GDP – Expenditure Approach: GICE

Government purchases of goods and services

Investment (GROSS PRIVATE DOMESTIC)
Personal Consumption expenditures
+ Net Exports (exports minus imports)
Gross Domestic Product

GDP – Income Approach: IPIRATED

Income of proprietors
Profits of corporations
Interest (net)
Rental income
Adjustments for net foreign income
Taxes (indirect business taxes)
Employee compensation (wages)
+ Depreciation (capital consumption allowance)
Gross Domestic Product

Demand-pull inflation: caused by increases in aggregate demand [ increases in

government spending, decreases in taxes, increases in wealth, increases in
consumer confidence, and increases in the money supply ]  all these cause
equilibrium price to rise

Cost-push inflation: caused by reductions in short-run aggregate supply

[ increase in oil prices and an increase in nominal wages ]  all these cause
equilibrium price to rise

Nominal GDP: current dollars (prices prevailing at the time of production)

Real GDP: constant prices (value of goods and services adjusted for changes in the
price level)

Real GDP = [ Nominal GDP / GDP Deflator ] x 100

GDP Deflator is the price index used to adjust nominal GDP for changes in the
overall prices of goods and services

Fundamental Law of Demand: Price and Quantity demanded have an INVERSE

relationship

Factors that shift demand curves: WRITEN

Wealth (changes in)
Related goods prices
Income of consumers
Tastes or preferences of consumers
 Expectations of consumers
Number of buyers in a market

Fundamental Law of Supply: Price and Quantity supplied have a DIRECT

relationship

Factors that shift supply curves: ECOST

Changes in price Expectations of the supplying firm
Costs of production
Demand for Other goods
Subsidies or taxes
Technology

Pure (Perfect) Competition: LARGE number of suppliers and customers acting

independently, VERY LITTLE product differentiation, NO BARRIERS to entry, produce
where P = MR = MC, firms are PRICE-TAKERS, strategies include maintaining market
share and responsiveness to sales price

Monopoly: SINGLE FIRM with a UNIQUE product, SIGNIFICANT BARRIERS to entry,

ability of the firm to set output and prices (e.g., patents and restrictions against
competition – firms are PRICE SETTERS), no substitute products, produce where P >
MC (i.e., less output than is socially optimal), strategies include ignoring market
share and FOCUS ON PROFITABILITY from production levels that maximize profits

Monopolistic Competition: NUMEROUS FIRMS with DIFFERENTIATED products,

FEW BARRIERS to entry, ability of firms to exert some influence over the price and
market, significant non-price competition in the market (to promote brand
awareness and loyalty), zero economic profits in the long run, strategic plans
include maintaining the MARKET SHARE but also including a plan for enhanced
PROD DIFFERENTIATION

Oligopoly: Relatively FEW FIRMS with DIFFERENTIATED products, fairly

SIGNIFICANT BARRIERS to entry (high capital costs, etc.), strongly interdependent
firms (prices tend to be fixed), kinked demand curve (firms match price cuts but
ignore price increases), strategic plans focus on MARKET SHARE and call for the
proper amount of advertising and ways to adapt to price and volume changes

Price elasticity of demand: % change in the quantity demanded / % change in

price

= [ (D2 – D1) / (D2 + D1) ] / [ (P2 – P1) / (P2 + P1) ]

Price elasticity of supply: % change in the quantity supplied / % change in price

= [ (S2 – S1) / (S2 + S1) ] / [ (P2 – P1) / (P2 + P1) ]

Inelastic: < 1.0 (LESS THAN ONE)

Elastic: > 1.0 (GREATER THAN ONE)

Unit elastic: = 1.0 (EQUAL TO ONE)

Five basic competitive strategies:

Cost leadership focused on a broad range of buyers

Cost leadership focused on a narrow range (niche) of buyers
Differentiation focused on a broad range of buyers
Differentiation focused on a narrow range (niche) of buyers

Cost leadership: lowest overall costs

Differentiation: unique features that create loyalty/value

Best cost: low cost leader among rivals and unique features

Four Key Management Processes of SCM: Plan, Make, Source, Deliver

Stages of SCM: The fundamentals, cross-functional teams, integrated enterprise,

extended supply chain, supply chain communities

Real Cost of Hedging Payables:

RCHP = Nominal Cost of Hedging Payables – Nominal Cost of Payables

Real Cost of Hedging Receivables:

RCHR = Nominal Domestic Revenues Received without Hedging – Nominal

Domestic Revenues Received from Hedging

After-tax cost (Net cash outflow): (1.00 – Tax Rate) x Tax-deductible cash
expense

After-tax benefit (Net cash inflow): (1.00 – Tax Rate) x Taxable cash receipt

Depreciation Tax Shield Savings: Tax Rate x Depreciation Deduction

Payback Method: Net initial investment / Increase in annual net after-tax cash
flow

Exchange Rate Risk of Payables: Futures contract -- Call option (option to buy)

Exchange Rate Risk of Receivables: Futures contract -- Put option (option to

sell)
Risk Adverse Behavior: Certainty equivalent is LESS THAN expected value
(expects more pay for taking on greater risk)

Risk Seeking Behavior: Certainty equivalent is GREATER THAN expected value

(expects less pay for taking on greater risk)

Risk Indifferent Behavior: Certainty equivalent EQUALS expected value

Diversifiable Risk: Unsystematic risk (non-market/firm specific)

Non-Diversifiable Risk: Systematic risk (market specific)

Degree of Operating Leverage: % Change in EBIT / % Change in Sales

Degree of Financial Leverage: % Change in EPS / % Change in EBIT

Degree of Combined Leverage: % Change in EPS / % Change in Sales

Pre-Tax Cost of Debt Formula: [I + (PV - Nd) / n] / [(Nd + PV) / 2] = ktd

PV = Par Value of Bonds, I = Annual Interest Pmts, Nd = Net proceeds from
Sale, n = No. of years

Cost of Preferred Stock Formula: DPS / NPS = kps .. or .. (D / P) + G = kps

DPS = Preferred stock cash dividends, NPS = Net proceeds of preferred
stock

Cost of Retained Earnings (CAPM Formula): krf + [bi x (km-krf)]

krf = Risk free rate, bi = Beta coefficient of the stock, PMR = Market risk
premium, km = Market
rate

[bi x (km – krf)] = risk premium

km – krf = PMR

Weighted Average Cost of Capital (RE) Formula: kwc = (kdx * wdx) + (kps *
wps) + (kcs * wcs)
k = Cost, w = Weight

Wdx = weight for long-term debt

Wps = weight for preferred stock
Wcs = weight for common stock equity
Kwc = weighted-average cost of capital

Working Capital Formula: Current assets – Current liabilities

Annual Percentage Rate for Quick Payment Discounts Formula:

[360 / (Pay period – Discount period)] x [Discount % / (100 % - Discount %)]

Cash Conversion Cycle Formula: Inventory Conversion Period + Receivables
Collection Period – Payables Deferral Period

Economic Order Quantity: √ (2SO/C)