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

Operating Leverage

The degree of operating leverage measures how sensitive a firm is to its fixed costs. It increases as fixed costs rise and variable costs fall. Operating leverage magnifies the effect of cyclicality on beta. That is, a firm with a given sales cyclicality will increase its beta if fixed costs replace variable costs in its production process.

Financial Leverage and Beta

Financial leverage is the sensitivity to a firm's fixed costs of financing.

The equity beta will always be greater than the asset beta with financial leverage: the equity beta of a levered firm will always be greater than the equity beta of an otherwise identical all-equity firm.

Extensions of the Basic Model

The Firm vs. the Project

Any project's cost of capital depends... Continue reading "Understanding Operating and Financial Leverage in Business Valuation" »

Key Business & Finance Terms

1. Bargain

Something that is of very good quality but relatively inexpensive.

2. Change

The money that someone gives back to you when you pay more than something actually costs.

3. Currency

The system or type of money that a country uses.

4. Discount

Something you buy that costs much less than normal.

5. Entrepreneur

Someone who starts a new business or arranges business deals in order to make money, often in a way that involves financial risks.

6. Fair Trade

The activity of making, buying, and selling goods in a way that is morally right.

7. Loan

An amount of money that you borrow from a bank, etc.

8. Mortgage

A legal arrangement by which you borrow money from a bank or similar organization in order to buy a house, and pay... Continue reading "Key Business and Finance Terms Defined" »

The work of the Human Resources department

We all know that recruitment and selection is one of the tasks that the HR department fulfills. The other tasks will be discussed below:

• Recruitment and selection: Involves selecting and attracting the best workers.

Wages and salaries: Must be enough to motivate or attract workers.
Industrial relations: There must be effective communication between departments.
Training programmes: Must meet the training needs of employees and accomplish business objectives.
Health and safety: Must do things according to the law.
Redundancy and dismissal: Must obey all laws when firing workers.

Recruitment and selection

Workers are needed when a business starts up, expands or an existing employee leaves. Businesses use the... Continue reading "Human Resources Department: Recruitment and Selection" »

Dimensions of Corporate Social Responsibility

Philanthropic (Good Citizen)

Ethical (Be Ethical, Right from Wrong)

Legal (Obey the Law)

Economic (Be Profitable)

5 Barriers to Sustainable Consumer Behavior

• Lack of Awareness & Knowledge
• Negative Perceptions
• Distrust
• High Prices
• Low Availability

Measuring Brand Equity

Contributes to positive perceptions of product quality

Qualitative (Free Association/Projective Techniques)

Quantitative (Brand Recognition Research/Brand Recall)

4 Dimensions of BrandAsset Valuator

Differentiation (Brand's Point of Difference)

Relevance (Brand Relates to You)

Esteem (How Well Regarded the Brand Is)

Knowledge (Understanding of the Brand)

Role of Social Media in Branding

• Brand Advocates/Sharing Info/Seeing Discounts/Customer Services
• Allows

Perfect Competition: Meaning and Definition

A perfectly competitive market is one with a large number of buyers and sellers, all trading a homogeneous product without artificial restrictions, and possessing complete market knowledge.

In other words, a market is considered perfect when all potential buyers and sellers are immediately aware of transaction prices. Under these conditions, the price of the commodity tends to equalize across the market.

As Mrs. Joan Robinson stated, "Perfect competition prevails when the demand for the output of each producer is perfectly elastic."

According to Boulding, "A perfectly competitive market may be defined as a large number of buyers and sellers all engaged in the purchase and sale of identically similar commodities,... Continue reading "Perfect Competition: Definition, Characteristics, and Examples" »

As the number of eCommerce sites grows each day more and more people prefer to shop online for convenience choices and ease of price comparison online shopping experience is easier than ever before.

On the one hand The huge majority of online stores offer prices that are much lower than what you will find in a physical store. There are some good reasons for it.

Most physical stores have a restricted array of services and products. They could only carry a lot of items, and there are many policies affecting access to services and products. As an example, there may be a certain item that is only available to those versions of the business that you can get from the mall.

Shopping online enables you to find many services and products that you'll not... Continue reading "Invention by experience" »

Types of Negotiation

• Distributive Negotiation: Parties compete to determine a fixed sum of value. The focus is on who will claim the most value (win-lose scenario).
• Integrative Negotiation: Parties integrate their interests into an agreement, aiming for a mutually beneficial outcome (win-win scenario).
• Multi-Phase Negotiation: Negotiation takes place over several sessions or phases.
• Multiparty Negotiation: At least two negotiators in each group, and there can be more than two groups involved.

Distributive Negotiation

Getting the Other Side on the Table

1. Offer Incentives: Such as money, time, service, or support.
2. Put a Price on the Status Quo: Highlight the costs or disadvantages of not negotiating.
3. Enlist Support: Use allies to facilitate communication.

Cash Flows and Dividends

1. Norris Company Dividends: Norris Company declared cash dividends of $60,000, payable as follows: $20,000 at the beginning of the year and $25,000 at the end of the year. (Calculation: $60,000 + $20,000 = $80,000; $80,000 - $25,000 = $55,000)

2. Indirect Method Cash Flow Statement: On the statement of cash flows prepared by the indirect method, the amortization of premium or discount on bonds payable is added back to net income.

8. Cash Receipts from Issuance: Cash receipts received from the issuance of stock are classified as financing activities.

11. Ten-Year Bond Issuance: A ten-year bond issued at par for $250,000 cash is classified as a financing activity.

17. Inflow of Cash: Issuance of long-term debt represents... Continue reading "Accounting Principles and Financial Statement Analysis" »

Decision Trees: Excellent tools for choosing between courses of action. They help form a balanced picture of risks and rewards for each option.

Capital Markets: Markets where governments or companies raise money (capital) to fund operations and long-term investments. Selling bonds and stocks are two ways to generate capital.

Primary vs. Secondary Markets:

In the primary market, securities are first issued to investors through an initial public offering (IPO). Investment banks assist with IPOs by guaranteeing a minimum price before selling to the public.

The secondary market—where people buy and sell previously issued securities—includes stock exchanges, bond markets, and other entities that trade financial instruments. Securities trade based... Continue reading "Financial Markets: Capital, Money, and Investment Banking" »