is doing

Corporate Management(Agent)

Manager: Stable Returns (Low-Risk/Low-Return)

Can operate Business

Unlimited Liability: Lose Job and Income

7

Who’s responsible for Managing a Corporation?

What Do you get with Common Stock and Do Not get with Preferred

Stock?‘Limited Liability’ and ‘Double

Taxation’

INFLATION

Consumer Price IndexesWho Benefits and Who Loses?

UNEMPLOYMENT/EMPLOYMENT RATE

Job Growth (Demand) vs. Labor Force (Supply)Always a ‘Bad Thing?’

GROSS DOMESTIC PRODUCT (GDP)

National, Regional and Local

INTEREST RATES

Leading IndicatorPrincipal Tool of Monetary Policy

Satisfy 10% Reserve

Requirement Every Day for Two

Weeks of Every Month

9

Shortage creates Market for Needed Reserves

Overnight Loans of Federal Reserve Funds

FOMC tradesGovernment Securities to

INFLUENCEFed Funds Rate

DEMANDElastic or Inelastic?

Elastic Demand: Quantity Demanded is Highly Responsive to Price Changes (Flatter Curve)

Inelastic Demand: Quantity Demanded not as Responsive to Price Changes (Steeper Curve)

Firm hasCOMPETITIVE ADVANTAGEWhen…

Competitors cannot Duplicate Value-

creating Processes of its Product and Market Position

Meaningful Product DifferentiationTargeting Under-served Market

SegmentEffective Distribution Channel

Essential Accounting Reports

Balance Sheet

Income Statement

Statement of Cash Flows

THREE ESSENTIAL METRICS

Current Ratio Debt-to-Equity Ratio Return-on-Equity Ratio

CAPITAL STRUCTURE

SOURCES

INTERNAL

EXTERNAL

Debt: Loan or Bond

Source: Commercial Bank

Stock: Preferred or

CommonSource: Investment

Bank

Retained Earnings Trade Terms

RECONCILE SOURCES/USES OF CASHOPERATING NEEDS Timing and Amounts

CAPITAL NEEDS Growth and Contraction

IMPLICATIONSOPERATIONS Debt Claims on Cash Flow/Assets

GOVERNANCE Common Stockholders’ Rights