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    RISK MANAGEMENT AND CAPITAL BUDGETING COMPOUND INTEREST AND PRESENT VALUE TABLES Future value of $1: Multiply amount invested x factor to get accumulation present value of $1: Multiply amount desired x factor to get the amount you have to invest NOW.

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    RISK MANAGEMENT AND CAPITAL BUDGETING COMPOUND INTEREST AND PRESENT VALUE TABLES Future value of $1: Multiply amount invested x factor to get accumulation present value of $1: Multiply amount desired x factor to get the amount you have to invest NOW.

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    60 views43 pages

    BEC2010

    Uploaded by

    Raquel Fernandez Sanchez
    RISK MANAGEMENT AND CAPITAL BUDGETING COMPOUND INTEREST AND PRESENT VALUE TABLES Future value of $1: Multiply amount invested x factor to get accumulation present value of $1: Multiply amount desired x factor to get the amount you have to invest NOW.

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    BUSINESS ENVIROMENT AND CONCEPTS 2010 BEC, MODULE 42. RISK MANAGEMENT AND CAPITAL BUDGETING COMPOUND INTEREST AND PRESENT VALUE TABLES Future Value of $1: Multiply amount invested x FACTOR to get accumulation Present Value of $1: Multiply amount desired x FACTOR to get the amount you have to invest NOW. This i the reciprocal of FV of $1 FutureValue of an Ordinary Annuity: Multiply payment x FACTOR to get accumulated amount. Payments are at the END of the period, Present Value of an Ordinary Annuity: Multiply payment x FACTOR to get the amount which must be invested ‘NOW to provide those payments. Ordinary Annuity or Annuity in Arrears means the payments are made at the END of the period. ‘Annuity Due or Annuity in Advance means the payments are made atthe BEGINNING of the period. To change from an Ordinary Annuity to an Annuity Due FACTOR: (OA FACTOR\(1 + 1)= AD FACTOR To change from an Annuity Due to an Ordinary Annuity FACTOR: ‘AD FACTOR = OA FACTOR asp CAPITAL BUDGETING TECHNIQUES 1, Payback Period. ‘The umber of years to recoup the investment in cash. Payback Period Investment ‘Annual Cash Inflow Annual Cash Inflow (Before Depn/Amort & Taxes) == Depn/Amort Expense = NBT = Taxes = NIAT + Depn/Amort Expense = Annual Cash Inflow (Net of Taxes) 2. Accounting Rate of Retum, The percentage of return on investment each year. Accounting Rate of Return = Net Income Investment BOTH THE PAYBACK PERIOD AND ACCOUNTING RATE OF RETURN TECHNIQUES IGNORE THE TIME VALUE OF MONEY. 3. Net Present Value, Uses present value tables. If PVoofthe Investment > PV of the Benefits from the Investnient, then NPV is negative and this isa poor investment. If PV of the Investment © <_—-PV of the Benefits from the Investment, then NPV is positive and this isa good investment. It PVoofthe Investment = PV of the Benefits from the Investment, then NPV is zero and ‘management would be indifferent. 4, Intemal Rate of Return, Uses present value tables. The interest rate that would make PV ofthe Investment = PV of the Benefits from the Investment ‘The annuity factor that would make these equal isthe same mumber as the payback period. BEC, MODULE 44, COST MEASUREMENT Primary Objective ofthe Cost Accountant: To compute the cot per unit for financial statement presentation of ‘COGS on the income statement and Ending Inventories on the balance sheet. 3. Components of Manufacturing Costs: (1) Direct Materials “Materials which become part of the product. (2) Direct Labor Employees who work on the product, (3) Factory Overhead All other MANUFACTURING costs, (Ga) Variable OH including normal spoilage. Gb) Fixed OF Prime Coss: DM& DL Conversion Costs: DL. & OH FLOW OF CosTS Direct Materials Beg. | Purch_| ‘Avail. [Used we FGI cogs End_| Beg. | Beg. | cods| DM used} COGM. ! Dives Labor _—®DL sed ‘Avail, COGS~ i Payroll | Used End. \ count | COGM i For End Var & Fixed OW ‘Actual | Applied PROCESS COSTING ~- EQUIVALENT UNITS OF PRODUCTION (EUP) Four Steps: (1) Calculate the number shipped (in whole units). (2) Calculate the equivalent finished units. (3) Calculate the cost per EFU. (4) Complete the WIP T account. Step 1. Calculate the number shipped (in whole units) Beginning Inventory + Units Started Units to be accounted for - Ending Inventory, : = Units shipped Step 2. Calculate the equivalent finished units, A. FIFO B. Weighted-Average —PM_ _cc_ —DM_ _cc Units shipped Units shipped + End. Inv. (EFU's) + End. Inv. EFU's) = Beg. Inv. (EFU's =WA EEUS (= EIFO EFU's Step 3. Calculate the cost per EFU A. FIFO B. Weighted-Average Cost per EFU = Curtent Costs Only Cost per EFU = Beg. Inv. + Current Costs EFUs EFUS Step 4. Complete the WIP T account. Using the number of Ending Inventory EFU's from Step 2 and Cost per EFU in Step 3, calculate the $ value of ending inventory in WIP and plug COGM. ‘ost Units (1) Abnormal Spoilage is a PERIOD COST; do not include it in WIP. (2) Normal Spoilage is a PRODUCT COST; the costs of all units are spread over the good units; usually part of OH, BEC, MODULE 44. COST MEASUREMENT. BACKFLUSH COSTING Tras Fl Deset Mar Is —fci_ —cocs y ae ——> cocm—» | —» cocs—> | vac bias \ I | Backflush Costing Method I: Combine DM and WIP, Combine DL and OH Materials & In-Process | —IG1__ coGs | | | ———“- Conversion Cost Control | — 1 Backflush Costing Method Il: Same as Method I, but also no FGI. ‘Materials & In-Process | ——___ 98 | Conversion Cost Control I | nd Traditional Backflush Method I Backflush Method IT 1, Purchase raw materials Materials DR Materials & In-Process DR. Same as | AP cr| “ar cR 2. Issue materials to production, wip DR ‘None ‘None “Materials cR 3._Incur direct labor costs. wip DR See next ent See next e Payroll cR " oo 4. Incur overhead costs. Variable OH Control DR Conversion Cost Ctrl DR Fixed OH Control” DR Payroll cR Same as I AP, etc. cR etc cR 5. Apply overhead. wip DR None None Variable OH Control cR Fixed OH Control cR 6. Complete goods. FGI DR Fol DR ‘cogs DR ‘WIP CR | “Conversion Cost Ctrl CR | “Conversion Cost Ctrl cR Materials & In-Process CR | Materials & In-Process CR 7. Sell goods. cogs DR Same as Traditional FGI cR 8. Recognize overhead variance (underapplied). cogs DR ‘cogs DR Same as ‘Overhead Control cR | Conversion Cost Cel cR BEC, MODULE 4S. PLANNING, CONTROL, AND ANALYSIS STANDARDS AND VARIANCES Direct Material, Direct Labor, and Variable OH Variances. Use the following matrix: AQruciased —* | DM Purchase Price Variance DL Rate Variance Variable OH Spending Variance AQpurtassused * spo = ‘DM Quantity/Usage Variance DL Effciency/Usage Variance SQaitowed . SP = Variable OH Efficiency Variance (Based on Units — Produced) As you go UP the matrix, if the numbers are going UP (increasing) then the variances are UNFAVORABLE. Fixed OH V: AQ : arose D4 Fixed OH Spending/Budget Variance BUDGET t ———_Production/Votume Variance SCatowed —* se o= Co (Based on Units Produced) 4-Way OH Variance Analysis. (Variable OH Spending Variance 2) Variable OH Efficiency Variance (3) __ Fixed OH Spending/Budget Variance (4) Production/Volume Variance [NOT CONTROLLABLE] 3-Way OH Variance Analysis: (@ (1) +G) above together are the OH Spending Variance (®) 2) above becomes the OH Efficiency Variance (drop the word Variable) (©) @) above is the Production/Volume Variance [NOT CONTROLLABLE] 2-Way OH Variance Analysis: (a) (1) + 2) + G) above together are the Controllable Variance (b) _ @) above is the Production/Volume Variance [NOT CONTROLLABLE] Flexible Budget Formula: Budgeted OH = Total Fixed Costs + (@HRs)(Variable OH Rate/HR) BEC, MODULE 45. PLANNING, CONTROL, AND ANALYSIS DIRECT COSTING vs. ABSORPTION COSTING Direct or Variable Costing ‘Not GAAP, Used for intemal decision making, ‘Treats FMOH as a PERIOD cost. Income Stat Sales Variable COGS (DM, DL, VMO#) Manufacturing Contribution Margin = Variable Period Costs Contribution Margin Fixed Costs (FMOH as Period Cost =Netincome Absorption or Full Cost GAAP Used for external financial reporting. ‘Treats FMOH as a PRODUCT cost. Income Statement: Sales = COGS (DM, DL, VMOH, FMOH) Gross Profit or Gross Margin Period Costs (Fixed & Variable) = Net Income If Production > Sales, then Ending Inventory Increases: ‘Lower NI Higher NI If Production < Sales, then Ending Inventory Decreases: Higher NI Lower NI If Production = Sales, then Ending Inventory does not change: ‘Same NI for both To calculate the difference in the net income between the two methods: Difference in NI =(Change in ending inventory)(FMOH/unit) COST-VOLUME-PROFIT (BREAK-EVEN) ANALYSIS Use only when they mention profit Formulas: cM=sP-VvC (CMR = SF=VC BEPUpis = Total Fixed Costs or CM funit BEPsates $= Total Fixed Costs or CMR BEPSates After Tax Profit = (Before Tax Profit) (1 ~ Tax Rate) Before Tax Profit = ‘ax Profit (1 Tax Rate) BEP pits = Total Fixed Costs + Before Tax Profit Minit otal Fixed Costs + Before Tax Profit ‘CMR Margin of Safety (in units or $) = Current Sales Level (in units or $) -- BEP (in units or $) CMiunit= Net Income ‘Margin of Safety in Units CMR = Net Income Margin of Safety in $ ‘TABLE 2 Present Value of $1.00 S is Page inthis tables =S1.00, PERIODS 4% 6% 8% [0% 12% Md 16% [8 WH 22 MR 26 T0962 G943 0926 D909 a3 0877 0862 0847 0833 0820 0.806 0794 2 0825 0850 0857 08250797 0.769 0743 718 0.604 0.672 0.450 0.630 3 0889-0840 0794 0751 0712 0675 OG 0.609 0579 0551 0524 0500 4 08S 0.792 0735 0683 0636-0592 0552 S16 0.482 “0451 0423 0397 s 0.822 0.747 0.681 0.621 «(0.567 0.519 0.476 «0.437 0.402 0.370 0.341 0.315 6 0790 0705 0.430 0564 0507 046 04100370 0335 0303 0.275 0250 TABLE 3 ‘Compound Amount of Annuity of $1.00 in Arrears® (Future Value of Annuity) s,0lleiBel PERIODS 4% 6% 8% 10% 12% 1% 16% 18% 20% 22% 24% _26% 1 1000 i.000 1000 7.000 7900 7.000 7.000 7.000 11000 1.000 1.000 7.000 2 2040 2.060 2080 2100 2120 2.140 2160 2180 2200 2220 2240 2260 3 3122, 3184 3246 3310 3374 3440 3506 35 3640 3708 3.78 3.848 4 42543754506 4.641 4.779 4921. 5.066 5215 5368 S524 S84 SMB 3 S416 S637 S867 6.105 6353 6610 GATT 7154 7442 7740 BOMB 8.368, 6 6633. «6975-7336 «7716 «~B11S «8536 8977 9.442 9930 10442 10980 11.544 TABLE 4 ‘resent Valus of Annully of $1.00 in Areas 1 1 met | ah | PERIODS 4% 6% 8% 10% 2% _M% 16% 18% 20% 22% 2% _16% 1 0962 6943 0926 ©0909 0.893 0877 0862 0847 0833 0820 0.806 0794 2 18861833 1783-1736 1.601.647 1.605 1566 1.528 149214571424, 3 275 2673 2577 2487 2402-2322 2266 2:74 2106-2082 19811923, 4 3630 3465-3312 3170 3.037 2914 2798 2690 2569 2494 2.404 2320 S 44524212 3993 3791 3.605 3433 3.274 3.127 2991 286s 2.745 2.638 6 S242 4917 46234355 «4.111 3.889 3.685 3498 3.326 © 3.167 3.020 2885 "*Payments (or receipts) at the end of each period. PARTNERSHIPS AND JOINT VENTURES’ - Bi ald i 2 3. A partnership is an association of two or more co-owners of a business for profit a. must have two or more parties (can be a persons, corporations or partnerships) b. must have co-ownership (two key factors are sharing of profits and of management) + the parties must be co-owners of a business, not co-owners of property ¢. must be a business operated for profit A partnership is formed by an agreement of all partners to conduct the business a. the partnership agreement may be oral and need not be ia writing ‘exception: partnerships impossible:to perform in one year require a writing b. ifta partner breaches the partnership agreement, (s)he is liable to other partners ‘A partnership is not usually considered to be a separate legal-entity (e.g. it is not taxed) + itisconsidered a separate legal entity for employment and for ownership of property GENERAL PARTNERS 1. 2. Partners in a general partnership have unlimited personally liability a. general partners are jointly liable for all partnership debts and contract obligations b, they are jointly and severally liable for all partnership torts General partners are agents of the partnership and agerits of each other a. _ partners owe the same duties that all agents do b. when acting with authority, each can impose liability on partners and the partnership c. any partner committing a tort while acting on partnership business imposes tort liability on himself, the partnership -and feliow partners (respondeat superior) 4 cach must give actual notice to old customers and published notice to new customers ‘upon their termination from the partnership eae ae eee ta ey 1. A limited partnership consists of two or more parties formed by filing with a state a. ~ there must be one or more general partners and one or more limited partners b. a general partner may also be a limited pariner in the same partnership To admit a limited partner all partners must agree. To admit a general partner only general partners must agree. Limited and general partners may be secured or unsecured creditors of the partnership Limited partners have the right to inspect and copy partnership books and records to specifically include the right to receive copies of any partnership tax returns 5. ‘Lisi ina limited partnership general partners have unlimited personal liability ® limited partners have no liability beyoné their capital contribution, but they are liable for any capital contribution not made cc. limited partners have (@0)right to daily management or control of the partnership ® if they do participate in daily mariagement, they. are personally liable'to any party reasonably believing they were a general partner 4. ‘imited:parters may vote on the following without incurring liability 1). dissolution of the limited partnership 2). fundamental changes in the limited partnership 3). temovalof-a-general:or limited parmet . | 4), amending the.certificate of limited partnership 5). may act as an agent without losing limited liability Glu aatkcn kd ° ~ 1, Partner have an equal:right to participate in management unless otherwise agreed a most decisions require only a majority vote b. unless otherwise agreed, the following require unanimous consent of all partners 1). to.admit new general partners or new limited partners 2), to transfer partnership property to others 3). to change a written partnership agreement 4), to admit liability in a law suit or submit a claim to an arbitrator 5), fundamental changes in partnership business to include selling the goodwill 2. Each partner has an equal right to share in profits and distributions, unless otherwise. agreed + iffa division of profits is specified but not losses, losses will follow profits 2.1 Ina limited partnership, if it doesn’t state how to divide up profits and losses, then they are divided up based on their capital contributions. 3. Each partner has the right to be reimbursed for loans and advances made to the partnership ¢ a partner is entitled to repayment only paid after all other creditors are paid 4, Allpartners and limited partners have the right to full information about the partnership ‘they have the right to inspect and copy books and records at reasonable times 5. Each partner is not a co-owner of partnership property (called a tenancy in partnership) a. each has an equal right to use partnership property for partnership purposes % ‘but has no right to use it for any other purpose without consent of other partners b. partner can’t transfer or assign his individual interest in partnership property to others ¢. _ partnership property may not be attached by an individual partner's creditors 4. ifapartner dies, partnership property goes to the surviving partners, not the heirs ASSIGNING A PARTNERSHIP INTEREST 1. Any general or limited partner may assign or sell their partnership interest 2, assignment does not dissolve partnership b, thus, the assignor remains a partner and is still liable for partnership debts 2. The assignee does not become a partner without the consent of all other partners 2. the only right an assignee gets is the right to receive assignor's share of profits if any b. the assignee is not liable for the assignor's share of losses. SSO! ey ee 1. Three steps are required for a partnership to formally end ‘a. dissolution: caused by any partner ceasing to be associated with the business ¢ dissolution terminates actual authority, but does not terminate apparent authority b. winding up or liquidation: settlement of partnership affairs ¢. termination: the completion of the winding up process 2. Dissolution generally occurs when a general partner ceases to be associated with the Partnership ‘a. changes in limited partners do not dissolve the partnership b. any partner can dissolve the partnership by simply withdrawing, even if prohibited by the partnership agreement (ifit breaches the agreement, the partner is liable) ©. dissolution may occur by operation of law (e.g. death of a partner, bankruptcy of a partner or bankruptcy of the partnership dissolves the partnership) Exception: Under Revised Uniform Partnership Act: 1. Partners that own majority of partnership may choose to continue general partnership within 90 days of partner's with drawl, death or bankruptcy. 3. Upon dissolution the business may be continued by some of the former partners and others a. non-continuing partners are credited with their profits or charged with losses ‘¢ liable to creditors even if continuing partners agree to hold them harmless b. creditors of the old business are creditors of the new business . anew partner has limited to creditors of the old partnership (lability is limited to his/her share of partnership property) Example:_In the ABC partnership, A leaves & N takes A's place (ABC becomes NBC) ABC Partnership| EtOH Wisi ©) Ais personally liable to creditors- even if | A is not personally liable unless there is a other partners agree to hold A harmless notice problem W's liability is limited to N's share of (Nis personally fable partnership property IN gets all the rights of a partner [DISTRIBUTION UPON DISSOLUTIO! Bees 1. The order of distribution in a general partnership is as follows ‘a. upon the distribution the first order of distribution is to pay creditors ‘partnership creditors have first claim on partnership assets, but they may ‘only sue a partner personally after all partnership assets are exhausted + personal creditors have first claim on personal assets b. the second order of distribution is to pay loans made by partners to the partnership ‘¢. the third order of distribution is to pay capital contributions made by the partners ._ the last order of distribution is to distribute profits to the partners ITED LIABILITY COMPANY (LL! 1. A Limited Liability Company (LLC) is a cross between 4 partnership and a corporation ¢ most states require at least 2 members to form an LLC. 2. A Limited Liability Company differs from other business forms in three key areas. a. liability advantage: LLC owners (called members) have no personal liability beyond their investment in most cases (similar to a limited partner or stockholder) b. participate in management : an LLC owner may fully participate in management like partners. (unlike limited partners or comporate stockholders) ©. an LLC can have the same federal tax advantage of a partnership or S corporation. 3. An LLC must file i's articles of organization with the state: ‘a. name must clearly indicate limited liability of ts owners (e.g. use L.L.C. after name) 'b. the agreement between LLC members governing the operation of the LLC is called an operating agreement (like a partnership agreement) and is not filed with the state. 4. Two main methods of managing an LLC are member managed and manager managed ‘a. ina member managed LLC each member has an equal right to manage unless otherwise agreed and each member has actual and apparent authority to bind the uc b. an LLC may be managed by managers elected by the members 1. members have no actual or apparent authority unless also a manager 2. LLC managers have the same limited liability as LLG members 5. LLC members have the following rights ‘a. right to profits, losses and distributions is determined by the operating agreement b. unless otherwise agreed, a memiber has the right to assign her interest in the LLC 1, assignment doesn't dissolve the LLC and assignee doesn't become a member 2. the assignee only receives the right to receive assignor’s share of distributions 6. Dissolution of an-LLC: an LLCs dissolved in much the same manner as a partnership © in most states. remaining members may continue the business by unanimous consent Wie ee eka a ee) 1. A Limited Liability Partnership (LLP) is a cross between a general partnership and a limited partnership and has been-adopted in over 36 states ‘a. an LLP is treated by the law as a general partnership for almost all purposes (¢.9. partners in an LLP are general partners, partners are jointly liable for partnership contract debts and an LLP istaxed-as a partnership) b. in an LLP partners have limited liability like a limited partner in one case only, for the negligence , wrongful acts or misconduct of other 1. some states extend this limited li employees or agents 2. two states (New York and Minnesota) limit a partner's liability to all obligations of the LLP most states a partner is stil lable for his/her own misconduct and the those acting under the partner's direct management or control 4. as.with a limited partnership an LLP must file with the state rs lity to include acts of 0 L JOINT VENTURES | 1. A joint venture is a business association of two or more owners acting together for profit fora limited purpose and for limited duration a. joint ventures are usually for a single project b. joint ventures are treated as a partnership in most cases by the law 1 CORPORATIONS ce PE 1 Formed by promoters who are primarily liable for pre-incorporation contracts a if corporation accepts a promoter’s contract, both the-corporation and the promoter are Hable (corporation cannot ratify promoters contracts) b. promoters remain primarily liable unless there is a novation Corporations are formed by filing the Articles of Incorporation which must contain: a. _stock provisions: amount of authorized shares, voting stock & capital structure b. _ names: name of corporation, it's registered agent & names of all incorporators Amending the Articles of Incorporation requires passage of a resolution by a majority of the board and approval by a majority of the stockholders FINANCING THE CORPORATION 1. 2. Corporations may be financed by debt securities, equity securities and retained earnings Debt securities are bonds which create a debtor-creditor relationship bonds may be secured by property or unsecured (also called debentures) Equity shares evidence corporate ownership and are called shares or stock common shares - at least one class must have voting rights preferred stock has special rights over other stock usually as to dividends cumulative preferred - dividend carryovers to future years if not paid authorized shares: amount legally permitted to be issued by articles of incorporation issued shares - those distributed outstanding shares are those is stockholders’ hands treasury stock is stock which has been issued but not outstanding 1), no pre-emptive rights 2). no voting rights and no dividends 3). corporation can't buy if it would make them insolvent 4), can be distributed as a stock dividend or resold at less than par value pre pogP Watered stock is selling par value at less than par in original issue ‘initial purchaser and all others with notice are liable for difference in price FOREIGN CORPORATONS 1 2. FOREIGN CORP. is one doing business in any state other than state of incorporation They must obtain a certificate of authority from any state in which they are doing business MERGERS & CONSOLIDATIONS Merger ~ A & B combine & one of them-survives Consolidation - A & B combine & X emerges Approval steps for merger or consolidation a. submit a formal plan of merger to both boards and get majority approval b. submit to all stockholders & get majority approval (give notice of time, date & place) right of appraisal: dissenting shareholders can buy out of corporation at FMV submit plan to secretary of state who issues.a certificate of merger upon approval 4. ‘short formmerger: parent merges with a 90%+ owned sub 1). the only approval needed is from board of the parent 2). only the stockholders of the sub get appraisal rights STOCKHOLDERS’ RIGHTS & LIABILITIES ig 2. They have no personal liability beyond investment but must pay present value for stock Piercing the corporate veil is disregarding the corporate form and holding stockholders personally liable - can be done for fraud, undercapitalization and commingling of funds Stockholders have only twe management rights: they elect board of directors (they do not elect the officers) and they can vote on fiundamental changes to the corporation amending the articles of incorporation dissolution selling substantially all of corp. assets (not buying all assets of another corp.) mergers unless a short form merger ode Can inspect books and records at reasonable times unless they have an improper motive Pre-emptive rights: a right to buy up to your percentage of ownership in newly issued shares to public. Pre-emptive rights are only available if corporation permits + not available with treasury stock or if stock is traded for property or services Derivative suit is brought by large group of stockholders in the name of the corporation a. the stockholders must show a harm to corporation b. —ifsuccessful, recovery goes to corporation Stockholder voting agreements are enforceable in most states if they are in writing 1 Dividends are declared by the board of directors a. no inherent right to stockholders for dividends b. directors are liable for wrongfully declarations of dividends a Dividends become a corporate debt only after declaration and a. once duly declared it cannot be revoked unless for fraud or illegality . once duly declared stockholders become unsecured creditors Stock dividends don’t reduce corporate assets or increase stockholder's percentage of ownership or wealth (thus no effect on earnings or profits for tax purposes) ediat rae Lite edad td 1 Principal duties a. _ directors handle the overall management of the corporation and set policy b. officers are selected by the board and handle day-to-day afftirs Business judgment rule - they not lible if they acted reasonably & in good faith a. thus, directors can usually.rely on reports.of officers or-agents b. officers and directors are liable if negligent Officers and directors owe a fiduciary duty of loyalty to corporation a. must act solely in the best interest of the corporation b, may make a personal profit on a deal with their own corporation in two cases: 1). they make a full disclosure & do not participate in the approval process 2), absent pre-approval - only if deal is fair & reasonable to corporation Indemnification: reimbursement for losses in a law suit if acting in their corporate capacity a. may be indemnified by corporation if they win lawsuit . _ if they lose the law suit indemnification may require court approval + DISSOLUTION 1. 2. Corporations have perpetual existence until voluntarily or involuntarily dissolved ‘Voluntary requires passage of a resolution by majority of board and the stockholders Involuntary dissolution requires court action a. state can request a court dissolution for fraud, ilegality or no business activity b. stockholders can request a court dissolution if the corporation is hopelessly deadlocked, acting illegally or oppressively, or for waste of corporate assets ‘Upon dissolution first creditors are paid, then shareholders receive their pro rata share Price ($) Microeconomics A. Definition B. Demand Shift to the Right Increase in demand DI ‘Quantity Price ($) Shift to the Left Decrease in demand Quantity Reasons why Demand Curve Shifts Direct relationship Inverse relationship Substitute Goods ‘Complementary goods Expectation of price increase Group boycott Consumer income (Normal goods) Size of market Consumer income (Inferior goods) Price elasticity of demand: Percent change in quantity demanded Percentage change in price Change in Qty Demanded _ ‘Average Qty —_, Change in Price ‘Average Price Example: Period | | Period? [Change] Average | Percent Change Quantity | — 200 400 Price $2.50 $1.50 15 Impact to Impact to total revenue How to Interpret quantity Elastic Decreasing price inereases | Elasticity of demand is E>1 | Quantity total revenue 1.334 (elastic) demanded is sensitive to price | Increasing price decreases | A 1% increase in the price changes total revenue of a product will result in a 1.334% decrease in quantity demanded | Unitary Increasing or decreasing | Elasticity of demand is Elastic price has no impact to total | 1.00 (unitary elastic), revenue (total revenue does not change). A.1% increase in the price of'a product will result in a 1% decrease in quantity demanded Inelastic Tnereasing price increases | Elasticity of demand is E<1 | Quantity total revenue 0.85 (inelastic), demanded is not sensitive to price | Decreasing price decreases | A 1% increase in the price changes total revenue of a product will result in a 0.85% decrease in quantity demanded Income elasticity of demand Percent change in quantity demanded Percent change in Income How to interpret income elasticity of demand Positive ‘Normal good Tncome increases: E>0 quantity demanded increases _| ‘Negative Inferior good Income increases: E<0 quantity demanded decreases 16 C. Supply Price ($) Quantity Price ($) Quantity Direct relationship Number of producer inerease ‘Government subsidies nrease (lower production ost- more profile - produce mor) Prveis epee to increas (higher expected profits - rode mors) Inverse relationship Production casts decease (due to tech advances. More peoible- produce mor) Prices of oter gods decrease (ther goods less profiable, switch avay fiom other goods ~ produce mare) Direct relationship "Number of producers decrease ‘Government subsidies decease (higher prodution cos - les profitable produce less) Price is expected to decrease (lower expected profits - produce Is) Inverse relationship ‘roductin cossincreas (les profitable - rode Is) Prices of ther goods increase (the goods more profitable, switch o other govds~ produce les) Elasticity of supply: Same concept as elasticity of demand D. Market Equilibrium Equilibrium price: The price at which all the goods offered for sale will be sold. Surplus Price Flor: A minimum specified price hat may be charges fru good he Noor is above the equim pc, a surplus will develop Price Ceiling: A mans 00d. Ifthe cling is below equim, deft wil develop 1m spovfed price tht may be charged fra Quantity The effects in the shift in demand and supply i Increase in demand, ne change in supply Decrease in demand, no change in supply PI Price (8) Quantity Quantity Increase in supply, no change in demand Price (S) Price (S) Indeterminate (Increase, decrease to change) Indeterminate (Inerease, decrease no change) <—' Quantity Demand increases, supply decreases Demand decreases, supply increases 8B & ‘ Indeterminate Juantity — throne dorene NY ‘no change) ‘no change) E. Costs of Production Total Cost data ‘Average/Marginal cost data 1 2 3 4 5 6 7 8 Output TFC TVC TC AFC AVC ATC MC per day 2+) |@/@ |@/a) |} @/a Chg 4/ or Chg! 0 50 0 50 1 50 15 65 2 50 25 75 3 50 34 84 4 50 42 92, Total Marginal Cost = 42 5 10.00 10.40 6 8.33 10.67 7 TA4 11.29 8 6.25, 12.25 9 5.56 13.56 10 5.00 15.20 i _ 4.55 18.36 Total Marginal Cost = 160 Law of diminishing returns: Short run concept. Plant size does not change. Long run total costs: The shape of the curve depends on the industry 19 deal plan size Biggest plant ‘would have he lowest ATC Na y ‘Output F. Production Marginal Product (MP), Marginal Revenue Product (MRP) A firm will hire an additional unit of a resource as long as the additional revenue from employing one more unit of the resource (MRP) exceeds the cost of employing the resource. A B c D E F Units of | Total Output | MP Product | Total MRP Labor Price Revenue Change in (B) divided (B)x@) by change in by change in (A) A) 1 14 $s 2 26 35 3 37 35 4 46 $5 3 33 35 6 58 $5 7 2 35 Total 296 62 $35 $1,480 $310 20 How to determine if there is an economic profit/loss » 3) 4) ‘Locate the point where MR = MC Follow the dashed line down to where it intersects quantity. This isthe quantity that maximizes profit. ‘Locate the place where the dashed line intersects demand and then move to the left where it intersects price. ‘This isthe price per unit that maximizes profit. Locate the place where the dashed line intersects ATC and then move tothe left where it intersects price. the average total cost per unit. If below the profit maximizing price, economic profit is made. Price ($) 2 Macroeconomics A. Definition Gross National Produet (GNP): The income eamed by Americans, regardless of whether that income was eared domestically or abroad. GNP counts the income that ‘Americans ear abroad, but it omits the income foreigners earn in the United States. Gross Domestic Product (GDP): The market value of all final goods and services produced within a country during a specific time period, usually a year Real GDP: Adjusted for the effects of inflation Potential GDP: The amount of output that can be expected at full employment. The maximum sustainable output level consistent with the economy's resource base. B. Aggregate Demand & Supply MPS + MP\ 1/ MPS = Multiplier Multiplier x change in spending = change in GDP Given: MPS =.25 Spending increases by $1,000,000 MPC must be .75 (MPS + MPC = I and we know that MPS = .25) ‘The multiplier must be 4 (1 / MPS = 1 /.25) Change in GDP must be $4,000,000 (change in spending x multi = $1,000,000 x 4) C. Business Cycles Peak (Real GDP > Potential GDP) Potential GDP Real GDP Trough (Real GDP < Potential GDP) Time 22 D. Economic Measures Producer Price Index (PPI): Prices of finished goods and materials at the wholesale level. Consumer Price Index (CPI): Price changes of a bundle of goods purchased by houscholds. 364 items followed. 21,000 stores visited to derive prices. GDP Deflator: Broader measure than CPI. Designed to measure the change in the average price of the market basket of goods included in GDP. Includes CPI plus large computers, airplanes, welding equipment, office space, etc. Money supply has several definitions. Mj = Currency & demand deposits & travelers checks Mz = M; & Savings deposits & small time deposits (< 100k) & money market funds Mg = M; & other larger time deposits Many economists and the Fed focus on Mz E, Monetary Policy Monetary Policy: The Federal Reserve can control money supply in three ways; Strategy Expansionary Restrictive Monetary Policy | Monetary Polic Reserve By changing the amount | Reduce reserve Tncrease reserve Requirements | banks must hold in reserve, | requirements (and _| requirements (and the Fed can manipulate the | increase the deposit | decrease the availability of excess expansion deposit expansion reserves and the size of the | multiplier) multiplier) deposit expansion multiplier (1 / reserve requirement) Rarely used — too powerful! ‘Open Market | By buying US government Operations | bonds, on the open market, in the open market. the Fed can directly inject (reduce the money new potential reserves into | (expand the money | stock, reduce bank Sell US securities the economy. Primary | stock, increase bank | reserves, fewer mechanism reserves, more loans) loans) Discount Rate | Borrowing from the Fed is | Lower the discount | Raise the discount discouraged. Banks are | rate (reduce rate (build up ‘more likely to build up their | excessive reserves, | excess reserves, reserves to ensure they extend more loans) | extend fewer not have to borrow from the loans) Fed. 23 F. Fiscal Policy ‘The Government can take several actions to expand/contract the economy. Rely on expansion multi lier theory. Fiscal expansion (when the economy is operating | Fiscal below its potential. Creates budget deficit) contraction (to combat inflation) Government | Increase spending. As the government spends | Reduce spending expenditures | more on highways, flood control projects, education, and national defense, these expenditures will increase demand in the goods and services market Tax policy | Decrease taxes. A reduction in taxes will increase | Increase taxes the current disposable income of business and households. G. Economic Theories ‘Monetary Policy | Fiscal Policy Classi No No Keynesi i Yes (government spending & tax policy) Moneta Yes. No Supply side [No Yes (primarily tax policy) ‘Neo-Keynesian | Yes Yes H. International Trade ‘Output per worker day Potential change in output Country Food Clothing Food Clothing USA 2 1 +6 3 Japan 3 9 3 +9 Change in total +5 +6 output 4 Which country has absolute advantage? Japan in both categories. Japan can produce 3 unit clothing per worker compared to 1 for the USA. of food per worker compared to 2 for the USA. Japan ean produce 9 units of Which country has comparative advantage: USA has comparative advantage with food. By transferring one worker from clothing to food, the USA gains 2 units of food at an opportunity cost of 1 unit of clothing, a ratio of 2:1. Japan, however, gains 3 units of food at an opportunity cost of 9 units of clothing, a ratio of 3:9. Since the USA has a higher ratio, has a comparative advantage with food. 24 Japan has comparative advantage with clothing. By transferring one worker from food to clothing, Japan gains 9 units of clothing at an opportunity cost of 3 units of food, a ratio of 9:3. USA, however, gains | unit of clothing at an opportunity cost of 2 units of food, a of 1:2, Since Japan has a higher ratio, it has a comparative advantage with clothing, Obstacles to trade Description ‘Who wins Who loses Tariff [Tax on imported goods, which makes | Domestic producers | Consumers it more costly for consumers to can sell more goods | since prices are purchase goods from foreigners. and increase prices _| higher Imports decline and the domestic price increases. Average tariff is less | Federal Government | Foreign than 3% through increased tax | producers revenue through fewer sales ‘Quota [A restriction on imports resulting in a | Domestic producers | Consumers reduction in foreign supply. Imports | can sell more goods | since prices are decline and the domestic price and increase prices. | higher. increases. Foreign producers _| Foreign granted import producers not permits to sell in the | able to export domestic market. their goods. I. Foreign Exchange Rates Example Foreign Exchange Rates from the Federal Reserve Bank of New York (Feb 2004) S 3 Mo. Forward 6 Mo. forward 1.2678 USD/Euro | 1.2647 USD/Euro | 1.2619 USD/Euro. Steps to determine if a currency is increasing/decreasing 1. Identify the currency in the denominator. In this case it is the Euro. The Euro, therefore, is the currency being measured. In the spot market, for instance, one Euro costs $1.2678 dollars. 2. Determine if the exchange rate is increasing/decreasing from period to period. In this case the exchange rate is decreasing. 3. Since the Euro is currency being measured and the exchange rate is decreasing from period to period, then the forward market shows the Euro decreasing in reference to the US dollar. The Euro is selling at a discount to the USD in the forward market. 25 J. Foreign Investment The Effects of the Economic Environment on Strategy A. General Environment B. Five Forces 26 C. Industry Analysis Perfect (pure) competition Demand curve: perfectly elastic © Large number of sellers © Each seller is small © No influence on price © Price takers ‘© Homogenous product (commodity) © No barriers to entry/exit Pure Monopoly Demand Curve: very inelastic * Single seller of product or service * No close substitutes ‘© Significant barriers to entry/exit © Political ©. Financial © Significant public relations effort Monopolistic Competition Demand Curve: relatively elastic © Large number of sellers © Slightly differentiated product/service (© Heterogeneous © Through advertising © Through innovations © Minor barriers to entry/exit Oligopoly Demand Curve: elastic & inelastic Yew number of large sellers © Significant barriers to entry/exit © Political o Financial « Kinked demand curve © Price increase * Ignored by others = Elastic demand curve © Price decrease = Matched by others = Inelastic demand curve 27 Price ($) Price (S) Ss) ‘Demand = Marginal Revenue = Price Quantity i Qantty ‘Marginal Revenue -mand ‘Marginal Revenue (8) Pri Quantity Module 41 Financial Management Working Capital Management Cash Conversion Cycle Inventory conversion Recetas colton period 91 days pevod27 Days Receive materials Fishes goods Cotes ‘from suppliers: Pay Suppliers ‘and sels them receivables ee —_,>——._————" Pay ee period Cash conversion cycle 30 Days 88 days (91 + 27-30) ‘© Inventory Conversion ering . Averagelnventory InventoryConversionPeriod = A”

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