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BU111 Final Exam Review

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Roopa Reddy

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Business Study Notes – Final exam Economic Factors Four Pillars of Canadian Financial system Pillar #1 - Chartered Banks - Privately owned, publicly traded, profit seeking - Largest and most important institution - Concentrated and highly regulated industry - Five largest account for 90% of total bank assets - Bank act limits foreign controlled banks to 8% of total domestic bank assets - Serve individuals, business, and others - Major source of short-term loans for business - Secured vs. unsecured loans Expand money supply through deposit expansion - Deregulation - Changes in consumer demands - Competition from foreign banks Pillar #2 – Alternate banks - Trust companies and Credit Unions Pillar #3 - Specialized lending/saving intermediaries - Insurance companies, venture capital firms, pension funds. Pillar#4 – Investment Dealers - Facilitate trade of stocks, bonds and other products in securities markets Primary markets - Investment bankers/dealers - Advise, underwrite, distribute Secondary markets - Toronto stock exchange and other exchanges Bank of Canada - Canada’s central bank - Manages economy and regulates aspects of chartered bank operations - Manages money supply Types of Investments Bonds Represents debt for issuing corporation or government Characteristics - Legal, binding agreement - Fixed rate f return (often paid semi-annually) - Fixed term – principal repaid at maturity - Priority over stockholders Types - Secured vs. Unsecured (dependetures) - - Registered vs. Bearer Features - Callable - Serial - Convertible Determinants of Bond Value 1) What the coupon rate at bond issue - Prevailing interest rates - Credit rating of issuer - Features 2) What impacts bond prices when traded? - Coupon rate & prevailing rates of interest (relationship) - Changes in credit rating - Economic/Marketing Risk - Inflation Concept of Yield - Percentage return on any investment - Helps us to compare investments Whatyoumade Interest+CapitalGain Yield  Whatyoupaid  Whatyoupaid  x% For a Bond: Interest = coupon rate x face value Capital Gain = face value – purchase price - In BU111, always use face value of $1000 for bonds. Approximate Yield to Maturity face value -price paid couponrate x face value  time to maturity  price paid Notes: - Assumes you will hold the bond until maturity - Need to calculate “what you made” on an annual basis Stocks Represents equity/capital for issuing company Characteristics: - Voting rights - No fixed term - Variable return - Discretionary payment (dividends) - Risk What impacts stock prices? Demand and supply of stock due to negative or positive perception/facts Primary factors: - Earning – above or below expectations, rumors - General market conditions – bull vs. bear markets, economy interests (especially preferred) - Speculation – bought or sold on belief price will soon move Price of a security is a collective expression of all opinions of those who are buying and selling Undervalued issue – offer higher return than stocks of similar risk Reading Stock Quotations - Prices $5 move in 5 cent increments - If not traded on a particular day… BID ASK Leverage Engaging in a transaction whose value is greater than the actual dollars you have available Creates potential to make a larger return or loss than indicated by the investment you have made Examples: - Buying on margin - Selling short Buying on Margin 1. Put up only part of purchase price 2. Broker lends remainder (with interest) 3. Min. requirements set and enforced by securities commission – crash of 29 – 10% Margin Buying Rules - Must qualify for margin account - Must sign “hypothecation” agreement (marginal account agreement form) – pledging of securities as collateral for a load - Must pay load interest - The investors % equity (margin) in the margins stock must always be > the minimum requirement Current Market Value - loan > % margin requirement Current market calue Selling short - Buy low, sell high = sell high buy low - Sell shares you don’t own – borrow from broker Rules - Short deposit must be 150% CMV at all times - Agreement may be terminated by either party at any time – forced to cover / “buy in” - Short sale price governed by “last sale” rule - Dividends declared are the responsibility of the seller Technological Factors Opportunities Product – innovation, uniqueness, value Management Process - Instant access to information - Better service through coordination - Leaner organization - Improved operations efficiency i.e CAD, ERP - Greater independency of company $ workplace Competitiveness - Create barriers to entry; cooperation with other firms Communication and collaboration - Within and with customers Customization Threats Imitation - Information costly to develop but to cheap to share New technologies in unfair areas - Disruptive technologies challenge the value of organizational capabilities and resources Unpredictable evolution - VHS vs Betamax - Blu-Ray vs. DVD’s 1. Need for constant learning and scanning 2. Information Overload 3. Greater independence of company & workplace Technology Standards Standards wars - Battles between incompatible technologies - Can determine survival of companies involved - Not limited to information technology Blu-Ray vs. (HD) DVD Important Technology Terms Installed bade - # of users - Bigger = greater influence Lock-in – size of investment - Larger = greater resistance to switch Switching Costs – cost of moving - Entry barrier; makes lock-in worse Complementary goods – needed for value; creates vicious or virtuous cycle Network effects – value depends on user Key Assets & Strategies Control over installed base of users - First-mover advantages – pre-emption - Expectations management - Offer customers a migration path Intellectual property rights - Slows imitation or requires cooperation Ability to Innovate - Stay on your guard Strength in complements –use alliances Sustaining Technology - presents improvements to existing products in expected ways - Provides mainstream, high-margin customers with enhancements in product functionality - Existing firms normally win Disruptive Technology - Presents a different package of performance attributes that aren’t initially valued by mainstream customers (starts in peripheral markets) - Gains foothold in lower performance segment, improves technology rapidly until they meet mainstream performance needs, then enter these markets - New disrupting firms normally win Why do large firms sometimes fail? Managers focus on satisfying mainstream customers - Ignore new technologies that don’t initially meet needs of mainstream customer - Move “up-market” to higher margin opportunities - Organizational processes weed out ideas that don’t address current customer needs - Organization structure and capabilities slow response time/ability How different types of innovation impact existing firms Challenge value of existing capabilities and/o
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