$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-1 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ ENTREPRENEURIAL FINANCE Fifth Edition Chapter 1 Financial and Economic Concepts

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-2 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Learning Objectives  Understand the basic concepts and importance of finance as it relates to individuals and business.  Understand the basic economic concepts of finance.  Distinguish between marginal revenue and marginal cost.  Distinguish between economic capital and financial capital.  Determine the opportunity cost of making decisions.  Identify the relationship that exists between savings, income, expenditures, and taxes.

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-3 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Learning Objectives (continued)  Identify those factors that affect interest rates.  Understand the relationships that exist between supply and demand for money and prevailing market interest rates.  Describe the role of the Federal Reserve and those tools used to achieve the goals of economic growth, price stability, and full employment.  Understand the relationship that exists between risk and return on investment.  Compare systematic risk to unsystematic risk and their impact on business.

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-4 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Opportunity Costs  The highest value that is surrendered when a decision to invest funds is made.

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-5 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Choices Available for Funds Table 1-1 Expected Financial Returns of Investment Opportunity Investment OpportunityExpected Annual Return (%) Purchase stock11 Purchase home9 Purchase bonds6 Place money in bank savings account2 Purchase new car-15

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-6 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Examples of Opportunity Cost  Decide to purchase car  Opportunity cost = Stock

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-7 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ  However, if you decided to purchase stock rather than the car  Opportunity cost = Home

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-8 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Income, Expenditures, and Taxes  Gross income is all of the money received from all sources during the year. › Wages › Tips › Interest earned on savings and bonds › Income from rental property › Profits to entrepreneurs

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-9 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Basic Income Calculations  Gross income - taxes = Disposable income › For most of us, disposable income is take-home pay.  Disposable income - Fixed expenses = Discretionary income › Fixed expenses are contractual obligations like rent, utilities, insurance, and car payments. › Discretionary income is that we can spend or save.

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-10 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ 07458

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-11 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Taxes  Progressive taxes: larger percentage of tax paid as income increases.  Regressive taxes: larger percentage of tax paid as income decreases.  Proportional taxes: percentage of tax paid remains the same at all levels of income.

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-12 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Example of Progressive Tax  Formula for tax percentage paid:  Income tax is progressive:

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-13 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Example of Regressive Tax  Sales tax is regressive: › Income = $20,000; savings = 0; sales tax = 5% › Sales tax paid = $20,000 x 0.05 = 1,000 › Income = $60,000; savings = $10,000; sales tax = 5% › Sales tax paid = $50,000 x 0.05 = $2,500

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-14 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Example of Proportional Tax  Formula for tax percentage paid: › Medicare tax is 1.45% › Annual income $30,000 › Medicare tax = $30,000 x = $435 › Annual income $500,000 › Medicare tax=$500,000 x = $7,250

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-15 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Flat Tax Proposal

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-16 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Factors Affecting Interest Rates  The supply of money saved is primarily the total money that is placed in demand deposit (checking) accounts, savings accounts, and money market mutual funds.  The demand for borrowed funds is all of the money that is demanded in our economy at a given price.

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-17 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ  Federal Reserve Policy › The Federal Reserve is the central bank of the United States.  Risk › Systematic Risk: Risk associated with economic, political, and sociological changes that affect all participants on an equal basis. › Unsystematic Risk: Risk unique to an individual, firm, or industry. Factors Affecting Interest Rates (continued)

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-18 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ 07458

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-19 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ 07458

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-20 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ 07458

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-21 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ 07458

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-22 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ 07458

$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 1-23 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ 07458