BU111 Exam Aid Session
December 8th @ 10pm - 1am Zoom
SOS Exam Aid products are created from the
experience and insights from students who have
previously excelled in the course. Instructors draw
upon their own notes and successful study practices
to provide an engaging opportunity for students to
learn from their peers.
Did you know more than 100,000 students
have been helped by our
Exam-AIDs on 25 University campuses?
• SOS has raised $2.5 MILLION DOLLARS for
educational projects in Latin America.
• With more than 2,000 active volunteers, SOS
is one of the largest student organizations in
Canada.
Youtube: Make a Real World Impact, Gain
Real-World Experience
See your donation in action!
Even through COVID-19, SOS
is still funding projects in
Latin America to support
learning through the
pandemic.
Watch this video to get a
glimpse of what we do at
SOS!
Youtube: We Are Students Offering Support
Instructor Profile – Imaad Mian
Program: 2nd Year Math/BBA (UW/WLU)
Extracurriculars:
Interests:
Finance, Books, Politics/Law
Instructor Profile – Jared Roy
Program: 4th Year BBA
Extracurriculars:
Interests:
NYR and Raptors fan, vinyl records
Instructor Profile - Adam Hanser
Program: 2nd BBA (WLU)
Extra Curriculars:
Interests:
Law, NFL, UFC, NBA, Raps
Instructor Profile - Wen Zhang
Program: 3rd year CS/BBA (UW~WLU)
Extra Curriculars:
Interests:
Skiing, Origami, & Rock-climbing! 󰗨
Instructor Profile - Tailai Wang
Program: 3rd year CS/BBA (UW~WLU)
Extra Curriculars:
Interests:
Hip-Hop, Outdoors Stuff, Basketball!
Instructor Profile - Feisal Borjas
Program: 4th year CS/BBA (UW~WLU)
Extra Curriculars:
Interests:
Board Games (especially deception games), Ping Pong,
Spikeball, Chess, the Outdoors (only in the summer though)
Agenda
Political Factors
• Types of Ownership - Imaad
International Business
• Expansion Models - Ansoff Matrix - Adam
Economics
• 4 Pillars (T) - Jared
• Bonds, Investment (T) - Jared
• TVM calculations (L) - Wen
Social (CSR, demographics) - Tailai
• Estimation - SAM TAM TOM
Technology - Feisal
Key Success Factors
Achieving financial performance
Meeting customer needs
Building quality products and services
Encouraging innovation and creativity
The Six
Gaining employee
commitment
Creating a distinctive competitive
advantage
Diamond-E
Management
Preferences
Organization
Strategy
Environment
- PEST
- Porter’s 5
Resources
SWOT:
Strengths, Weaknesses
Opportunities, Threats
Porter’s Five Forces
Potential
Entrants
What are the factors that will
predict
Industry profitability?
Suppliers
Industry
Competitors
(Rivalry
among
existing
firms)
Substitutes
Buyers
And how can I proactively
manage them?
Political Factors
PEST – Why does it matter?
Framework for analyzing the general environment
Identify trends or changes in the environment that will have an
effect on our business
Helps managers identify opportunities and prepare for threats in the
environment
Political Factors
●
Laws and
regulations
●
Taxes
●
Trade agreements
●
Political system
●
Political stability
*Protect consumers
*Support domestic businesses
*Create opportunities in foreign markets
How Government Affects Business
●
●
●
●
●
Promotes competition
○ Small business support, Competition Act
Promotes innovation
○ Intellectual property rights
Protects customers
○ Hazardous Products Act
Achieve social goals
○ Healthcare and education
Protect the environment
○ Canada Water Act, Fisheries Act, etc.
Roles of Government
Law Maker,
Regulator
●
●
●
Promotion of
competition
Protect
consumers
Promote
social goals
Customer
●
●
Purchase
materials and
equipment
Companies bid on
tenders
Competitor
Roles of Government
Taxation
•
Collected by 3
levels of
government
Service Provider
•
•
•
Roads
Healthcare
Education
Business Support
• Subsidies
• Tax breaks
• bail outs
Link to Porter’s 5 Forces
Customer
Competitor
Regulator
Taxation Agent
Provider of
Incentives
Provider of
Essential Services
Link to Porter’s 5 Forces
Competitor
Potential
Entrants
Suppliers
Industry
Competitors
(Rivalry among
existing firms)
Provider of Incentives
Buyers
Substitutes
Regulator
Provider of Essential Services
Example:
Identify a business that would view
each as a threat and opportunity
Government of Manitoba prohibits non-essential items from
being sold during COVID-19 lockdown (ie. barriers within
grocery stores, closed small retailers)
Government of Manitoba prohibits non-essential items from
being sold during COVID-19 lockdown (ie. barriers within
grocery stores, closed small retailers)
•
Threat: Large “grocery stores” like Walmart and Costco that offer a
wide product offering including food, clothing and gifts are forced
to place barriers, and lose revenue from non-essential product
offerings
•
Opportunity: For small retailers, customers can use porch pick up
to obtain non-essential items like clothing and gifts without
entering store; ideally driving Big store revenue to be diverted to
small retailers
CRTC allows 3 more mobile service providers to enter Canada
CRTC allows 3 more mobile service providers to enter Canada
•
Threat: Big mobile providers like Bell and Rogers may worry that the new
entrants will force them to lower rates or lose customers
•
Opportunity: Businesses and consumers will be able to switch mobile service
providers and obtain services at a lower price, this would result in consumers
and businesses spending less per more on phone expenses
How business influences government
●
●
●
●
Lobbyists
○ Politicians hired to persuade Gov. to pass
legislation
Trade Associations
○ Fragmented industries group together
Industry Contacts
○ Provides expert opinion on industry
Advertising
○ Pays for advertisement to sway voters
○ Popular in US (PACS)
Forms of
Ownership
Sole
Proprietorship
Partnership
Private
Corporation
Public
Corporation
Sole Proprietorship
●
Think “YOLO” and decide to do it
alone
●
PRO: You get to keep all the
money, easy to form, control
every aspect of operations
●
CON: You have unlimited liability
●
TAX: Taxed as personal income
Partnership
●
●
Find a friend (s)
PRO: Share resources, share costs,
easy to form
●
CON: *You have unlimited liability,
may disagree with each other, lack of
continuity
●
TAX: Taxed as personal income
●
Types: General partnership, joint
liability, several liability, limited
partnership
Private Corporation
●
Legal entity
●
●
Double taxation (dividends)
PRO: Limited liability, continuity, privacy,
low regulation
●
CON: Other shareholders care who you sell
your shares to, moderately complex to form
●
TAX: Double taxation--profits taxed on
corporate tax return, dividends taxed on
personal one
Public Corporation
●
Legal entity
●
PRO: Easy financing,
limited liability, continuity
●
CON: No privacy,
complex to set
up, regulation
●
TAX: Double taxation
Social Enterprise
•
•
•
•
•
Fill a gap in the market (market inequities/failures)
Health, environment, food insecurity, poverty, housing
Creating social value, NEED financial sustainability
Example: Common Good in Edmonton provides laundry services to
restaurants and employs those overcoming homelessness, providing
additional training RE: resumes, opening bank accounts
Similar to a non-profit or charity, but it offers goods and services in exchange
for $$$, rather than just asking for donation revenue or government grants.
•
•
ie. difference between asking your parents for money to buy your BU121 textbook,
versus offering to shovel the driveway 2x week for a month in exchange for $120
Stakeholders are underserved members of population, require supporters or
investors instead of typical paying customers in a for-profit business
INTERNATIONAL
EXPANSION
Globalization
Basically the process of
businesses and economies
becoming integrated with
one another
Can anyone name some of
the driving forces of it?
3 components of international strategy
1. Should we go
international?
2. Barriers to entry
3. Entry strategy
Should you go international?
PEST, Diamond-E
Porter’s Diamond-E
Is there
demand for
our
product?
Can our
product be
modified to
fit the
foreign
market?
Is the
foreign
business
climate
suited to
imports?
Diamond-E
Does the firm have
or can it get the
skills and
knowledge we’ll
need to do
business there?
Solutions
Political
Government
treaties
Economic
Alliance with
local firm,
establish
foreign
subsidiary
Licensing
Social
Alliance with
local firm,
branch office,
local agents
Technological
IP Laws,
technological
formats
Barriers to international trade
Political
Quotas, tariffs,
subsidies,
protectionism,
local content
laws, business
practice laws
Economic
Exchange
Rates
&
Foregin GDP
Social
Adapting to
customer needs,
values, language,
norms
laws
Technological
IP Laws,
technological
formats
Also: 5 Forces
Distribution, Customers, competition, suppliers, substitutes all different in new market
Strategies to enter a foreign market
Foreign subsidiary
Local Sales Office
I
N
V
E
S
T
M
E
N
T
Alliance/joint venture
Licensing/franchising
Manufacture and sell in foreign markets 🡪 all functions
Serves customers in that country, does not perform all
functions (e.g. Manufacturing)
Joint venture/partnership 🡪 mutually beneficial. Significant
costs and not easy to break up.
Giving another company rights to your property/ideas in
another country in exchange for royalties.
Sales agent or
distributor
Employ salespeople that know local culture. Requires some
understanding of foreign market and exporting
Indirect export
Sell to 3rd party export company Requires no additional
cost or market knowledge. 🡪 NO CONTROL over pricing,
promo, strategy...
C
O
N
T
R
O
L
Why
Risk
Capabilities
Foreign
Subsidiary
Overcome trade barriers
Control of intellectual property and marketing
Cost of facility and establishment of
operations; sometimes need
permission of foreign government
Sales volume justifies investment; understanding
of foreign market and access; distribution
capabilities
Sales office
Retain marketing control
Insufficient volume to justify facility
Have excess capacity in domestic facility
Don’t have resources to build foreign facility
Don’t want to take risk (yet)
Trade barriers, market knowledge,
investment to establish foreign sales
capabilities
Understanding of foreign market, ability to pay for
and supervise foreign office, investment in foreign
office, ability to modify product
Joint Venture
Political or trade barriers;
overcome market barriers with lower investment or risk;
overcome production constraints
Time, personnel, money. Partnership
doesn’t work – partner doesn’t deliver,
doesn’t deliver as expected or
promised or is difficult to work with
(incompatibilities); Not easy to break up
Something of value for partner, capability to
negotiate, supervise and work in partnership;
resources as determined by partnership
Licensing and
franchising
Faster and larger expansion with fewer financial resources
No need to understand market, export, produce, distribute
etc
No need to overcome trade barriers or acquire additional
resources
Damage to intellectual property
Intellectual property of value that other company
can’t easily acquire
Sales agent or
distributor
You aren’t familiar or have the network resources to easily
tap into the foreign market
Limited understanding of foreign market
Share attention with other
organizations; Limited marketing
control; Subject to trade barriers
Manufacture in sufficient quantity to satisfy
agent/distributor; adjust product; some
understanding of foreign market and exporting
Indirect
export
No additional cost
No market knowledge, export experience or new
infrastructure needed
No risk from foreign market political volatility
No customer contact; No control over
destination; no control over pricing,
promotion or foreign distribution
strategy
None
Apply diamond-E to decide foreign
strategy
•
•
•
•
•
What is the risk tolerance of management?
Does the organization have foreign trade experience?
Does the organization have knowledge of the market and
international network?
Does the organization structure and management capability
support foreign strategy?
Resources: expected high sales volumes? Does IP have
value abroad? Is HR capable internationally? Does the co.
have financial resources to go international??
Should You Go International?
Diamond-E
Porters
Can our
product be
modified to fit
the foreign
market?
Is there
demand for
our product?
PEST, Diamond-E
Is the foreign
business
climate suited
to imports?
Diamond-E
Does the firm
have or can it
get the skills &
knowledge
we’ll need to
do business
there?
Factors to identify where to expand
internationally
Population (more is better)
• Average spending (more likely to spend on our product)
• Customer reachability (can they be persuaded)
• Competition
• Liability of foreignness (how different is the culture indicates
how many changes will need to be made)
• Distance (shipping costs)
• Administrative barriers (more = more time and hassle)
Turn this into an acronym to remember!
•
ANSOFF MATRIX
Ansoff Matrix
How to describe/pick a
growth strategy
Strategies: Market Penetration
Market Penetration:
Sell more of existing product to
existing target market = greater
market share and/or greater
purchase frequency
Example:
From December 7-13, McDonald’s
is offering $1 for any sized coffee if
you order from the app (not kidding)
Strategies: Market Penetration
Tactics
Cut Prices
Increasing advertising, loyalty
schemes
Increase distribution channels
Volume incentives
Buy a competitor
Why?
Low risk because you build on
what you know and can
optimize your existing
infrastructure
Challenges
🡪 competitor reaction, winning
customers
Strategies: Market Development
Market Development:
Selling what you already produce to
new target markets (market
segments) or new geographies
Example:
From 2010-2017, Netflix expanded to
over 190 countries in 7 years
Strategies: Market Development
Tactics
Establish yourself in new
market
Geographic Expansion
Why?
Able to capitalize on
established infrastructure
Market and customer
diversification
Challenges
🡪 Customer access and
awareness
Strategies: Product Development
Product
Development:
Develop related or unrelated products
your customers value; product line
extension
Example:
In October 2020, Apple announced
the new iPhone 12 and iPhone 12
mini
Strategies: Product Development
Tactics
Extend product
Repackage
Combination of
complementary product
Why?
Add on existing customer
knowledge and brand equity
Distribution synergies
Challenges
Give up existing product
efficiencies
High risk as your starting from
scratch with a new product
Strategies: Diversification
Diversification:
Chasing new customers with new
products; creating new businesses
Example:
Related: Beyond soda, Coca-Cola
sells energy drinks like “Vitamin
Water”
Unrelated: They also offer a wide
variety of Coca-Cola branded apparel
on their website
Strategies: Diversification
Tactics
M&A
Joint ventures and alliances
Can be vertical, horizontal,
conglomerate
Why?
Portfolio diversification,
capitalize on existing
capabilities and knowledge
Challenges
🡪 High risk due to creation and
changing of many vital activities
and capabilities
Economic Factors
The 4 pillars
#1: THE CHARTERED BANKS
●
●
●
Serve individuals and
businesses- deposits,
borrowing savings
Primary lending source for SME
Publicly Traded, profit
seeking companies
#2: ALTERNATE BANKS
●
●
●
●
Trust companies
Credit unions
SME primary lending source
Make deposits & borrow
funds
The 4 pillars
#3: SPECIALIZED LENDING/SAVING
INTERMEDIARIES
●
●
●
Influential-source of investment capital for firms
Mid-Large companies- Private equity/ borrowing
Insurance companies, pension funds,
venture capital firms
#4: INVESTMENT DEALERS
●
●
●
Facilitate trade of stocks, bonds etc.
in securities market
Primary Markets: Investment
bankers/ dealers
Toronto Stock Exchange-Average
consumers can trade stocks on
TSX
Types of Investments- Bonds
Bonds: Represents debt for issuing corporation/Government
●
●
An ‘IOU’ with fixed interest payments
Legally binding- MUST be paid, or company declares bankruptcy
○
●
●
Gets paid back before stockholders
Fixed end date/term → principal (amount of loan) paid back at
maturity
○ PRINCIPAL = FACE VALUE
Fixed rate of return….= COUPON
Pop Quiz: If I bought shares in SOS Inc. and you bought bonds, and then it
goes bankrupt, who has priority to get their money back?
What determines a bond’s value?
At Issuance
●
Interest rates, quality of issuer
○ If you can get 3% interest from your savings account, would
you buy debt with a coupon of 2%? No!
○ Debt carries additional risk of default, investors need to
be compensated for it!
What determines a bond’s value?
When Bonds are Traded
●
●
Coupon rate & interest rates
○ When interest rates go up, price of a bond goes down
○ Why? Bond prices are inversely correlated- investors desire
a certain yield, if interest rates go up, investors can simply
put their money in a savings account. Bond prices fall in
order to compensate and meet desired yield of investors
Market/economic risk, inflation
○ If there is a high risk of default, investors demand a higher
yield
○ EX: Detroit Red Wings have lost 10 straight games, if you
were to bet on them winning we would want a large payout
for taking on the risk
So…what is yield?
●
●
●
Yield is our ROI (return on investment)
Allows us to compare
different investments
○ Should I buy bond x, or bond y
Yield = What you made/ What you
paid
Let’s try this: bond pricing
The boys sold their new venture (Plan-C) for $1000. They decide to invest a bond in JDCC Inc.
with a coupon of 6%. The bond has a face value of $1000 and is currently trading for $925. The
bond will mature in 3 years and the boys will use the money to buy FRONT ROW Two Friends
tickets (Big Bootie mix guys). What is the yield on this bond?
TB in 2020
TB in
2023
STEP 1:
The boys sold their new venture (Plan-C) for $1000. They decide to invest a bond
in JDCC Inc. with a coupon of 6%. The bond has a face value of $1000 and is
currently trading for $925. The bond will mature in 3 years and the boys will
use the money to buy FRONT ROW Two Friends tickets (Big Bootie mix guys).
What is the yield on this bond?
1.
2.
3.
4.
Coupon rate = 6%
Face value= $1000
Purchase price= 925
Time to maturity =3 years
STEP 2:
Calculate each part of the bond that earns you money
The boys sold their new venture (Plan-C) for $1000. They decide to invest a bond in JDCC Inc.
with a coupon of 6%. The bond has a face value of $1000 and is currently trading for $925.
The bond will mature in 3 years and the boys will use the money to buy FRONT ROW Two
Friends tickets (Big Bootie mix guys). What is the yield on this bond?
1.
2.
Coupon rate = 6%
○ 0.06 x 1000 = $60 each year
Capital Gain
○ 1000-925= $75
○ 75/3 years= $25 per year
What you made: 60+25= $85
STEP 3:
Plug it into the formula!
The boys sold their new venture (Plan-C) for $1000. They decide to invest a bond in JDCC Inc.
with a coupon of 6%. The bond has a face value of $1000 and is currently trading for $925.
The bond will mature in 3 years and the boys will use the money to buy FRONT ROW Two
Friends tickets (Big Bootie mix guys). What is the yield on this bond?
Yield= what you made / what you
paid
We made $85 and we paid $925
85/925= 9.1892%
Why is yield different from coupon rate?
Yield accounts for additional risk that comes from investing in
a bond
Yield= interest rate + risk premium
3 scenarios for bond prices
At a premium
●
●
Bond is trading at HIGHER than
face value
Occurs when coupon is higher
than interest rate
At a discount
●
●
Bond is trading at LOWER than
face value
Occurs when coupon is lower than
interest rate
At par
●
●
Bond is trading EXACTLY at face
value
Occurs when coupon = interest rate
How to read a bond
Sun Life 5.3 of 2021 at
95
How to read a bond
Key Point: Face value is always $1000 (what your bond is worth at
maturity)
Maturity
date
Sun Life 5.3 of 2021 at
95
Company
Coupon rate (% of FV)
Price= % of FV
Types of investments - stocks
Stocks: Represents ownership of a company (buyer), equity/capital for issuer
Common Shares
●
●
●
●
Voting rights
No fixed term
Variable returns
RISK
Preferred Shares
●
●
●
●
No voting rights
Payments promised
but not legally
required
Fixed term
Lower risk (pay
you before
common
shareholders)
Types of investments – common shares
Voting Rights
● Stocks represent a part ownership of the corporation. Each share has one voting right to elect the
Board of Directors
No Fixed Term
● You are an owner, and the company does not have to repay you. You can hold the shares for as long as
you want!
Variable Return
● Increase in stock price or payments of dividends based on performance of the company, investor
perceptions
○ High returns in profitable years, low or negative returns in unprofitable years
Discretionary Payment
● Dividends are paid only when company is profitable
High Risk
● High possibility of generating a return, high risk of losing it all
Types of investments – preferred shares
No Voting Rights
●
Preferred shareholders give up their voting rights in exchange for a guaranteed dividend
No Fixed Term
●
●
Preferred shareholders are still owners of the company
Can own the stock forever
Fixed Return
●
Dividend is fixed every year
Non-Discretionary Payment
●
●
Legally the company has to pay the dividend
Cumulative: Dividends unpaid in one year must be paid in the next profitable year
Low Risk
●
Lower possibility of generating a return (since it is fixed), low risk
Priority in the Case of Bankruptcy
Liquidate Assets
Pay off creditors
(bondholders)
Pay off preferred
shareholders
Remainder for
common
shareholders
Investment Problems- Going Long
Going Long: Simple transaction of buying shares and selling them later
●
●
The investor makes money when the price of the shares increases between
the time that they bought it and the time that they sold it
Buy at a price and sell at a higher price
Capital Gain: The amount of money you gained from the transaction
●
Difference between what you received from the sale and what you spent to
purchase the shares
Yield: Percentage return (money made) on the investment
●
Yield= What you made/ What you paid
Let’s Go Long
You decide to purchase 500 shares in Keefe Inc. at
$20 a share. A month later the Leafs fire Babcock
and Keefe Inc.’s stocks rise to $28 and you decide to
sell. What is your capital gain and yield?
Let’s Go Long
Step 1: Write down the information that’s
given
You decide to purchase 500 shares in Sheldon
Keefe Inc. at $20 a share. A month later the Leafs
fire Babcock and Sheldon Keefe Inc.’s stocks rise
to $28 and you decide to sell. What is your
capital gain and yield?
Step 3: Solve for capital gain
Purchase price: $20 Sell Price: $28
# of Shares: 500
PC: Commission is 2%
Step 2: Solve for capital gain Revenue - Cost
Revenue:
$28 x 500 shares= $14,000
Less: 2% commission… 0.02x14,000= 280
Total Revenue= 13,720
•What you made - what you paid
•Cost:
•$20 x 500 shares= $10,000
•Add: 2% commission… 0.02x10,000= 200
•Total Cost= $10,200
•Total Capital Gain= 13,720-10200
= $3,520
•Step 4: Solve for Yield (Profit/Cost)
•3,520/10,000= 35.2%
Buying on Margin
Purchase of an investment by paying an amount (margin) and borrowing the
balance from your broker
● Margin is expressed as a % of the market value of the investment
Investor opens a margin account with their broker and deposits funds to
purchase investment
Buying on Margin
Minimum Margin Requirement: Set by the broker. The margin must
always be greater than the minimum margin requirement
Margin Call: When the share price drops, and you must deposit more
money into the margin account to meet the minimum margin
requirement
Leverage: The concept of engaging in a transaction that has a greater
value than the amount that you have available
● Offers potential for higher reward at the cost of the potential
for higher risks
● Example: Margin buying
Time Value of Money
Time Value of Money
NOTE: CARRY ALL DECIMAL PLACES BUT SHOW ONLY FOUR IN YOUR WORK
71
Math?!? Don’t be scared!!
•
1/3 of exam is TVM
Identify all variables in the question
Identify if PV or FV and which formula to use
Read the question carefully
Formula sheet:
•
SA – single amount, if multiple amounts/payments treat it as an annuity
•
FV– future value
•
PV – present value
•
OA – ordinary annuity (end of period)
•
AD – annuity due (beginning of period)
•
•
•
•
Time Value of Money - 4 Phase Lesson Plan
Difficulty in Understanding
Lump Sum
What is TVM?
Why do we use it?
Present vs Future
Value
Effective Rates
Annuity
Combination
Questions
Understanding TVM relies on
understanding these items in ascending
order. Do not move on until you are
comfortable with the previous concepts!
Ordinary Vs. Due
NPV
83
Introduction to TVM
Difficulty in Understanding
Lump Sum
What is TVM?
Why do we use it?
Present vs Future
Value
Effective Rates
Annuity
Combination
Questions
Ordinary Vs. Due
NPV
84
TVM – An illustration
Scenario 1:
●
You put $100 in your bank account today
●
You receive 10% interest for having it in
your account
●
In one year from now, you have $110
In either scenario, the value of
money has changed.
This is because there is a benefit or
cost of holding or borrowing money
Scenario 2:
●
You borrow $100 from your bank today
●
You are charged 10% interest for because
you borrowed it
●
In one year from now, you have to pay
back $110
$100 dollars today
$100 dollars in the future
Present and Future Value
Difficulty in Understanding
Lump Sum
What is TVM?
Why do we use it?
Present vs Future
Value
Effective Rates
Annuity
Combination
Questions
Ordinary Vs. Due
NPV
75
TVM - Underlying Mathematics
Year 0
i = 10%
$100
100 x
(1.10)
Year 1
Year n
$11
0
$100
?
100 x (1.10) x (1.10) x ……….. x = 100 x
(1.10)
(1.10)n
n times
We now have a way to
take money and find the
value in the future!
But wait, we if we
were given the value
in the future, we can
also find the value
today!
We now have a way to find the
value of money at any given
point in time! We just have to
determine when that is!
Time Frame Reference
Today
We are Given:
Cash flows at
different times
We can
Calculate:
Year 1
$$
The Present Value of
all the money ($$)
Today
$$
Year 2
……..
$$
……..
OR
Year X
$$
The Future Value of
all the money ($$)
In the Future (Year X)
Now that we understand the difference and it is possible through the
underlying math, we must determine which of the two it is!
Determining PV or FV
Future Value
Present Value
●
●
●
How much would you
need to save
today…..
●
You take out a loan
today…..
●
You buy a house or
a car today….
Will always give a
scenario in present day
●
You want to save
$1,000 for
retirement…
You want to save for
a trip in 2 years...
What is the value of
$100 in 10 years….
Will always give an
aspiration for the future
It is useful to draw a
timeline and look at
the direction the cash
is moving.
Forward = FV
Backward = PV
Single Amount and Annuities
Difficulty in Understanding
Lump Sum
What is TVM?
Why do we use it?
Present vs Future
Value
Effective Rates
Annuity
Combination
Questions
Ordinary Vs. Due
NPV
90
TVM – Single Amount
Today
Future Value:
$1,000
What is the value of an investment
made today, in n years?
Year 1
Given
Solving
10% Interest
10% Interest
Today
Present Value:
What would you need to invest
today, to have X amount in n
years?
?
Year 2
Year 1
?
Year 2
Solving
Given
10% Interest
10% Interest
$1,210
91
TVM – Single Amount Example
What would be your balance after 4 years if you deposited
$10,000 today in a bank account earning 3.75% interest?
A) $9,290.17
B) $11,586.50
C) $10,375.00
D) $8,630.73
92
TVM – Single Amount Example
What would be your balance after 4 years if you deposited
$10,000 today in a bank account earning 3.75% interest?
A) $9,290.17
B) $11,586.50
C) $10,375.00
D) $8,630.73
“What would be your balance” => FVSA
PV =
$10,000 r =
0.0375
n=4
93
TVM – Annuities
Not a single amount, but a series of amounts!
What to Look For
●
You make monthly
payments….
●
You deposit X every
4 months….
●
Every year, for
10 years,
you…..
Today
Year 1
Year 2
……..
$$
$$
……..
Think about it like finding the PV or FV
of multiple single amounts,
the annuity formulas are doing this!
Year X
$$
TVM – Annuities - Present Vs Future
Same as previous section,
Current Situation = PV
●
●
Future Aspiration = FV
You take out a loan
worth $10,000
today to pay down
every month…
●
You want to be able to
take out $100 every
month for n years,
how much do you
need today...
●
You want to save
money every month to
have $10,000 in n
years….
You deposit $100
every month, how
much do you have in n
years….
Be careful, even if
the ‘payments’
are in the future,
the event can be
today, so PV
TVM – Annuities - Ordinary Vs Due
After you determine present or future value,
Next question to solve: when is the first amount occuring?
Ordinary Annuity (OA):
Today
Year 1
Year 2
……..
Year n-1
$$
$$
……..
$$
Today
Year 1
Year 2
……..
Year n-1
$$
$$
$$
……..
$$
First payment is due at end of
first period (year in this example)
Annuity Due (AD):
First payment is due at beginning
of first period
Think about it as a
everything shifted over
once!
Year n
$$
Year n
Be careful, first payment at the “beginning of the next year” is still OA
TVM – Annuity Example
You take out a loan for $10,000, you are expected to pay it
back in ten years. If you are charged 5% interest, what would
be your yearly payments if your first payment is due at the end
of the first year?
97
TVM – Annuity Example
You take out a loan for $10,000, you are expected to pay it back in
ten years. If you are charged 5% interest, what would be your yearly
payments if your first payment is due at the end of the first year?
Since you are taking out a loan
today, it is a PV question. Since
the first payment is at the end of
the first year, it is an OA
Answer: PMT = $1,295.05
98
Effective Rates and Combinations
Difficulty in Understanding
Lump Sum
What is TVM?
Why do we use it?
Present vs Future
Value
Effective Rates
Annuity
Combination
Questions
Ordinary Vs. Due
Net Present
Value
99
TVM – Effective Rates - What is it?
Until Now
●
Payments are
annually, and
interest rates are
annual
●
n = number of years
●
r = what is given
New Concepts
●
Payments and interest
are not always annual
●
Payment and interest
frequencies may not
align
●
Need to now solve for
r in the annuity
formulas
The formulas are
the exact same,
we just need to
now solve for r
TVM – Effective Rates – New Variables
m
p
The frequency the
stated rate is
compounded at
●
●
In other words, the
number of times a
year it is compounded
●
In other words, the
number of times per
year
●
Ex. 6% compounded
semi-annually
m=2
●
Ex. monthly payments
p=12
●
The frequency you
are making payments
or withdrawals
rnom
●
The stated rate from
the question
●
Ex. 6% compounded
semi-annually
rnom=0.06
TVM – Effective Rates Adjustments
Matching schedules
Yes m=p
r adjustments
r = rnom ÷ p
n = # years * p
No
r = Effective rate for payment period
n = # years * p
Interest stated as
APR Assume m = p
r = APR ÷ p
N = # years * p
Only scenario where
you have to use the
effective interest
rate formula!
Once you solve for r and n, you can proceed like before with SA
and Annuity problems!
10
2
TVM – Effective Rates Formula Practice
What is the effective interest rate of an investment that pays quarterly
and earns 4% compounded quarterly?
A) 4.00%
B) 1.125%
C) 1.025%
D) 1.00%
10
3
TVM – Effective Rates Formula Practice
What is the effective interest rate of an investment that pays quarterly
and earns 4% compounded quarterly?
A) 4.00%
B) 1.125%
C) 1.025%
p = 4 = {payment frequency}
m = 4 {compound
frequency} rnom = 0.04 =
{rate given}
D) 1.00%
*Since m = p
r = rnom÷p = 0.01
10
4
TVM – Effective Rates Formula Practice
What is the effective interest rate of an investment that pays monthly and
earns 4% compounded quarterly?
10
5
TVM – Effective Rates Formula Practice
What is the effective interest rate of an investment that pays monthly
and earns 4% compounded quarterly?
p = 12 = {payment
frequency}
m = 4 {compound
frequency}
rnom = 0.04 = {rate given}
*Since m ≠ p
10
6
TVM – Combination Questions
Types of Questions
You will now be tasked with with
scenarios that will use a combination of
annuities and single amounts, and other
considerations!
●
Bond Pricing
●
Retirements
●
Mortgages
Bond Price - Example
To raise funds to buy raptors season tickets, Maggie Inc. has decided to issue bonds.
The bonds have a face value of $1000, a coupon rate of 6% with semi-annual
payments. The bond will mature in 20 years, and current semi annually
compounded interest rates are 4%. How much would you pay for this bond and
support Maggie’s Dream?
10
8
Bond Price - Example
•To raise funds to buy raptors season tickets, Maggie Inc. has decided to issue
bonds. The bonds have a face value of $1000, a coupon rate of 6% with
semi-annual payments. The bond will mature in 20 years, and current semi
annually compounded interest rates are 4%. How much would you pay for this
bond and support Maggie’s Dream?
FVsingle amount = $1,000 = {face value of bond}
Coupon Information - will be used to calculate
PMT # of years = 20
Rnom = 0.04 = {stated interest
rate} m = 2 = {compounding
frequency}
p = 2 = {number of payments per year}
Note:
m=p
10
9
Bond Price - Example
Step 1: Calculate coupon payment
Step 2: Determine important information
PMT = $30
n = 20*2 = 40
r = .04/2 = .02
Fv
single amount
= $1,000
Step 3: Plug variables into formula
99
Bond Price - Example
When working with bonds remember…
● Face Value is assumed to be $1000 (if not stated otherwise)
● Bonds are assumed to pay semi-annual coupons and compound
semi-annually
●
Lump sum is the Single Amount (Face Value)
Coupon payments are the Ordinary Annuity
111
TVM - Retirement
You are 40 years old and want to retire at age 55 and play
semi-pro connect 4 until you die. Each year, starting one year
from now, you will deposit an equal amount into a savings
account that pays 6% interest, compounded semi-annually. The
last deposit will be on your 55th birthday. On your 55th birthday
you will move your savings into a safer bank account that pays
only 3.5% interest, compounded annually. You will withdraw your
annual income of $150,000 at the end of that year (on your 56th
birthday) and each subsequent year until your 85th birthday (you
expect to pass away later that year ).
How much do you have to save each year to make this
retirement plan happen?
112
TVM - Retirement
You are 40 years old and want to retire at age 55 and play
semi-pro connect 4 until you die. Each year, starting one year
from now, you will deposit an equal amount into a savings
account that pays 6% interest, compounded semi-annually. The
last deposit will be on your 55th birthday. On your 55th birthday
you will move your savings into a safer bank account that pays
only 3.5% interest, compounded annually. You will withdraw your
annual income of $150,000 at the end of that year (on your 56th
birthday) and each subsequent year until your 85th birthday (you
expect to pass away later that year).
How much do you have to save each year to make this
retirement plan happen?
113
TVM - retirement
Savings (pre-retirement)
r (nom) = 6%
m = 2 (compounded semi
annually)
p = 1 (need effective rate!)
n = 55-40 = 15 yearly
payments
ordinary annuity (end of year
payments)
Spending (post-retirement)
r (nom) = 3.5%
m = 1 (compounded annually)
p = 1 (one payment per year)
n = 85-55 = 30 payments
PMT = 150,000
ordinary annuity (end of year
withdraws)
TVM - Retirement
40th birthday
55th birthday
85th birthday
115
Mortgage example
Ben wins the lottery AGAIN (I think he’s cheating!!) Because Ben is
greedy, he now wants to also buy a mansion. The mansion he
purchases is $1,000,000 and he makes a down payment of
$100,000. He arranges a 5-year mortgage with a 8% interest rate
compounded quarterly. The mortgage has an amortization period of
25 years. How much will Ben be paying per month for his mortgage
on his dream house?
116
Step 1: Determine important information
n= 25x12 = 300, r(nom)= 8%, m = 4, p = 12,
Down payment = $100,000
Mortgage amount = $1,000,000 - $100,000 = $900,000
Step 2+3: Plug variables into formula and solve
117
TVM - Perpetuity
PV = 1.25 ÷ 0.03 = 41.67
118
NPV – Starbucks on King
Starbucks Waterloo franchise owner determines that investing in
a new expresso machine may increase sales. It would cost
$100,000 to purchase, and $700 each year to maintain and
they’d use their LOC which charges 9% interest annually.
Expected useful life of expresso machine is 3 years, where it will
generate an increase in gross profit, as seen below. Should
Starbucks invest in the new expresso machine?
Gross Profit increase:
Year 1: $25,000
Year 2: $33,000
Year 3: $45,000
NPV – Starbucks on King
Starbucks Waterloo franchise owner determines that investing in
a new expresso machine may increase sales. It would cost
$100,000 to purchase, and $700 each year to maintain, and
they’d use their LOC which charges 9% interest annually.
Expected useful life of expresso machine is 3 years, where it will
generate an increase in gross profit, as seen below. Should
Starbucks invest in the new expresso machine?
Gross Profit increase:
Year 1: $25,000
Year 2: $33,000
Year 3: $45,000
NPV – Starbucks on King
•
NPV
•
•
•
•
Initial investments, costs,
cash outflows are negative
Profits, revenues, cash
inflows are positive
If NPV is positive, accept
the project
If NPV is negative, decline
the project
TVM Tips & Tricks
When Reading Word Problems
o Write down the key variables as you see them in the problem.
Variables like…. (n, r, pmt, pv, etc)
o Recognize what words indicate PV, FV, SA or Annuity (and
due) Sentences like… (Today, Immediately, At the end of
each year, how much would you pay now, what will it be
worth then)
Step by Step:
1) Read the problem
2) PV or FV?
3) Single or Annuity? & 3.1) Due or Ordinary
4) Adjustments for effective rates?
123
TVM Tips & Tricks
Remember the assumptions… (Leases are always annuity due, bonds have
semi-annual coupons)
Keep as many decimals for intermediate steps - Especially
effective rate formulas!
Requirements
Show formula and correct variables within formula on final exam
Use all decimal places while executing calculation steps
Round final answer to nearest penny (two decimal places)
Formulae will be provided on exam
124
Social Factors
“Elements” of Social Factors
•
•
•
•
Customs (or cultural
norms)
Habits
Values/attitudes
Demographics
•
Why is this important?
•
•
•
•
Customer preferences
Employee behaviour and
attitudes
Standards of business
conduct
CSR
Class example:
Stakeholders & their importance
Stakeholder
Expectations
Provides
Society/local
community
Education, health, employment
Employees, customers
Environment
Responsible production & products
Natural resources
Investors
Honesty, fair return, representation
Funds
Customer
Respect, safety, value
Revenue
Employee
Fair pay, safety, respect,
development/training
operations
$$$$$$$$
Stakeholders
have
conflicting
and different
expectations
of an
organization.
$$$$$$$$
The balance of
expectations
will depend on
CSR
Corporate Social Responsibility
● What an organization does to
and for stakeholders
● Organizational ethical conduct
● How business balances
conflicting stakeholder interests
4 levels of CSR
1. Proactive: looks for
opportunities
2. Accommodative: Does more
than the bare minimum only if
asked
3. Defensive: legally required only
4. Obstructionist: Does as little
as possible
Why should a company focus on
CSR?
By making the environment manageable, Meet KPI’s
Improves profitability (ie. generating more sales & less pollution fees)
Socially responsible & aligning with the environment that stakeholders expect, also
avoiding adverse reactions like boycotts 🡪 Improves trust and loyalty of customers,
employees, investors (employees want to work for a company that does GOOD, ex.
Bruce Power)
Less waste 🡪 Promotes operating efficiency
Cleaner operations require continuous improvements & innovation, and by setting an
example, will promote favourable legislation
Demographic
Refers to study of human population
Cohorts (generations) are homogenous groups within the
larger population
-
Used to predict behaviour and trends, supply & demand,
informs decisions regarding environmental analysis and
HR decisions
Things to know about certain cohorts
•
•
•
Size of cohort (# people in each age group, may be affected
by fertility rate and birth rate)
Characteristics
Participation in activities
•
Example: many millennials participate in brunch (avocado toast)
•
Future & trends
Canadian cohorts: WW1, Roaring Twenties, Depression
babies, Baby boom, Baby Bust – Gen X, (Baby boom echo)
millennials, millennium busters – Gen Z
•
More details in lab manual article
•
What determines characteristics of a
cohort?
FACTORS relating
to childhood
CHARACTERISTICS
of young adults
IMPLICATIONS
Economics
- How comfortable
were living
conditions at home?
Values & priorities
- Saving vs. spending
How to attract,
retain & motivate
Technology
Lifestyle
What makes a
product appealing
World events/news
- World wars
- September 11
Habits (digital & other)
How to attract
consumers
Parenting
- Helicopter
parents
- Ultra supportive
parents
Mindset
- entitlement
How much they
spend and what
they’re spending
on
Tip: Read this chart backwards
(from right to left). ie. for a
company to decide how to attract,
retain and motivate a cohort of
employees, they need to
determine & consider that cohort’s
values & priorities which are
dependent on the economic state
that they grew up in.
Overview of cohorts
UK study shared in
class
Make note of:
- Formative
experiences
- Portion of
workforce
- Aspirations
- Attitude toward
career
- Preferred
communication &
financial decision
preference
Cohort consumer & employment preferences
• Overtime
• 1 career & company
whole life (lifer)
Boomers
Prefer in person
transactions
Gen Z
• Meaningful, flexible,
work-life balance
• Several careers
Digitally savvy
Value uniqueness
Brand recognition
Customization
Experience >assets
Avoid debt
Socially Minded
Gen X
Research online
but buy in person
Brand loyal
• Seeking:
• Flexible work
• Perfect career
Gen Y/Millennials
Digitally savvy
Quality > brand
Want authenticity
Customization
Access/rental >
ownership
Socially minded
• Flexible, meaningful,
work-life balance
• Will change jobs
What job features are needed to attract each
demographic?
• Millennials are looking for jobs with flexible hours and meaningful work to obtain
work-life balance
•
• Gen X wants flexible hours but they want the perfect linear career (ie. BU111 TA 🡪
BU111 Head TA 🡪 Researcher 🡪 Assistant Professor 🡪 Associate Professor. Make sure
they know there’s a path to the top
How to retain?
• Gen z: meaningful work, work-life balance, competitive wages & benefits, feedback &
recognition, career advancement.
• Millennials don’t want to do overtime, so don’t expect them to spend long hours
• Gen x : Opportunities to develop their career within the company, ie. additional training
opportunities, promotions
What product features should be
emphasized with each cohort?
X: the brand
Y: High quality, authenticate materials, customizable and personal, option to
rent, social impact
Z: brand name, customization options, low price, social impact
Implications of current demographics
•
•
•
Baby boomers are aging & this brings challenges like
increased elder care needs and an increased number of
vulnerable seniors (high demand for care)
There’s more people retiring than entering the workforce
(potential labour shortages) 🡪 fewer workers supporting
pensions (strain on pension & healthcare)
Children of boomers are moving back & have more
disposable income because parents are paying for
essentials
Ethnic Composition
•
•
•
Immigration increasing over past decades
Immigrants are younger, likely to live in cities (opportunity
& diversity)
Many consumers have difficulty interacting with
marketplace
Households
More single-person households than single family
households, often childless households
Lost economies of scale in living & shopping (meaning living is
more expensive on average per person)
Families currently face time constraints (busy schedules with
activities)
Estimation
What might a firm need to estimate?
• Market size and share
• market size is a number in $ Billions or Millions, share is %
• Revenue Potential/impact
• Based on market size, estimating potential sales
• Profitability potential/impact
• Considering new costs and new sales, what’s the potential profit
What’s the difference between TAM,
SAM & SOM?
Estimation
What is the estimating process?
1. Clarify info & details
2. Break down problem & solve in pieces then aggregate
a. Think about factors that would relate
b. Go top down (biggest group first)
3. Determine what info you’d like to have
4. Make defensible assumptions for those factors and info (ie. assuming
population size)
5. Identify assumption imperfections and refine
6. Common sense check
Look at common knowledge slide if the Canadian numbers aren’t natural to
you (ie. median household income, CAN population)
Estimation – what # to start with?
Use population - when the units are driven by serving population in
geographic area like stores.
Households – calculate consumables based on # per household (FG)
Example: hoses, fridges, printer (household items)
Individuals – calculate consumables per person (FG)
Example: socks, shoes, sunglasses (personal items)
Proxy (# units, # stores) – calculate # stores in an area as a function of the
population. Example: ratio of residents per store
Technological Factors
Why do we care about technology?
What is technology?
●
●
●
Internet- e-commerce platforms, new communication options etc
Information technology- how firms manage information and communicate it with other firms
Much more- not just computers and information -- VR, AR
Why is technology important?
●
●
●
New advances in technology place extreme demands on businesses
There is a need for continuous learning and scanning - without this can fall behind
These demands create large challenges for companies
How does technology impact business decisions?
●
●
Changes what we can make, how we make it, and how we sell distribute it
Creates a number of opportunities and threats
Opportunities technology creates
Products
●
●
Innovation, uniqueness, value
Ex: Bluetooth → wireless headphones & speakers
Information
●
●
Improve information use, access & sharing
Ex: Email
Competitive Advantage
●
●
Creates barriers to entry for competitors
Ex: Google with SEO (Search Engine Optimization)
Customization
●
Ex: Lego allows you to build virtually on their website and then actually get shipped
the pieces to build your creation physically
Threats technology creates
Imitation
●
●
Information is costly to develop but easy to share
Ex: Bluetooth → wireless headphones: many options due to ease of imitation
New Entrants
●
●
New technologies and entrants in unfamiliar areas → require new capabilities, resources
and learning
Ex: Banking → developing chatbots etc
Information overload & security
●
●
●
Companies may get too much information than needed and causes incorrect focus
With more information data security is becoming very important
Ex: Disney+ launched and had over 1 million users personal information stolen
Threats technology creates
Imitation
●
●
Information is costly to develop but easy to share
Ex: Bluetooth → wireless headphones: many options due to ease of imitation
What are some ways to capitalize on tech opportunities and mitigate the threats?
1. Create a virtuous cycle with network effects
New Entrants
2. Innovate with one of the four types of innovation
● New technologies3.andStrategize
entrants inby
unfamiliar
areas
→small
require
new capabilities, resources
size (large
vs.
player)
and learning
● Ex: Banking → developing chatbots etc
** Not exhaustive
Information overload & security
●
●
●
Companies may get too much information than needed and causes incorrect focus
With more information data security is becoming very important
Ex: Disney+ launched and had over 1 million users personal information stolen
Vicious Vs. Virtuous Cycle
Availability of
complementary goods
Attractiveness to
users
Attractiveness to
producers of
complementary goods
A phenomenon
that helps or
hurts your
tech-based
product
# of users
Vicious Vs. Virtuous Cycle
Availability of
complementary goods
Indirect Network Effect: Value
of product increases as
complementary goods increase
How to exploit the cycle?
Create network effects!
Attractiveness to
producers of
complementary goods
A phenomenon
that helps or
hurts your
tech-based
product
Attractiveness to
users
Direct Network Effect:
Value of product increases
as # of users increase
# of users
Vicious Vs. Virtuous Cycle
Availability of
complementary goods
Solutions:
● Compatibility
● Alliances
● Incentive for
complementary
goods
● Build a user base
Attractiveness to
producers of
complementary goods
Indirect Network Effect: Value
of product increases as
complementary goods increase
A phenomenon
that helps or
hurts your
tech-based
product
Attractiveness to
users
Direct Network Effect:
Value of product increases
as # of users increase
# of users
Six Technology Concepts to Know About
1. Lock-in: Extent to which a customer is committed to a product or
service
● Larger → greater resistance to switch
●
●
Causes: habit or system, learning, investment, switching costs
Solution if you don’t have it: Lower switching costs, offer a leap in
performance vs. competitors
2. Complementary goods 🡪 goods that are compatible with others
3. Technology standard 🡪 established technological norm for products,
enables compatibility of complementary goods
4. Installed base 🡪 # of users for a product
5. Direct network effect 🡪 value of product increases as user base grows
6. Indirect network effect 🡪 value of product increases due to complementary
goods
Innovation Types and Challenges
How can firms create advantage by commercializing disruptive technologies?
Innovation Types and Challenges
How can firms create advantage by commercializing disruptive technologies?
Structural Challenge:
High = Do we need to substantially change how parts are linked together?
Knowledge/Capabilities Challenge:
High = Do we need substantial new knowledge of some new component part?
Innovation Types and Challenges
How can firms create advantage by commercializing disruptive technologies?
Enhances what’s already there
E.g. The new iPhone
has 2x more battery
life (this is false don’t
quote me lol)
Innovation Types and Challenges
How can firms create advantage by commercializing disruptive technologies?
Totally rewrites the rules
Enhances what’s already there
E.g. The new iPhone
has 2x more battery
life (this is false don’t
quote me lol)
Innovation Types and Challenges
How can firms create advantage by commercializing disruptive technologies?
Totally rewrites the rules
Works essentially the same, but
components are reconfigured
Enhances what’s already there
E.g. The new iPhone
has 2x more battery
life (this is false don’t
quote me lol)
Innovation Types and Challenges
How can firms create advantage by commercializing disruptive technologies?
Totally rewrites the rules
Works essentially the same, but
components are reconfigured
Major rework of some core part
Enhances what’s already there
E.g. The new iPhone
has 2x more battery
life (this is false don’t
quote me lol)
Innovation Types and Challenges
How can firms create advantage by commercializing disruptive technologies?
Totally rewrites the rules
Works essentially the same, but
components are reconfigured
Key Takeaway:
Understand how to
categorize
product
innovations
ofthere
examples
Major
rework of some
core part
Enhances and
what’sthink
already
E.g. The new iPhone
has 2x more battery
life (this is false don’t
quote me lol)
Innovation Types and Challenges
Taking a deeper look at two of the innovation types...
2
1
Sustaining
Innovation
New and improved, better
than before
●
●
●
Improves existing
products in expected
ways
Target: Mainstream,
high margin customers
with enhancements in
product functionality
Winners: Incumbents
Disruptive
Innovation
The thing you never knew
you needed
●
●
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Different performance
attributes not valued by
mainstream
Target: Lower performance
segment, improves rapidly
Winners: Disrupting firms
Why do Large Firms Fail?
Failures
Solutions
Structure and
size delays
responses and
limits choices
Monitor
Weed out
ideas that
aren’t deemed
“safe”
Establish
venture
units
Focus on
mainstream
customers
Partner
with young
firms
Avoid niche
markets
Design by
job not
customer
How do Small Firms Compete?
Enter with a
product large
firms don’t
care about
One you are
strong, move
up-market
They can't
easily
adjust
They don't
care, small
margins
STAY IN THE LOOP!
@lauriersos
@lauriersos
Thank You!
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