ECON lesson 5 Chapter 10 sections 1 & 2
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This document provides an overview of Lesson 5 which covers microeconomics topics related to how businesses finance, market, and distribute products. It discusses the three main types of financing - short term, intermediate term, and long term. Short term financing is less than 1 year and includes trade credit, unsecured loans, secured loans, and lines of credit. Intermediate term is 1-10 years and is used for expansion projects. Long term is over 10 years and large corporations issue bonds or sell stock. The document provides examples and details of each type of financing and factors companies consider when determining the best financing options.
ECON lesson 5 Chapter 10 sections 1 & 2
- 1. Lesson 5 Introduction Page 172 Lesson 5 Introduction Page 172 Continued look at MICROECONOMICS ? small units such as individuals & firms
- 2. We’ll look at: 1. How businesses FINANCE, MARKET & DISTRIBUTE their PRODUCTS.
- 3. We’ll also have a look at: 2. The American Labor Force 3. Worker & Company Relations 4. Cost-Benefit Analysis
- 4. After studying L. 5, we’ll be able to Explain how a firm decides whether to expand Describe how technology changed production methods Understand the change in ROLE of MARKETING in USA Identify worker categories according to skills & training Explain ROLE of Unions in the workplace Describe COLLECTIVE BARGAINING procedures
- 5. CHAPTER 10: Financing & Producing Section 1 Investing in the Free Enterprise System Page 173
- 6. WHY do entrepreneurs need financing? 1. For C_____ Needs 2. For L___ Term Needs 1. For Current Needs 2. For Long Term Needs Examples for each Parts, Tools, Supplies Growth Getting funds or money capital for business expansion Duh, what’s financing? Duh, what’s financing?
- 7. I don’t know!I don’t know! What’s a big part of our Free Enterprise System? Financing business ops & growth Financing business ops & growth But how does it work? But how does it work? Folks save by depositing in places… Folks save by depositing in places… then these institutions lend $ out to firms to grow and expand then these institutions lend $ out to firms to grow and expand
- 8. Figure page 174 Financing Business Expansion
- 9. People save money -> resources for financing of business expansions Folks get interest on savings Folks get interest on savings PUT YOUR $$$ in Banks, Savings & Loan, Credit Union, Mutual Funds, Retirement
- 10. They lend savings $ -> businesses for INTEREST
- 12. I have a hardware store, a corporation. OPPORTUNITY POPS UP to open MORE stores Bummer. No cash to invest in expansion. Bummer. No cash to invest in expansion. What are my options? What are my options?
- 13. Dig into my savings Ask friends/family to lend firm $$$ Take out a loan Sell more stock
- 14. & THINK But the question remains, SHOULD I EXPAND? I know what you need to do, kiddo! I know what you need to do, kiddo! A COST- BENEFIT ANALYSIS! A COST- BENEFIT ANALYSIS!
- 15. 1 2 3 4 5 Wonder how observant they are? Wonder how observant they are? Estimate expansion costs Calculate expected revenues (total income from sales) Calculate expected profits (revenues – costs) Calculate cost of financing 5Expected profits > cost of financing expansion, okay.
- 16. A million-dollar loan will cost 10%/year Cost/year = ?$100,000 Would it be worthwhile If expected profits/year = $50,000? $200,000? NO WAY Yes! In short, additional benefit must = additional cost Additional benefit is + profits. Additional cost is interest paid.Additional benefit is + profits. Additional cost is interest paid.
- 17. 5 Steps of Cost-Benefit Analysis p. 175 1.Estimate expansion costs Rent/new stores New employees’ training Extra bookkeeping Opportunity cost of time/checking new stores Utilities More insurance New taxes Meeting government regulations More inventory
- 18. 2.Calculate Expected Revenues 3.Calculate Expected Profits 4. Calculate Monthly Cost of Loan + Interest 5.Expected Profits > Expansion Costs
- 19. Now, let’s get this straight. A cost-benefit analysis compares the estimated cost of whatever action with WHAT? A cost-benefit analysis compares the estimated cost of whatever action with WHAT? Its benefits, of course! Its benefits, of course! And what are REVENUES & PROFITS? And what are REVENUES & PROFITS? Income of sales & money left after costs Income of sales & money left after costs
- 20. Section Types of Financing for Business Ops p. 176
- 21. A Credit Check ?Firms must prove creditworthiness Credit ratings: Good, Average, Poor Firms must pay interest on loan/repay it within a specific period DEBT FINANCING = ?Raising $ for business through borrowing
- 22. 3 Types of Financing • Short-term • Intermediate-term • Long-term
- 23. SHORT-TERM?SHORT-TERM? Financing < a year Example?Example? Firm’s doing well, but will only be paid next mo. Needs $ for payroll & bills Farmer needs $ during growing season To pay for seed, repairs, wages
- 24. EXAMPLES of Short-term Financing The 1st is TRADE CREDIT The 1st is TRADE CREDIT That’s when your company buys goods from mine & I give you 30-90 days to pay. That’s when your company buys goods from mine & I give you 30-90 days to pay. If bill’s unpaid in 10 days, in effect, interest is paid for use of the trade credit. Firms often get a discount if bill is paid in 10 days.
- 25. 2nd type of Short-term Financing UNSECURED LOANS That’s the type most short-term bank credit for businesses is. That’s the type most short-term bank credit for businesses is. What’s the guarantee ? What’s the guarantee ? Nothing but the promise to pay it back. Nothing but the promise to pay it back. No way! No way! Well, the borrower signs a PROMISSORY NOTE. It says the $ must be repaid in full with interest. Well, the borrower signs a PROMISSORY NOTE. It says the $ must be repaid in full with interest. Oh, right. Usually within a year. Oh, right. Usually within a year.
- 26. SECURED LOANS Backed by COLLATERAL ? That’s something of value you will lose if loan isn’t repaid! That’s something of value you will lose if loan isn’t repaid! Like property, machinery, inventory or accounts receivable. Like property, machinery, inventory or accounts receivable. ACCOUNTS RECEIVABLE = $ owed to firm by customers. ACCOUNTS RECEIVABLE = $ owed to firm by customers. 3rd Type of Short-Term Financing
- 27. 4th Type of Short-Term Financing LINE OF CREDIT That’s the maximum amount of money a firm can borrow from a bank during a period of time, usually a year. That’s the maximum amount of money a firm can borrow from a bank during a period of time, usually a year. So they don’t have to reapply for a loan every single time. So they don’t have to reapply for a loan every single time.
- 28. INTERMEDIATE-TERM FINANCING That’s for borrowing money for 1-10 years. That’s for borrowing money for 1-10 years. Example: for expansion; opening another store A 90-day loan wouldn’t help. A 90-day loan wouldn’t help. If I wanted to open another shop, I’d go for intermediate-term financing. If I wanted to open another shop, I’d go for intermediate-term financing.
- 30. INTERMEDIATE-TERM FINANCING R E P A Y M E N T 1 to 10 years 1. Generally requires COLLATERAL MORTGAGE = secured by property Big, solid firms may get unsecured intermediate- term loans.
- 31. INTERMEDIATE-TERM FINANCING 2.LEASING = renting instead of buying Advantages? 1. Leaser gives cheap repair service 2. Part of leasing costs can be deducted before figuring income taxes DISADVANTAGE? More expensive than borrowing $ to buy item
- 32. LONG-TERM FINANCING > 10 years Used for ?major expansion. Examples? Build a new plant Replace equipment What do corporations do to finance 10 to 15-yr. debts? Issue stock OR Sell Bonds Who sells bonds to finance long- term debts? Who sells bonds to finance long- term debts? Big corporations Big corporations Yep, they appeal more to investors wanting to buy bonds. Yep, they appeal more to investors wanting to buy bonds. `Cause the risk is better? `Cause the risk is better? Yup, corps have huge assets, unlike smaller companies. Yup, corps have huge assets, unlike smaller companies.
- 34. BONDS Promise to pay a certain amount of interest over a specific period of time, & to repay the full amount borrowed at the end of that time. S T O C K S EQUITY MGMT = selling stock, since partial ownership, or equity is being sold. Corps. sell common or preferred stock. What are the differences between common & preferred stock.
- 35. COMMON STOCK Issued by ALL public corps PREFERRED STOCKMany corps don’t issue The stock most often bought & sold
- 36. COMMON STOCKholders vote Elect the board of directors PREFERRED STOCKholders don’t.
- 37. COMMON STOCK may pay dividends based on corp performance. Good -> high dividends / Poor -> low or no dividends PREFERRED STOCK pays a fixed dividend Is paid before common stockholders get dividend. If company doesn’t pay on time, it must be paid at a later date.
- 38. Value of COMMON STOCK rises & falls depending on performance & what investors expect it to do in the future. Value of PREFERRED STOCK changes according to company performance.
- 39. IF a corporation FAILS COMMON STOCKHOLDERS are the last to be paid with money left after paying creditors. PREFERRED STOCKHOLDERS are paid before COMMON BONDHOLDERS are paid before stockholders
- 40. Choosing the RIGHT FINANCING Financial MGRS try to get capital at minimum cost They try to get the best mix of financing. Length of loan OR Selling bonds depends on 4 factors
- 41. They 4 factors are: 1. Interest costs 2. Firm’s financial shape 3. Economic climate 4. Firm’s owners’ opinions
- 42. INTEREST COSTS High rates -> companies reluctant to expand May take out short=term loans, hoping rates drop Interest rates affect decision to issue bonds High Rates -> Corps must offer high interest rates on bonds Rates drop, corps offer lower return on bonds
- 43. FIRM’S FINANCIAL CONDITION COMPANIES with STABLE SALES & PROFITS, or with expectations to increase CAN SAFELY TAKE ON MORE DEBT IF current debt’s not BIG Financial Mgrs use cost-benefit analyses to figure if potential profits will cover financing cost of expansion
- 44. MARKET CLIMATE Financial Mgrs must be aware of this when deciding whether to SELL BONDS or ISSUE STOCK to raise financing. High Interest Rates + Slow Economy = Disaster for a firm interested in expansion If economic growth in market is slow, investors may prefer the fixed rate of return of bonds or preferred stock to the unknown return of common stock.
- 45. CONTROL OF THE COMPANY Bonds don’t have voting rights attached to them. Neither do most preferred stocks COMMON STOCKHOLDERS can vote. Financial Managers MAY need to get common stockholders’ approval before taking action.
- 46. COMING UP in the NEXT class The Production Process
- 47. THE