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BU111 Final Exam Notes 2011.docx

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Wilfrid Laurier University
Leanne Hagarty

BU111 EXAM STUDY NOTES Critical Success Factors 1. Achieving Financial Performance -making profit -maximize profit to outperform your competitors 2. Meeting Customer Needs -identifying hidden needs -creating potential needs 3. Building Quality Products and Services -building a quality of product that your customer will expect for the money they are spending (ex BMW vs. Ford) -doesn’t mean building the highest quality 4. Encouraging Innovation and Creativity -always staying ahead of your competition -keeping your competition trying to catch you (ex. Apple) 5. Gaining Employee Commitment -committed employees will go above and beyond to make the company better -they will work harder, longer, and devote 100% if they are happy working for the company 6. Creating a Distinctive Competitive Advantage -also known as establishing a mini-monopoly -ex Apple’s products being user-friendly and easy to operate ***ALL FACTORS ARE CONNECTED*** Diamond-E Model -Identifies key variables to be considered in strategic analysis -ALL ASPECTS NEED TO BE IN SYNC Management Preferences- biases, attitudes, and predispositions of your management team Organization- culture, leadership, structure, capabilities that are influenced by human and financial resources Resources- financial capital and human resources Q: Do you have the resources to execute strategy? A: Yes/No, consider money, assets, people (resources)  Strategy - Most focal point - Affects everything - Opportunities the business is pursuing - Determines needed resources, organizational capabilities, and managerial preferences - Any variable can drive or constrain strategy  Management Preferences - Relates to the management’s biases, how they make decisions, if they’re risky or not - Affects types of resources needed for the organization - Shapes your organization; mainly in the sense of the culture your organization will have  Organization - If your managerial staff makes unethical decisions then it will affect the organization - If you bring in new management, the culture in the organization is already established and they may not be able to do what they wanted to  Resources - If you want to do something and you do not have the resources you simply cannot do it - Resources companies have affect the opportunities they pursue Strategy-Environmental Linkage -THE CRITICAL LINKAGE IN THE MODEL (The bridge between the inside and outside environment) -First Task: deal with strategy-environment linkage (assess forces at work & their implications) PRINCIPLE LOGIC- Consistency or alignment within the model WHEN DETERMINIG STRATEGY: does it match our management preferences? Entrepreneurship -Entrepreneurship- identifying an opportunity and accessing resources to capitalize on it -Three steps in the entrepreneurial process 1. Entrepreneur – must match in knowledge, experience and interest (willing to put capital on the line) 2. Opportunity – good idea 3. Resources -Successful only when entrepreneur (diamond E), opportunity (environment is supportive) and resources match (These three pieces must be in harmony for a new business to be successful) -Begins with entrepreneur identifying an opportunity then accessing resources -Small Business  owner-managed, not dominant in market <100 employees - 97.8% of all businesses in Canada are small - Contribute less than 26% annually to GDP (Provide more jobs than large businesses) BU111 EXAM STUDY NOTES- ECONOMIC FACTORS Canadian Financial System -Financial systems facilitate the flow of money -Four distinct legal “pillars” 1. Chartered Banks 2. Alternate Banks 3. Life Insurance Companies (Invest the money elsewhere to pay for insurance payoffs) 4. Investment Dealers (Allows individuals to make secure trades through) -Lines between pillars have been blurred due to deregulation (a reduction in the number of laws affecting business activity) Banks -Major source of loans for businesses Secured Loans: require the borrower to pledge assets in the case that they can’t pay back the loan (collateralex. House) Unsecure Loans: no underlying asset promised, no collateral (ex. Credit cards) -Changes in banking caused by: deregulation, changes in consumer demand, competition from foreign banks Bank of Canada Bank Rate (Rediscount Rate)- the rate at which chartered banks can borrow from the Bank of Canada -Bank Rate serves as the basis for establishing the chartered banks prime interest rates -Bank of Canada can either increase or decrease the money supply Tools Expansionary Policy (stimulate Restrictive Policy (slow down business business activity & increase money activity and decrease the money supply) supply) 1. Open Buy Government Securities: these Sell Government Securities: these sales Market purchases increasebank reserves and decrease bank reserves and their ability Operations their ability to make loans to to make loans to businesses and businesses and consumers consumers 2. Bank Rate Lower the Bank Rate: by increasing Raise the Bank Rate: by decreasing the the willingness of banks to borrow, willingness of banks to borrow, fewer more loans to businesses and loans to businesses and consumers can consumers can be made be made Chartered Banks (Pillar #1) -Privately owned banks (profit seeking) who serve individuals, businesses and others -Largest and most important institution because so much money is held within it -Anyone can buy bank stocks -Offer the prime rate of interest (lowest rate/best rate) -Five largest banks account for 90% of total bank assets -Bank Act limits foreign-controlled banks to less than 8% of total domestic bank assets (government does not want a loss in control as a result of extensive foreign influence in the banking system) -Expand money supply through deposit expansion - This is how banks get the money to loan to others - Reserve requirement  If someone deposits $100 into a bank, the bank must hold onto 10% and keep it in reserve ($10) it then has the other $90 to lend out to other people Alternate Banks (Pillar #2)  Trust Company - Safeguards property – funds and estates – entrusted to it - Ex. A corporation selling bonds to investors appoints a trustee, usually a trust company, to protect the bondholder’s interests - Transfer Agent  Records changes in ownership for a corporation’s shares of stock - Registrar  Certifies to the investing public that stock issues are correctly stated and comply with the corporate charter - Prepare and issue dividend cheques to stockholders  Credit Union - Cooperative savings and lending associations formed by a group with common interests - Lend money to businesses and consumers, give out long-term, short-term or mortgage funds - Sell certificates of deposits to the general public - Tend to pay dividends to their members when they make profits Life Insurance Companies (Pillar #3) - Life Insurance Companies  Lends some of the money it collects from premiums to borrowers; largest financial intermediary next to chartered banks; substantial investors in real estate mortgages and in corporate and government bonds - Venture Capital Firms  Provides funds for new or expanding firms that seem to have a significant potential (Allow businesses to grow; give money to risky companies that banks won’t fund) - Pension Funds  Accumulates money that will be paid out to plan subscribers at some time in the future; the money collected is invested in corporate stocks and bonds, government bonds, or mortgages until it is to be paid out - Factoring Companies  Buys accounts receivable from a firm - Financial Corporations Investment Dealers (Pillar #4) -Facilitate trade of securities (also known as stockbrokers or underwriters) -Get people started -Primary distributer of new stock and bond issues International Banking & Finance -Governments and corporations frequently borrow in foreign markets -The international bank structure relies on a loose structure of agreements World Bank: provides limited services; typically funds national improvements through loans for building roads, power plants, schools International Monetary Fund: promotes the stability of exchange rates, provides short term loans to members, encourages members to cooperate on international monetary issues, and encourages development of a system for international payments Securities Market Securities: stocks, bonds, and mutual funds etc. Primary Market: market in which new stocks and bonds are bought and sold -When a bond is issued for the first time it is through the primary market -Companies must attain approval from the provincial securities commission to issue a new stock -Investment Bankers are financial specialists in issuing new securities, through the primary market Secondary Market: the sale and purchase of previously issued stocks and bonds (ex. TSX) -Has to also deal with the provincial securities commissions Bonds -Represents debt (lending by investor) -When interest rates go up, bond prices go down -Principle plus stated rate of interest must be paid back at a future date -Bonds are a legal obligation, yet they allow you to remain in control Characteristics: -Fixed rate of return (often called coupon payment) is the interest that the bond pays; a percentage of the face value, usually paid back in 2 semi-annual payments -Fixed term (principle repaid at maturity) -Priority over stakeholders Types of Bonds: 1. Secured vs. Unsecured (Debentures) 2. Registered: the names of holders are registered with the company Bearer: require bondholders to clip coupons from certificates and send them to the issuer to receive interest payments 3. Callable: a bond that may be paid off by the issuer before the maturity date Bond Value is Determined By: 1. Prevailing interest rate (higher interest rates=higher coupon rate) 2. Coupon Rate (the interest) 3. Credit Rating of Issuer (risk factor  higher risk=higher return) 4. Features 5. Time to Maturity (how much time it will take to get your interest  more time=more risk) Concept of Yield -Percentage return on any investment -Face Value: amount company will pay back at maturity date What you made Yield  What you paid -If you buy the bond at less thCapital Gain= Selling Price – Purchase Price the coupon rate -Yield Interest rate in the economy + risk premium -Yield and price paid can change, face value and time to maturity cannot Calculating Approximate Yield to Maturity face value -price paid couponrate x face value  time to maturity  price paid Example: Bought a 6% bond for $850 with 10 years to maturity Yield= (0.06 x 1000) + (1000-850)/10 850 = 8.8% Stocks  Characteristics of stock - Equity - Voting rights - No fixed term - Variable return  Up and down - Discretionary payment (dividends)  no legal obligation  Dividends only give when business is doing well - Risk  High risk, high return  Common Stocks - Individuals and companies buy a firm’s common stock, hoping that the stock will increase in value (a capital gain) and/or will provide dividend income - Stock value is expressed in three ways: 1) Par Value  the arbitrary value of a stock set by the issuing company’s board of directors and stated on stock certificates 2) Market Value  The current price of one share of a stock in the secondary securities market; the real value of a stock 3) Book Value Value of a common stock expressed as total stockholder’s equity divided by the number of shares of stock  Preferred Stock - Usually issued with a stated par value - Dividends paid on preferred stock are usually expressed as a percentage of the par value - Some preferred stock is callable  the issuing firm can require the preferred stockholders to surrender their shares in exchange for cash payment (call price) COMMON PREFERRED STOCK STOCK VOTING RIGHTS Yes No unless a number of dividends are unpaid DIVIDENDS Not necessarily – Yes but only after interest is extra dividends are paid on debt sometimes given BANKRUPTCY Paid after preferred Paid after debt holders PRICE Most volatile Less volatile (dividends and VOLATILITY liquidity position) – sensitive to interest rates MARKETABI- Most shares, larger Thinner market (harder to buy) LITY market OTHER Right – more Redemption – company can FEATURES shares at set price buy back convertibility à to common (your choice) Factors Affecting Stock Price - Demand and supply of stock due to negative or positive perceptions/facts - Primary factors o Earnings  above or below expectations o General market conditions  Bull (periods of upward moving stock prices) vs. bare markets (periods of falling stock markets), economy, interest (especially preferred) o Bull Markets  Use call option; Bare markets  Use put option o Speculation  Bought or sold on belief that price will soon move - Price of a security is a collective expression of all opinions of those who are buying and selling - Undervalued issue  Offers higher return than stocks of similar risk  Other investment vehicles - Blue chip stocks Stocks from well established, financially sound firms (lower risk) - Small-cap stocks  belong to companies that don’t have a big capitalization - Penny stocks  selling for under $1 (high risk) - Canada Savings Bonds (CSBs)  Lending to the government  low risk  long term - Guaranteed Investment Certificates (GICs)  Higher interest than if you put your money into a savings account - Treasury Bills – T-Bills  90 day maturity  government issued, buy at discount - Mutual funds  Not individual (buy a piece of a collection) o Advantage  Buy more diversified portfolio o Disadvantage  Always a management fee every year 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  Selling short  Deposit 50% of value of transaction  Buying on margin  Invest part of the value of the transaction (margin requirement) and borrow the rest  Magnifying the size of the investment we can make Buying on Margin  Allows you to realize greater profits but also realize greater losses  Minimum requirements are set and enforced by Securities Commission  Put up only part of the purchase price and the broker lends the remainder with interest  Allows you to buy more than you could using just your own money  When you think the price of a stock will go up  Margin Call  Increase the value of the loan  Max profit you can make  unlimited  Max loss  Price of stock  When you buy on margin, no one can force you to sell Selling Short  Selling shares you don’t own  borrow from broker  RULES - Agreement may be terminated by either party at any time  forced to cover/ “buy in” - Short sale governed by ‘last sale’ rule  Has to be at or above whatever the price of the last sale transaction of that stock - Dividends declared are the responsibility of the seller - Short deposit must be 150% of the current market value (CMV) at all times  When you see a stock that you think is going to drop  sell first, buy later  Short Call  Having to pay more money to keep CMV above 150%  Increase value of investment  Max profit  Price of short (whatever price you sold the short at)  Max loss  Price can rise infinitely  Stop Buy  When the market goes to a certain price, stop short selling because you will lose too much money  Risks - Unlimited losses - Forced to cover short at disadvantageous price - Dividends may be declared that you must cover - Short calls Options  A contract that allows the investor (option ‘holder’/’buyer’) the right to buy or sell at a specific price in the future regardless of market price  Guarantees you a price  Why? - Buy Call – leverage, guarantee cover price - Sell Call – income - Buy Put – leverage, protect profit - Sell Put – income  Call  Option to buy buy a call option when you think the stock price is going to go up  Put  Option to sell  buy a put option when you think the stock price is going to fall  Create a call if you think the stock prices are going to fall  Create a put if you think the stock prices are going to go up Option to buy Premium One LMN July/85 Call at 5 100 shares rd Expiry – 3 Friday Strike price Underlying interest/security  Underlying interest  company you are guaranteeing a price on  One one option; 100 shares (the right to buy or sell a board lot)  right to trade 100 LMN shares  July  month that option expires  85  guaranteed price (exercised price)  Price of the option itself  $5/share therefore $5 x 100 rd  “Option to buy 100 shares of LMN stock before the 3 Friday in July at a price of $85”  Premium depends on: - Time Value Length of time of contract - Intrinsic Value Difference between strike price and market price - Direction of market -Volatility of stock optioned Time Value  $1 today is not worth the same as $1 tomorrow because of: risk, real interest, and inflation  Concept is important to: leases, mortgages, bonds, retirement contributions, stock valuation, and project selection  FV single amount - Payments only happen once per year - Questions where you start with money today  PV single amount - Questions where you get money in the future and need to know how much to invest today to achieve that amount - Payments only occur once per year  Ordinary Annuities  Payments occur at the end of a pay period or payments occur at the end of year one ex. Six months from today  Annuities Due  If the payment or receipt begins at the start of a pay period (at time zero)  Perpetuity  Dividend on a preferred share  Effective Annual Rate  Use when interest is compounded more than once per year but payments are made more than once per year but the periods are not the same  APR  Annual percentage rate BU111 EXAM STUDY NOTES- TECHNOLOGICAL FACTORS Information Technology -The various devices for creating, storing, exchanging, and using information -Consumers use it daily (ex. ATM, shopping) -Companies use it to gather information on customers and run operations ***HELPS TO MEET CUSTOMERS NEEDS (CRITICAL SUCCESS FACTORS)*** Information Technology and Organizational Processes 1. Better service through coordination -Delivery (when/how they want it) and information 2. Leaner, more efficient organizations -Networks enable information linkages between employees -Instant access to information for decision-making and increased responsiveness -Can work from remote locations at any time 3. Increase collaboration inside and out -Ex. Employees can work virtually anywhere using a BlackBerry 4. Greater independence of company and workplace -Information is accessible, which reduces the need to ask other employees for it 5. Improved management processes CAD: Computer Assisted Design ERP: Enterprise Resource Planning 6. Improved flexibility for customization (用户定制化) ***RELATES TO MEETING CUSTOMERS NEEDS (CRITICAL SUCCESS FACTORS)*** -Technology has allowed for more flexible products that are mass customizable -Info tech has allowed customers to tell companies how they can make their products better 7. Providing new business opportunities -Reaching clients in a new or improved way (all possible through the advancements in tech.) -Ex. Businesses get consumers attention through the internet -Ex. Kijiji and Ebayare ways that technology has allowed people to easily sell products Retailing Retailers Mission- right product, place, price, and time Historical Waves of Change: 1. Department store – Sears, Hudson Bay 2. Mail order (catalogue shopping) 3. Discount department stores- Walmart, Zellers Started with specialist stores  Department stores took a variety of products into one location where the highest amount of customer traffic occurs  Department stores such as Sears started mail order catalogue since customers trusted the company  Specialist stores created catalogue after people were comfortable with the process  Discount department stores were created and located at low customer traffic areas (less expensive-rent)  Shopping malls were created that had large stores as anchors, so that customers were attracted to these stores, but also had specialist stores in the mall (specialist stores restore a size of the market)  The future of internet retailing The Future of Internet Retailing Question: Can the Internet deliver on retailer’s miss
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