Notes, summaries, assignments, exams, and problems for Economics

Balance Sheet Structure

Assets

Non-Current Assets

• Intangible Assets (Industrial property less Accumulated depreciation of intangible property)
• Property, Plant and Equipment (Buildings, furniture, and technical equipment less Accumulated depreciation)
• Investment Property (Investment buildings less Accumulated depreciation and Impairment of investment property)
• Non-Current Financial Assets (Non-current investments in equity instruments)
• Deferred Tax Assets

Current Assets

• Inventories (Merchandise less Impairment of merchandise plus Advances to suppliers)
• Trade and Other Receivables (Trade receivables, other receivables, and tax receivables less Impairment of trade receivables)
• Other Current Assets (Prepaid expenses)
• Current Financial Investments (Receivables

The Company Beta (β)

β = Cov(R_i, R_M) / Var(R_M)

Problems of Beta:

1. Betas may vary over time.
2. The sample size may be inadequate.
3. Betas are influenced by changing financial leverage and business risk.

Solutions:

1. Problems 1 and 2 can be moderated by more sophisticated statistical techniques.
2. Problem 3 can be lessened by adjusting for changes in business and financial risk.
3. Look at average beta estimates of several comparable firms in the industry.

Stability of Beta

Most analysts argue that betas are generally stable for firms remaining in the same industry, but they can change due to:

• Changes in product line
• Changes in technology
• Deregulation
• Changes in financial leverage

Using an Industry Beta

It is frequently argued that one can better estimate a firm's beta...

Partnerships and Limited Companies

Partnership: A business carried on in common with a view to profit.

Advantages:

• Shared responsibility
• Economies of scale
• Private accounts
• Spread profit for tax purposes

Disadvantages:

• Shared profit
• Joint and several liability
• Disagreements
• All profits taxed

Limited Company: Owned by shareholders, run by directors. It can be a public or private company and is a separate legal entity that pays corporation tax.

Advantages:

• Limited liability
• Perpetual succession
• Corporation tax

Disadvantages:

• Running costs
• Personal guarantees may be required
• Filing deadlines
• Private transactions
• Owner vs. manager conflict (payout or reinvest)
• Privacy (public accounts)

Inheritance Tax - Agricultural Property Relief

Must be occupied for 2 years. Relief...

Income Statement: Financial Performance

Measures a company's financial performance over a specific period of time.

• Revenue: First amount on right (credit)
• Expense: Second amount on left (debit)
• Revenues - Expenses = Net Income
• If net income is negative, it is called a Net Loss.
• Net income is allocated to either Dividends or Retained Earnings.

Retained Earnings: Company Profits

Represents the portion of net income that the firm has kept (as opposed to paying out as dividends).

• Ending Retained Earnings (ERE) = Beginning Retained Earnings (BRE) + Net Income (NI) - Dividends
• In a Statement of Stockholders' Equity, it would include common stock: ERE = BRE + Common Stock (Owner Contribution) + NI - Dividends

Balance Sheet: Financial Position Snapshot

Reports...

Chapter 21: International Financial Management Concepts

Key International Finance Terminology

• Know all terms and their definitions.

Multinational Corporations (MNCs)

What is a multinational corporation? MNCs engage in various forms of international business:

• Exporter
• Licensing Agreement
• Joint Venture
• Fully Owned Foreign Subsidiary

Foreign Exchange Rates and Influencing Factors

Understand foreign exchange rates and the factors that influence them:

• Purchasing Power Parity (PPP) and the Purchasing Power Parity Theory
  • Practice Problems 3, 4
• Inflation
• Interest Rates and the Interest Rate Parity Theory
• Balance of Payments (A trade surplus strengthens the currency; a trade deficit weakens it.)
• Government Policies (e.g., central bank’s actions)
• Other factors: stock

Understanding Bonds and Debt Instruments

Bonds are debt instruments where an investor loans a company money; the firm promises to repay the loan plus pay interest. Firms issue bonds to raise money for expansion.

• Bonds pay interest, while stocks typically pay dividends.
• Bonds often offer a guaranteed rate of return and are generally considered less risky than stocks.
• Bonds are typically sold in increments of $1,000.

Investment Companies and Market Trading

Investment companies facilitate the buying and selling of securities in open markets.

Mutual Funds: Pooled Investment Vehicles

A mutual fund is a type of investment that pools money from many investors and uses it to make investments based on a stated investment objective. Each shareholder participates...

The Systematic Process of Accounting

Accounting is the systematic process of identifying (looking for financial information of the business), recording (writing down collected information), summarizing (classifying into accounts), analyzing (understanding financial information), interpreting (being aware of the impact), and reporting (communicating information) financial information in the form of financial statements to the decision-makers.

Functions of the Accounting Department

The functions and responsibilities of the accounting department include:

• Payroll: Calculating salaries, wages, checks, taxes, and employee benefits.
• Procurements and Inventory: Recording goods sold, purchases, products for sale, and liabilities.
• Cash Collectors: Identifying

Market expansion strategies (concentration-specialization and spreading-flexibility)

Motivation for internationalizing: Proactive and Reactive:

• Reactive: market-competitive environment-political environment-economic environment-chance occurrence-extra inventory-exporting.
• Proactive: expanding sales-launch an offensive-power & prestige, lower costs of labor-less stringent rules-extend life of a product.

Rules of entry mode: Naive-Pragmatic – strategy.

Entry modes: Exporting-Contractual- Investment.

• Exporting: Types:
  • Direct (ad: control foreign markets-good info feedback-better protection of trademarks. Dis: higher start-up costs-high investment-info requirements)
  • Indirect (ad: fast market access-Little commitment-export management is outsourced.

Multiple Choice Questions

1. The optimal use of a variable input occurs when the marginal revenue product equals marginal factor cost.

2. In which range of market share is a firm typically considered dominant? 30% to 85%

3. Which of the following is usually not a source of sustainable competitive advantage? A firm may have a large marketing budget.

4. Before launching a new type of product, what should a company do? Sensitivity analysis

5. The type of economic indicator used to predict future economic activity is a leading indicator.

6. Which of the following is not part of the four-step forecasting process? Developing internal controls

7. In which model is the new forecast equal to the old forecast plus some proportion of the last observed forecast error? First-order

Product Classification Types

• Consumer Products

  Products sold directly to families and individuals for personal use, not to companies.

• Business Products

  Products sold to organizations, including small and large businesses.

Specific Product Categories

• Convenience Products

  Inexpensive items requiring minimal purchasing effort (e.g., toothpaste, basic groceries).

• Shopping Products

  Items for which consumers are willing to spend more money and effort comparing options (e.g., jeans, electronics).

• Component Parts

  Finished items that become part of a larger product.

• Process Materials

  Materials used directly in the production of other items (e.g., glue, chemicals).

The Four Stages of the Product Life Cycle

Industry profit changes significantly as a product moves through...