Chapter 6Business Organization and Finance

Types of Business vs Forms of businessTypes of business: HOW a does acompany makes a profit?

Form of a business:

WHO Owns the business?

WHAT is the legal structure

Types of BusinessService:

Sells a service that makes our lives better Ex. First Choice, Molly

Maid

Merchandising: Buys goods and

resells them for a higher price Ex. Future Shop,

Manufacturing: Buys raw materials and

converts them into finished goods for sale Ex Bombardier

Producing Business Farm, Forestry, Mine

Not for Profit: Organization that

meets social needs Ex Cancer Society

Need accountants because they raise a lot of money

Forms of Business Ownership

1. Sole Proprietorships: One owner

2. Partnership: Two or more owners

3. Limited Company / Corporation: The corporation is a separate legal entity from its owners. The owners are called shareholders.

Corporations A corporation is a legal entity

separate from the persons that form it.

Vocabulary Liability: legally responsible.

Unlimited Liability means that there is no separation between the company’s assets and the owners personal assets

Limited Liability means that there is a separation between the company’s assets and the owners personal assets

Liability Unlimited Liability

Limited Liability

HW Read pg. 119 - 128

Types of Industries Primary Industries: (Producing)

Turning natural resources into primary products Ex Mining Iron ore and turning into iron

Types of Industries Secondary Industries:

(Manufacturing) Turning primary products into finished products

Types of Industries Tertiary Industries: Services, retail and

wholesale sales, transportation and distribution, entertainment banking, healthcare, and law

Types of Industries Quaternary industry: intellectual

services: research, development, and information and technology.

Types of business in Canada Canadian industry has shifted from

primary to tertiary

Types of Businesses in CanadaCanada

2%

28%

70%

agriculture:

industry:

services:

Types of Businesses

2

28

70

1

22

77

4

31

65

11

49

41

2

25

72

0%10%20%30%40%50%60%70%80%90%

100%

Canada USA Mexico China EU

services:

industry:

agriculture:

SOLE PROPRIETORSHIPS Vast majority of small businesses

start out as a sole proprietorship Firms are owned by one person,

usually with day-to-day responsibility of running the business

Owner controls all assets of business and assume complete responsibility for any of its liabilities or debts

SOLE PROPRIETORSHIPS Advantages

Easiest and least expensive

Complete control May make all decisions

Receive all income to keep or reinvest.

Profits flow-through to the owner's personal tax return.

Easy to dissolve/liquidate

Disadvantages unlimited liability Disadvantage in raising

funds Personal Savings, Credit

Cards, Family Difficulty attracting high-

caliber employees, Hard to transfer

ownership

PARTNERSHIPS 2 or more people share ownership The law does NOT distinguish between

the business and its owners Partnership Agreement (legal agreement)

How decisions will be made Profits will be shared Disputes will be resolved Future partners will be admitted How partners can be bought out How to dissolve the partnership Contribution: Capital or Expertise

PARTNERSHIPSAdvantages

Relatively easy to establish Partnership agreement takes

time Attracting capital easier The profits flow to personal

tax returns Employees may be attracted

by possibility of becoming a partner

Complementary skill set Limited liability in (limited

partnership)

Disadvantages Unlimited liability (general

partnerships) Liable for the actions of the

other partners Profits must be shared Disagreements can occur. Some employee benefits are

not deductible from business income on tax returns

The partnership may have a limited life; it may end upon the withdrawal or death of a partner

Hard to Sell

Types of PartnershipsGeneral Partnership

Partners divide responsibility for management and liability

Unlimited Liability Shares of profit or loss

according to their internal agreement.

Equal shares are assumed unless there is a written agreement that states differently.

Limited Partnership "Limited" means that

most of the partners have limited liability (to the extent of their investment)

Limited input regarding management decisions

Investors for short term projects, or for investing in capital assets

Angel Investor More complex and

formal than that of a general partnership

CO-OPPERATIVE A business firm owned equally by its various

members Members must have a common relationship, goal, or

economic purpose Categories include: Marketing, Retail, Financial,

Service (CS-COOP, Mountain Equipment Co-op, Credit Union)

Many Co-operatives incorporate themselves under provincial law

Every member is entitled to ONE vote Board of Directors elected annually Very popular in Western Canada and rural Eastern

Canada

CO-OPPERATIVE Advantages

Each member has equal say

Members can obtain goods and services at excellent rates

Profits not re-invested are paid out as patronage returns to members

Disadvantages Many members,

many different ideas (slow)

Unpaid nature of officers’ positions leads to apathy

Limited ability to raise capital

Limited to conducting business with existing members

GOVERNMENT ENTERPRISE (Crown Corporations) Businesses owned by the federal,

provincial or municipal government Generally provide services that private

sector won’t offer (low profits) Privatization has been a recent trend

(Petro-Can!) Crown Corps have status as distinct legal

persons Canada Post, CBC, Via Rail, Atomic Energy LCBO, utilities, transit commissions ,

telecommunications (Sasktel) “natural monopolies” often result

GOVERNMENT ENTERPRISE (Crown Corporations) Why do we have Crown Corporation

Providing an essential good or service Would not be delivered because it could

not be profitable Fostering economic development

Act as a “springboard” or “nurturer” or “Incubator” for broader economic development

GOVERNMENT ENTERPRISE (Crown Corporations) Why do we have Crown Corporation

Regulating sensitive industries Ensure public control over sensitive

industries, in particular, those that may impact national security and/or safety

Atomic Energy of Canada Unity and nation building

fostering national unity and a sense of common identity

CBC

Non- Profit Organizations need to be government registered not permitted to generate profits raise money to cover operating

expenses and fundraising activities eg. Canadian Cancer Society, food

banks, School Boards (public), World Vision, Save the Children Fund

CORPORATIONS (Public) Chartered by the province in which it is

headquartered Any company with Inc. Ltd. Corp. in there name is

a corporation Considered by law to be a unique entity, separate

and apart from those who own it (limited liability) Can be taxed, sued and can enter into

contractual agreements Owners are the shareholders Shareholders elect a Board of Directors (one

share one vote) Corporation has a life of its own, does not

dissolve when ownership changes

Corporations Corporate Social Responsibility

PR Stunt Real Change in Corporate Culture

Corporation CSR

Who is responsible GOVERNMENT (Effective Regulations that

represent the will of the people) CORPORATIONS CONSUMERS (Be aware of how you use

your dollars)

Ethical Issues Corporate Social Responsibility

Real or not an impact Good habit Minimum not making change “Green” – As a marketing scheme Biodegradable Donating to kids Grassroots company = grassroots

involvement

Corporations Ownership in a corporation is called

Shares Privately held: Shares are not listed

on a stock exchange Publicly held: Shares are traded on

major stock exchage

HW Read page 119 -128 Check Your Understanding questions 1

and 2 Unit TEST Tuesday, May 1st

Stock Market Terms1. Share: Equal division of a corporation that

are sold, giving ownership and share of profits

2. Stock market: Physical or electronic location where shares are bought and sold

3. Stock market Index: A method of measuring the tendencies of the market. Made up of sample of companies (ex. DOW or S&P500)

Stock Market Terms4. Stock market Index: S&P/TSX

(Standard and Poor’s), Dow Jones Industrial Average

5. Top 5: New York Stock Exchange, Tokyo Stock Exchange, NASDAQ, Euronext, London Stock Exchange

6. TSX: Toronto Stock Exchange, NYSE: New York Stock Exchange

Stock Market Terms7. TSX trades electronically

NYSE trade on a trading floor8. Stock Markets in Canada

1. TMX Group1. TSX: Toronto Stock Exchange2. M-X: Montreal Stock Exchange3. TSX-V Venture Exchange (Junior Companies) :

1. Calgary2. Vancouver3. Winnipeg4. Montreal

Stock Market Terms9. Ticker: Unique Code to represent a

Stock (AAPL = Apple, T = AT&T)10. Role of Stock Markets:

Business: Access to capital to grow business and create wealth

Investors: Access to investment opportunities at varying degrees of risk

11. Publicly traded corporations supply shares, investors demand shares

Stock Market Terms12. What moves share prices:

1. Supply and demand for the share a) Future expectations of the company revenue

2. News3. Fear and Greed

13. Risk: Investing in the stock market can result in total loss of initial investment.

Stock Market Terms14. Brokers: Conduct transactions on behalf

of their clients. They also advise clients. They charge a commission which is either fixed per trade amount ($20 to buy/sell) or percentage of the trade (2% of investment).

15. Advantage of Investing: Over time equity investment (stocks) had out performed debt investment (bonds) on a ROI basis. Equity is more volatile.

Stock Market Terms16. Compound Interest:

Interest on Interest. Ex. $10,000 investment at 5% paid quarterly.

17. Mutual Fund: Investment company pools the money of numerous investors. Uses money to buy a balanced portfolio of shares. Sells units of the fund. Each unit consists of a small portion of each stock in the fund.

Year Simple Compounding Additionalthat yearfromcompounding

0 $10,000 $10,000 $0

1 $10.500 $10,509.45 $9.45

2 $11,000 $11,044.86 $35.41

3 $11,500 $11,607.55 $62.68

4 $12,000 $12,198.90 $91.35

5 $12,500 $12,820.37 $121.48

7.5 $13,750 $14,516.13 $203.68

10 $15,000 $16,436.19 $296.76

20 $20,000 $27,014.85 $805.56

30 $25,000 $44,402.13 $1,652.43

Stock Market Terms18. Rule of 72: How long will it take for the

investment to double. 1. 72/ 9% = 8 years

19. Bear Market: The prices of stocks are generally declining (pessimism)

20. Bull Market: The prices of stocks are generally increasing (optimism).

Stock Market Terms21. Capital Gain: Price of acquisition –

Selling Price – aka. what you made22. Dividend: A portion of the company’s

profits are distributed to shareholders. Dividends are only declared if money is not required to grow the business (re-invest). Many people by dividend stock as income replacement.

Stock Market Terms23. Blue Chip: A well established company

with low liabilities and regular dividends24. Small Cap: (Cap = Capitalization) Small

company (low # of shares) and low stock value but with the potential of growth

25. Penny Stock: Stock with a low price. Small price change can result in large gains.

Stock Market TermsPenny Stock

$100 000 Investment$0.10 per share1 Million SharesPrice goes up $0.05?

Blue Chip$100 000 Investment$100 per share1 000 SharesPrice goes up $0.05?

Stock Market TermsPenny Stock

$100 000 Investment$0.10 per share1 Million SharesPrice goes up $0.05?$150 000

Blue Chip$100 000 Investment$100 per share1 000 SharesPrice goes up $0.05?$100 050

Stock Market Terms26. Preferred Shares:

1. Pro: In the case of liquidation they get paid first2. Con: No Vote

27. IPO: Initial Public Offering “going public”

Prepare a prospectus Financial audit Underwriters need to undergo “due diligence” File with the appropriate government

commission (Provincial Securities Commission/SEC in the US)

Stock Market Terms28. Annual Report: Document sent to

shareholders outlining performance and plans for the future

1. Must be made public for publicly traded companies

29. Bid: Highest price willing to pay for a stock Sell: the selling value that you can sell a

stock for

Stock Market Terms30. Long vs Short:

1. Long: I expect the value to go up in the future. 1. I own the stock2. Risk is limited to my initial investment

2. Short: I expect the value to go down in the future.

1. I borrow the stock. 2. I sell the stock3. After the price has gone down I buy the stock in the

market and give back the same number of units that I borrowed

4. Risk Is unlimited

Long vs ShortLong

Jan 1 Buy 1 share of ABC at $2

March 1 Sell 1 share of ABC at market price of $3

Profit $1 Want stock price

to increase

Short Jan 1 Borrow 1

share of XYZ at price of $2

March 1 Sell Share of XYZ at $1

Give money back to broker

Want stock prices to decrease

Stock Market Terms33. Call (Option): The right but not the

obligation to BUY a certain number of shares at certain price on or before a certain date

34. Put (Option): The right but not the obligation to SELL a certain number of shares at certain price on or before a certain date

35. Forward: A contract that obliges the sale or purchase of a number of shares at certain price on a certain date

Stock Market Terms36. Hedge: The use of financial instruments

(Options, Forwards, other stocks) to mitigate risk of one investment

Ex. Company A and Company B are competing companies

Long 1000 shares of Company A Short 500 shares of Company B

36. Insider: owns more than 10% of the shares of a corporation, a company executive, or a director elected by the shareholders

37. Prospectus: A legal document that offers shares for sale at a certain price, explains the terms/objectives of the offer, and financial information from the company. This is required for an IPO.

Stock Market Terms39. Regulators

1. US: Securities Exchange Commission (SEC)2. Canada: Provincial Securities Commission

1. OSC: Ontario Securities Commission

3. EU: Committee of European Securities Regulators

40. Stock Split: 1 share is split into 2 or more. Stock splits are designed to decrease the price to increase volume

Ex. 100 shares of stock A at $10/share = $1000 investment

2 for 1 split = 200 shares at $5/share = $1000 dollar investment

Stock Market Terms41. Halting Trading:

1. Important News2. A run on the stock (Mass selling)3. Improper or illegal activity

42. Volume: The number of shares tradeVolatility: The rate of change in the share price

Stock Market Terms41. Halting Trading:

1. Important News2. A run on the stock (Mass selling)3. Improper or illegal activity

42. Volume: The number of shares tradeVolatility: The rate of change in the share price

Stock Market Terms43. Stock Yield: The stock yield is the

dividend expressed as a percent of the stock price. It is calculated by dividing the dividend amount by the stock price, then multiplying by 100%.

44. Portfolio: A group of stocks owned by a person

Stock Market Terms45. Diversified Portfolio: contains a variety

of stocks that are not all likely to rise or fall at the same time.

1. Industry (Banking, Mining, Manufacturing …. )

2. Geography (Canadian, European, Asian…)3. Size of companies (Small cap and Blue chip)4. Countercyclical (Wal*Mart and Mercedes

Benz)

Stock Market Terms46. Day Trader: A speculative trading

strategy. Makes many trades during a single day. Liquidates the portfolio at the end of trading.

47. Venture Capitalist: An investor that focuses on start ups and small cap business

Stock Market Terms48. Technical Analyst: Looks for trends in

the market (price volume) to make buy sell decision

49. Fundament Analyst: Looks at company data such as sales, debt, and potential growth to predict to make buy sell decision

50. Institutional Investor: Invests on behalf of a group of smaller investors ex mutual fund and insurance companies

Ratios Net Profit Margin:

Net profit margin = Net incomeNet Sales

Ex: 19% Profit margin means that for every dollar of sales 19 cents are profit

Ideally we want to see an increase in net profit margin

What would a decreasing net profit margin mean?

Ratios P/E (Price to Earnings Ratio):

P/E = Current Price of Common Stock Earnings Per Share

A strong indicator of true stock price Ex. $10 stock with a P/E of 75 is much more

expensive than a $100 stock with a P/E of 20

P/E of 75 is saying that for every $75 you spend you earn $1

P/E of 20 is saying that for every $20 you spend you earn $1

Often a higher P/E means that a stock is over priced (overvalued) and a lower the P/E the better opportunity (undervalued)

However… A higher P/E can also mean that big growth is expected to

come. Example: Microsoft in its earlier days had a P/E ratio of

over 100. Eventually when that growth slowed down the P/E dropped to 43

Where is it today?

So how do we use P/E information. Do your research High P/E look at past numbers have sales increased

dramatically? Are big things coming? If not it’s an overpriced stock.

Investing1. Look at summary

1. Price vs 52 week

2. Look at trends1. Price 2. Volatility

3. Fundamentals1. Ratios

4. News

Risk tolerance Can you deal with short term dips Total Income Time to retirement Knowledge of market Family to support

HW Read pg. 133-136 Do Check Your Understanding #1-3 on page 136

HW Pg. 128 Question #1

A) partnership B) proprietorship C) co-operative D) corporation E) government enterprise

Question #2 A general partner vs a limited partner

General partners have a say and have unlimited liability for all debts of the partnership.

Limited have little to no decision making power and have limited liability

A public corporation and a private corporation Public corporation is privately owned that sells shares

to the public Private corporation is a privately owned company

that have ownership shares that are privately traded. Shares cannot be purchased on the stock market.

Question #2 Dividends vs Patronage

Dividends are profits paid to corporate investors on a per-share basis.

Patronage refers to the distribution of profits paid to the members of a co-operative enterprise based on their personal volume of business conducted with the co-operative.

Check Your Understanding HW Pg. 136

#1 Difference between market value, book value and asset value of a share of common stock. Which value is most important

Answer: Book Value

Represents the value at which a stock was originally purchased.

Asset Value Represents each share’s portion of the corporations net

worth (assets – liabilities). It approximates the shares value if the business were to be dissolved

Market Value Represents what the stock is currently selling for in the

stock market Is the most practical measure of value. Therefore it is the

most important indicator.

http://abcnews.go.com/GMA/video/graffiti-artist-facebook-stock-cash-15545889