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MGM 101 Test #2.docx

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Dave Swanston

Forms of Business Ownership Sole Proprietorship: business that is owned and operated by one person without forming a corporation  Advantages o Ease of start/end o Your own boss o Pride of ownership o Leave legacy o Retain profit o No special taxes o Fewer regulations  Disadvantages o Unlimited liability o Limited financial resources o Difficult in management o Time commitment o Few fringe benefits o Limited growth o Limited life span Partnership: legal form of business with two or more parties  Advantages o More financial resources o Shared management o Longer survival o No special taxes  Disadvantages o Unlimited liability o Division of profits o Disagreements among partners o Difficult to terminate Corporation: legal entity with authority to act and have liability separate from its owners  Advantages o More money for investment o Limited liability o Separation of ownership/management o Ease of ownership change o Perpetual life o Size  Disadvantages o Initial cost o Paper work o Two tax returns o Termination difficult o Stockholder and board conflict o Double taxation Other Types of Corporation Professional Corporations: Canadian-controlled private corporation engaged in providing professional services (accountants, architects, lawyers, dentist…) Non-resident Corporations: has head office outside of Canada Non-profit Corporations: no owners/stockholders (religious institution, hospital, college....) Corporate governance: process and policies that determine how an organization interacts with its stakeholders – both internal and external Business Regulations: companies that wish to operate in Canada must follow federal and provincial business laws and regulations (applies to registration and reporting and information) Merger: result of two firms forming one company  Vertical merger: joining of two companies involved in different stages of related business (e.g. soft drink company + artificial sweetener company)  Horizontal merger: joining of two firms in the same industry (e.g. soft drink company + mineral water company)  Conglomerate merger: unites firms in completely unrelated industries (e.g. soft drink company + snack company) Disadvantages:  Companies overpay to acquire firms  After merger, managers disagree about integrating operations  After merger, cost cutting obsession hurts business Acquisition: one company’s purchase of the property and obligations of another company Leveraged Buyout (LBO): attempt by employees, management, or group of investors to purchase an organization primarily through borrowing. Franchise: right to use a specific business’s name and sell its goods or services in a given territory Advantages:  Management and marketing assistance  Personal ownership  Recognized name  Financial advice & assistance  Lower failure rate Disadvantages:  High start-up costs  Shared profit  Management regulation  Restrictions on selling  Fraudulent franchisors Co-operatives: an organization owned by members and customers who pay an annual membership fee and share in profits (pay no income tax) The Business Environment  Canada has one of the most fully developed economic systems in the world  Canada’s abundance of natural resources, skilled labor force and sophisticated technology-based businesses have enabled the economy to grow and poster over the past 200 years  Key Factors in ensuring resilient and competitive Canadian economy o Productivity gains o Strong business investment o Technological innovation o Moderate wage increases o Favorable currency exchange rate  Products driving current trade performance o Oil/gas o Canola o Wheat o Gold, nickel, potash, sulfur o Telecommunications o Aerospace o Forestry-related o Automotive sector products  Canada is member of G7/8 (quasi-organization comprising the world’s major fully developed economies) Contributing Factors to Economic Development Foreign Direct Investment (FDI): occurs when company or individuals from one country makes investment into a business within another country (reflect physical ownership of productive assets or purchase of a significant interest in the operations of a business) 3 Fundamental Market Composition Principles: Balanced relationship need to exist between three principles in order for economic system to develop and grow 1. Law of Supply and Demand o Ability of market, independent of external influences, to determine the price for which a product or service will be bought and sold 2. Allowance for private ownership, entrepreneurship, and wealth creation o Refers to openness of market to support, encourage, and promote concepts of private enterprise, personal ownership, entrepreneurship and wealth creation 3. Extent of government in influencing economic activity and direction o Government can play various roles such as customer, regulator, and restricting access, manager… o Open System: economic system that adheres to principles of economic freedom o Controlled System: economic system where the fundamentals of law of supply and demand, private ownership, entrepreneurship and wealth creation are largely restricted or absent. The government fully controls the economic direction and activity o Mixed Economic System: economic system that contains components of both open and controlled systems (e.g. Canada) Bank of Canada  Canada’s central bank  Meets 8 times per year to assess status of economy and related inflationary pressures  Fundamental responsibility to develop and mange monetary policies and financial systems associated with Canada’s economic activity  Core areas of responsibility o Managing inflation and currency supply o Develop and manage financial system and safeguards o Provide fun management services to chartered banks Chartered banks: financial institutions regulated under the Canada Bank Act  Bring together borrowers and lenders by accepting deposits and lending out money  E.g. BMO, CIBC, RBC, Scotiabank, TD Canada Trust Four Pillars of Economic Activity Economic Activity = Expenditures + Savings + Investment + Credit Expenditures: purchases you make in support of day-to-day economic activity (e.g. clothing, food, housing, transportation…) Savings: money you set aside today that will support economic activity and wealth creation in/for the future Capital asset investments: investments you are making today to further expand capacity to conduct and expand productivity and overall economic capacity Credit: borrowing of dollars to support expenditures or investments made Economic Growth Cycle Gross Domestic Product (GDP): refers to total market value of goods and services (economic output) a nation produces domestically over a period of time (usually one calendar year)  Goods and services produced and purchased domestically for consumption  Business investments within the economy  Goods produced for export purposes  Government spending -Economists track movement of GDP (up or down) over a period of time to determine whether an economy is growing or contracting Recession: period of time that marks a contraction in overall economic activity. Believed to occur when an economy experiences two or more quarters of negative GDP movement Inflation: rise in the level of prices of goods and services within an econ
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