The Mid-Term Exam
WHAT IT ISN’T: Not Bluebook, Scantron,
Lap-top, Open-Book or Open-Note
WHAT IT IS: Emphasizes Terminology and
Applying Themes
The Mid-Term Exam
Bring several
Pens or Pencils
Earn all the Points on Essay Questions
 Clearly State Answer (Thesis)
 Explain Answer
 Why did you write what you wrote?
 Don’t repeat Question
Three Organizational Forms
THREE BASIC FORMS OF
BUSINESS ORGANIZATIONS
Sole
Proprietorship
Any Business
Owned and
Operated by an
Individual
General
Partnership
Corporation
Two or More
Persons Operating
a Business for a
Profit
Legislatively Created
and Regulated
Governance,
Ownership and
Financial Structure
Which Form Best Fits the Needs
of your Business?
Determinants of Organizational Form
 Owner’s Objectives: Control,
Liability, Capital Needs, Distribution
of Profits (Losses) and Taxes
 Dealings with Outside World: Other
Owners, Employees, Suppliers,
Customers and Future Owners
 Legislative Goals: Special-Purpose
Entities subsidize Social Objective
THE AGENCY PROBLEM
Occurs when (1) Goals of Principal (Owner) and Agent
(Employee) Conflict and (2) Principal cannot Verify
what Agent is doing
Corporate Shareholders
(Principal)
 Investor: Maximum Returns
(High-Risk/High-Return)
 Cannot operate Business
 Liability is Limited: Can
Lose only Investment
Corporate Management
(Agent)
 Manager: Stable Returns
(Low-Risk/Low-Return)
 Can operate Business
 Unlimited Liability: Lose
Job and Income
Who’s responsible for
Managing a Corporation?
What Do you get with
Common Stock and Do Not
get with Preferred Stock?
‘Limited Liability’ and ‘Double Taxation’
7
UNEMPLOYMENT/EMPLOYMENT RATE
Job Growth (Demand) vs. Labor Force (Supply)
Always a ‘Bad Thing?’
GROSS DOMESTIC PRODUCT (GDP)
National, Regional and Local
INFLATION
Consumer Price Indexes
Who Benefits and Who Loses?
INTEREST RATES
Leading Indicator
Principal Tool of Monetary Policy
Satisfy 10% Reserve
Requirement Every
Day for Two Weeks of
Every Month
Shortage creates Market
for Needed Reserves
Overnight Loans of Federal
Reserve Funds
9
FOMC trades
Government Securities to
INFLUENCE
Fed Funds Rate
Elastic Demand: Quantity
Demanded is Highly Responsive
to Price Changes (Flatter Curve)
DEMAND
Elastic or Inelastic?
Inelastic Demand: Quantity
Demanded not as Responsive to
Price Changes (Steeper Curve)
Firm has
COMPETITIVE
ADVANTAGE
When…
Competitors cannot
Duplicate Value-creating
Processes of its Product
and Market Position
Meaningful Product Differentiation
Targeting Under-served Market Segment
Effective Distribution Channel
Essential Accounting Reports
Balance Sheet
Income Statement
Statement of Cash Flows
THREE ESSENTIAL METRICS
 Current Ratio
 Debt-to-Equity Ratio
 Return-on-Equity Ratio
CAPITAL
STRUCTURE
SOURCES
INTERNAL
 Retained Earnings
 Trade Terms
EXTERNAL
 Debt: Loan or Bond
Source: Commercial Bank
 Stock: Preferred or
Common
Source: Investment Bank
RECONCILE SOURCES/USES OF CASH
OPERATING NEEDS
CAPITAL NEEDS
Timing and Amounts
Growth and Contraction
IMPLICATIONS
OPERATIONS
GOVERNANCE
Debt Claims on Cash Flow/Assets
Common Stockholders’ Rights