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Chapter 6 Business Organization and Finance. Types of Business vs Forms of business Types of business: HOW a does a company makes a profit? Form of a.

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Presentation on theme: "Chapter 6 Business Organization and Finance. Types of Business vs Forms of business Types of business: HOW a does a company makes a profit? Form of a."— Presentation transcript:

1 Chapter 6 Business Organization and Finance

2 Types of Business vs Forms of business Types of business: HOW a does a company makes a profit? Form of a business: WHO Owns the business? WHAT is the legal structure

3 Types of Business Service:  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

4 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.

5 Corporations  A corporation is a legal entity separate from the persons that form it.

6 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

7 Liability  Unlimited Liability  Limited Liability

8 HW  Read pg

9 Types of Industries  Primary Industries: (Producing) Turning natural resources into primary products Ex Mining Iron ore and turning into iron

10 Types of Industries  Secondary Industries: (Manufacturing) Turning primary products into finished products

11 Types of Industries  Tertiary Industries: Services, retail and wholesale sales, transportation and distribution, entertainment banking, healthcare, and law

12 Types of Industries  Quaternary industry: intellectual services: research, development, and information and technology.

13 Types of business in Canada  Canadian industry has shifted from primary to tertiary

14 Types of Businesses in Canada

15 Types of Businesses

16 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

17 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

18 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

19 PARTNERSHIPS Advantages  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

20 Types of Partnerships General 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

21 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

22 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

23 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

24 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

25 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

26 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

27 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

28 Corporations  Corporate Social Responsibility PR Stunt Real Change in Corporate Culture

29 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)

30 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

31 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

32 HW  Read page  Check Your Understanding questions 1 and 2  Unit TEST Tuesday, May 1st

33 Stock Market Terms 1. 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)

34 Stock Market Terms 4. 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

35 Stock Market Terms 7. TSX trades electronically NYSE trade on a trading floor 8. Stock Markets in Canada 1. TMX Group 1. TSX: Toronto Stock Exchange 2. M-X: Montreal Stock Exchange 3. TSX-V Venture Exchange (Junior Companies) : 1. Calgary 2. Vancouver 3. Winnipeg 4. Montreal

36 Stock Market Terms 9. 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

37 Stock Market Terms 12. What moves share prices: 1. Supply and demand for the share a) Future expectations of the company revenue 2. News 3. Fear and Greed 13. Risk: Investing in the stock market can result in total loss of initial investment.

38 Stock Market Terms 14. 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.

39 Stock Market Terms 16. 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. YearSimple Compounding Additional that year from compounding 0$10,000 $0 1$10.500$10,509.45$9.45 2$11,000$11,044.86$ $11,500$11,607.55$ $12,000$12,198.90$ $12,500$12,820.37$ $13,750$14,516.13$ $15,000$16,436.19$ $20,000$27,014.85$ $25,000$44,402.13$1,652.43

40 Stock Market Terms 18. Rule of 72: How long will it take for the investment to double / 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).

41 Stock Market Terms 21. Capital Gain: Price of acquisition – Selling Price – aka. what you made 22. 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.

42 Stock Market Terms 23. Blue Chip: A well established company with low liabilities and regular dividends 24. 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.

43 Stock Market Terms Penny Stock $ Investment $0.10 per share 1 Million Shares Price goes up $0.05? Blue Chip $ Investment $100 per share Shares Price goes up $0.05?

44 Stock Market Terms Penny Stock $ Investment $0.10 per share 1 Million Shares Price goes up $0.05? $ Blue Chip $ Investment $100 per share Shares Price goes up $0.05? $

45 Stock Market Terms 26. Preferred Shares: 1. Pro: In the case of liquidation they get paid first 2. 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)

46 Stock Market Terms 28. 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

47 Stock Market Terms 30. Long vs Short: 1. Long: I expect the value to go up in the future. 1. I own the stock 2. 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 stock 3. 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

48 Long vs Short Long  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

49 Stock Market Terms 33. 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

50 Stock Market Terms 36. 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

51 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.

52 Stock Market Terms 39. 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

53 Stock Market Terms 41. Halting Trading: 1. Important News 2. A run on the stock (Mass selling) 3. Improper or illegal activity 42. Volume: The number of shares trade Volatility: The rate of change in the share price

54 Stock Market Terms 41. Halting Trading: 1. Important News 2. A run on the stock (Mass selling) 3. Improper or illegal activity 42. Volume: The number of shares trade Volatility: The rate of change in the share price

55 Stock Market Terms 43. 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

56 Stock Market Terms 45. 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)

57 Stock Market Terms 46. 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

58 Stock Market Terms 48. 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

59 Ratios  Net Profit Margin: Net profit margin =Net income Net 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?

60 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

61 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.

62 Investing 1. Look at summary 1. Price vs 52 week 2. Look at trends 1. Price 2. Volatility 3. Fundamentals 1. Ratios 4. News

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

64 HW  Read pg  Do Check Your Understanding #1-3 on page 136

65 HW Pg. 128  Question #1 A) partnership B) proprietorship C) co-operative D) corporation E) government enterprise

66  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.

67  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.

68 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

69  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.

70  artist-facebook-stock-cash artist-facebook-stock-cash


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