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The provided discussion presents a comprehensive overview of business environment concepts. It includes information about Ellen Rackas's experience, internal control assessments, and corporate governance. The text also explores the impact of AI and technology on various business functions, data analytics methods, and economic principles like economic growth, unemployment, and inflation. Furthermore, the document addresses globalization, supply chain management, financial risk management, and financial statement analysis. It also outlines strategic planning techniques, IT systems development, data governance, performance measurement, costing methods, and financial modeling for forecasting and decision-making. Finally, it covers topics such as continuous improvement, responsibility accounting, transfer pricing, breakeven analysis, and make-or-buy decisions.
I. RFID and Inventory Management
5130.45 Inventory management: Radio frequency identification (RFID) is used for inventory tracking.
5130.46 How RFID helps inventory management: RFID tracks shipments and ensures product availability in suitable quantities to customer demand.
II. National Income and Product Accounts (NIPA)
Gross Private Domestic Investment (Ig): Includes final purchases of machinery and equipment, all construction, changes in inventory, and new residential housing.
Net Investment = Gross Investment - Capital Consumption Allowance
Determinants of investment spending: interest rates, capacity utilization rates, firm's ability to develop projects with a positive net present value.
Government Purchases (G): Spending for goods and services used in providing government services, including spending on social capital like buildings and highways.
III. Market Structures
Monopolistic Competition (5212.02): Many small firms producing differentiated products, with some control over price. Assumptions include a large number of independent buyers and sellers.
Oligopoly (5212.03): Few firms selling standardized or differentiated products, with difficult entry into the industry. Assumptions include few large firms, interdependent firms, and non-price competition.
Monopoly: Strong barriers to entry, downward-sloping demand curve with marginal revenue less than price, and potential rent-seeking behavior.
IV. Supply and Demand
Price Discrimination (5212.06): Selling a product or service at different prices to different consumers when not justified by cost differences. Possible when the firm has some degree of control over output and price.
Change in Demand (5221.02): Movement along a demand curve is a change in quantity demanded when price changes. A shift of the demand curve is a change in demand caused by changes in demand determinants other than price, such as the price of other goods.
Supply (5221.03): Quantity producers are willing and able to offer for sale at various alternative prices at a given time.
Change in Supply (5221.04): Movement along a supply curve is a change in quantity supplied when price changes. A shift of the supply curve is a change in supply caused by changes in supply determinants other than price.
Price Elasticity of Demand (5221.06): Measures consumer responsiveness to a price change.
Formula: Ed = (% Change in Quantity Demanded) / (% Change in Price)
Midpoint Formula: Ed = [(Q1-Q0) / ((Q1+Q0)/2)] / [(P1-P0) / ((P1+P0)/2)]
Elastic (Ed > 1), Inelastic (Ed < 1), Unit Elastic (Ed = 1), Perfectly Elastic (Ed = ∞), Perfectly Inelastic (Ed = 0)
Total Revenue Rule: Elastic demand - reduce price to increase total revenue; Inelastic demand - increase price to increase total revenue; Unitarily elastic demand - changing the price will have no impact on total revenue.
Other Measures of Elasticity (5221.09):
Income Elasticity of Demand: Ey = (% Change in Demand) / (% Change in Income)
Normal good (Ey > 0), Inferior good (Ey < 0)
Cross-Elasticity of Demand: EPy = (% Change in Demand for Good A) / (% Change in Price of Good B)
Substitutes (EPy > 0), Complements (EPy < 0), Unrelated (EPy = 0)
Complementary Goods (5221.10): Goods used together. A decrease in the price of one leads to an increase in demand for the other.
Normal Goods (5221.10): Demand increases as income increases.
Substitute Goods (5221.10): Goods used in place of each other. A decrease in the price of one leads to a decrease in demand for the other.
V. Currency Markets and the Federal Reserve
Functions of Money (5223.01):
Medium of exchange: facilitates trade.
Unit of account: measures value.
Store of value: transfers purchasing power.
Bank Reserves (5223.03):
Reserves = Reserve Deposits at the Fed + Vault Cash
Required Reserves = Required Reserve Ratio (r) x Checkable Deposits
Excess Reserves = Reserves – Required Reserves
Banks create money by creating an asset in the form of the loan and a liability in the form of a checkable deposit.
Money Multiplier (5223.04): Determines the degree to which the banking system can expand the money supply when new deposits are received.
Monetary Policy Tools (5223.05):
Reserve Requirement: Percentage of deposits banks must hold in reserve.
Open Market Operations: Buying and selling of U.S. Treasury or federal agency securities by the Fed in the open market.
Term Deposit Facility: Drains reserves from the banking system.
Fed Funds Market (5223.06): Banks lend excess reserves to each other.
VI. Blockchain Technology
Block: The "current" part of a blockchain, records some or all of the recent transactions.
VII. Interest Rates and Risk
Interest Rate Risk (5231.10): Arises from timing of interest rate changes and cash flows (re-pricing risk), asset-liability mismatch (basis risk), changing rate relationships across maturities (yield curve risk), and interest rate-related options (option risk).
Basic Interest (5231.11): Calculated on an annual basis using the stated rate of interest.
Basic interest rate = Interest / Amount Borrowed
APR & EAR:
APR = Period interest rate x Number of periods per year
EAR = ((1 + Rate per period)^2 – 1), where the rate per period = APR/2
Bond Valuation (5231.16):
Bond value = PV of the interest payments + PV of par value
Hedging Strategies (5231.17): Money Market hedge, Currency option hedge.
VIII. Transfer Pricing
A transfer price is the price one segment of a company charges for a product or service it supplies to another segment of the same company.
IX. Financial Ratios and Analysis
Key Financial Ratios (BEC 2-87): Equity multiplier, gross margin, inventory turnover, operating cash flow ratio, price earnings ratio, profit margin, quick ratio.
Measures of Liquidity (BEC 2-88): Current ratio, quick ratio, inventory turnover, accounts receivable turnover, cash conversion cycle, days in inventory, days of payable outstanding, days sales in accounts receivable, operating cash flow ratio.
Measures of Return on Investment (BEC 2-88): Asset turnover, return on assets, return on equity, price-earnings ratio, dividend payout, return on sales.
X. Risk and Return
Default Risk (5311.08): The lower the quality of the bonds, the greater the interest rate the issuing firm is required to pay in order to compensate for the risk.
Purchasing Risk (5311.09): Risk that inflation will result in less purchasing power for a given sum of money.
XI. Leverage
Degree of Operating Leverage (DOL) (5311.10): DOL = Contribution Margin / (Contribution Margin - Fixed Costs)
Financial Leverage (5311.11): The extent to which debt and preferred stock are used in the capital structure. DFL = EBIT / (EBIT – Interest expense)
Total Leverage (5311.12): A high degree of operating and financial leverage can result in large fluctuations in EPS.
XII. Capital Structure
Factors Influencing Capital Structure (5312.01): Tax position, industry comparison, internal funds, risk.
Cost of Retained Earnings (5312.02): ke = (D1 / Po (1 – F)) + g
Weighted Average Cost of Capital (WACC) (5312.02): Consider proportions of debt, preferred stock, and equity, along with their respective costs. Ri = RF + Ξ²i (Rm – RF)
Optimal Capital Structure (5312.03): Minimizes the WACC by balancing the tax shield of debt with financial distress costs.
XIII. Short-Term Financing
Trade Credit (5313.05): Lost trade credit days by taking discount = (Days in year / Lost trade credit days by taking discount) x Discount
Unsecured Bank Loans (5313.06):
Line of Credit: Agreement with a bank to have up to a specific amount of funds available as a short-term loan during a particular period.
Term Loans: Generally, term loans are paid off in equal installments.
Bonds (5313.11): Publicly offered long-term debt. Bonds have a coupon rate (rate of interest) that is generally fixed.
Bond Ratings (5313.13): AAA (very strong) to D (in default). AAA and AA are considered to be of a high investment quality, and they along with A and BBB rated bonds are considered to be investment grade. BB and B are considered to be substandard, and CCC to D are considered to be speculative.
Leases (5313.19): Finance lease for a lessee or sales-type lease for the lessor if the lease meets any of the following criteria at commencement:
Ownership transfers to the lessee by the end of the lease term.
The lease contains a purchase option that the lessee is reasonably certain to exercise.
The lease term is for the major part of the remaining economic life of the underlying asset.
XIV. Inventory Management
Economic Order Quantity (EOQ) (5313.20): EOQ = √(2DS / Ci)
Reorder Point (RP) (5313.20): RP = (LT x D) + SS
XV. Financing Decisions
Cost of Foregone Discount (5313.21): Return on taking discount = Lost Discount / Additional credit supplied
XVI. Financial Statement Analysis
Liquidity Measures (5322.04): Measures a firm’s ability to satisfy short-term obligations.
Debt to Total Assets (5322.10): Total debt to total assets = Total debt / Total assets
Economic Value Added (EVA) (5322.11): EVA = NOPAT – (Weighted-average cost of capital x (Total assets – Current liabilities))
XVII. Business Valuation
Going Concern vs. Liquidation (5332.01): Is the business expected to continue operating or is it in the process of liquidation?
Valuation Engagement (5332.01): A valuation engagement is free to employ the use of any valuations approach or method that is professionally deemed appropriate under the circumstances.
SSVS 1 (5332.04): States that a rule of thumb should not be used as the method to set value; however, it can be used as a reasonableness check for the results achieved using other methods.
Financial Decision Models (5333.01): Focus on earnings power and cash generation capability.
XVIII. Option Pricing
Black-Scholes Model (5333.02): A commonly used model to price options.
Binomial Model (5333.02): A variation of the Black-Scholes model, which incorporates the underlying security for a period of time rather than a point in time.
XIX. Risk and Return Models
Risk-Free Rate (5333.03): Estimated as the rate of return on long-term (i.e., 10 years) U.S. Treasury bonds.
Market Risk Premium (5333.03): Additional return over the default-free rate required for the average stock.
Beta Coefficients (5333.05): Measure a stock's volatility.
Dividend Discount Model (DDM) (5333.06): A procedure for valuing the price of a stock by using the predicted dividends and discounting them back to the present value.
XX. Portfolio Performance
Jensen Measure (5334.10): A measure of absolute performance on a risk-adjusted basis. Return on the portfolio = Risk-free rate + (Return on market index – Risk-free rate) x Ξ²
XXI. Capital Budgeting and Time Value of Money
Future Value (5335.01): F = P (1 + i)^n
Present Value (5335.01): P = F / (1 + i)^n
Future Value of an Annuity (5335.01): FVA = PMT * [((1 + i)^n - 1) / i]
Present Value of an Annuity (5335.01): PVA = PMT * [1 - (1 + i)^-n / i]
Break-Even Analysis (5335.02): Zero Profit = Total Revenue - Variable Costs - Fixed Costs
Margin of Safety (5335.02): Excess sales over the breakeven sales point.
XXII. Internal Controls for Sales
Approve Credit (5410.38): A credit sale should be approved before goods are released from inventory.
Threat and Controls (5410.39): Set credit limits, give sales order personnel general authorization, and have someone other than the salesperson approve special circumstances.
XXIII. Networking
Local Area Network (LAN) (5410.111): Links computers and other devices located close to each other.
LAN Configurations (5410.111): Star configuration, ring configuration.
XXIV. Internet Protocol
Internet Protocol (IP) (5410.112): Specifies the structure of the packets and how to route them to the proper destination.
Router (5410.112): Reads the destination address field in an IP packet header to determine where it is to be sent.
XXV. Data Management
Data Warehouse (5410.113): A type of data management system that supports business intelligence activities, mainly analytics.
Data Lake (5410.113): A large data repository that stores unstructured data.
Data Mart (5410.113): A subset of a data warehouse focused on a particular line of business or department.
Metadata Repositories (5410.113): Store data about data and databases.
XXVI. Costing
Activity-Based Costing (ABC) (5541.04): Customer level, product level activities.
XXVII. Regression Analysis
Standard Error of the Estimate (Se) (5542.10): The range within which the true y is located.
T-Statistic (t-value) (5542.13): Used to evaluate the significance of the relationship between changes in the dependent variable (y) and the independent variable (x).
XXVIII. Forecasting
Exponential Weighted (Smoothed) Moving Average (5542.15): Weighted (Smoothed) Moving Average = [Alpha (Actual) + (1 – Alpha) (Previous Forecast)].
XXIX. Decision Making Under Uncertainty
Expected Value (5542.40): The sum of each possible outcome multiplied by its probability.
Variance (5542.41): A measure of dispersion of a random variable.
Standard Deviation (5542.42): The square root of the variance.
Payoff Table (5542.43): A decision maker is frequently faced with several decision alternatives and several possible states of nature.
BEC Quiz: Short-Answer Questions
How does RFID technology aid in inventory management, and what benefits does it provide to companies like Walmart?
What are the main components of gross private domestic investment (Ig), and what factors primarily influence investment spending decisions?
Describe the key characteristics that differentiate monopolistic competition from an oligopoly market structure.
Explain the concept of price elasticity of demand and the total revenue rule.
Define income elasticity of demand and cross elasticity of demand, providing examples of how these measures can be used.
List and describe the three primary functions of money.
Explain how banks create money through the process of lending and the role of excess reserves.
What are the key monetary policy tools available to the Federal Reserve, and how do they impact the money supply?
Describe what the Black-Scholes Model measures, and name another model to measure it.
Define and explain the difference between debt to total assets and economic value added (EVA).
BEC Quiz Answer Key
RFID aids in tracking inventory shipments from manufacturer to store, ensuring products are available at the right time and in suitable quantities. This benefits companies like Walmart by improving inventory accuracy, reducing stockouts, and optimizing supply chain efficiency.
Gross private domestic investment includes machinery and equipment, construction, changes in inventory, and new residential housing. Investment spending is primarily determined by interest rates, capacity utilization rates, and the ability to develop projects with a positive net present value.
Monopolistic competition features many small firms with differentiated products, while oligopoly consists of a few large firms selling standardized or differentiated products. Monopolistic competition has relatively free entry and exit, while oligopoly has difficult entry.
Price elasticity of demand measures consumer responsiveness to price changes. The total revenue rule states that reducing price increases total revenue with elastic demand, increasing price increases revenue with inelastic demand, and changing price has no revenue impact with unitarily elastic demand.
Income elasticity measures the responsiveness of demand to changes in consumer income, classifying goods as normal (positive) or inferior (negative). Cross-elasticity measures the responsiveness of demand for one good to changes in the price of another, classifying goods as substitutes (positive) or complements (negative).
The three primary functions of money are: serving as a medium of exchange to facilitate trade, acting as a unit of account to measure value, and functioning as a store of value to transfer purchasing power.
Banks create money by making loans, which generate new demand deposits, thereby expanding the money supply. They can only make loans if they have excess reserves.
The Federal Reserve's monetary policy tools include reserve requirements, open market operations, and the term deposit facility. These tools influence the ability of financial intermediaries to expand the money supply.
The Black-Scholes Model is a model that measures the price of options. The Binomial Model of pricing options is a variation of the Black-Scholes model.
Debt to total assets indicates the extent of leverage used to finance assets, while economic value added (EVA) measures the true economic profit of a company by subtracting the cost of capital from net operating profit after tax (NOPAT).
Essay Questions
Discuss the different market structures (perfect competition, monopolistic competition, oligopoly, and monopoly) and their implications for pricing, output, and economic efficiency. Provide real-world examples of each market structure.
Explain the functions of the Federal Reserve and how monetary policy tools are used to influence economic activity. Analyze the potential impacts of these policies on inflation, unemployment, and economic growth.
Describe the various types of financial ratios used in financial statement analysis and explain how they are used to assess a company's liquidity, solvency, profitability, and efficiency.
Explain the concept of the weighted average cost of capital (WACC) and its importance in capital budgeting decisions. Discuss the factors that influence a company's WACC and how it can be minimized to optimize the firm's value.
Discuss the different methods for business valuation, including discounted cash flow analysis, market multiple approach, and asset-based approach. Explain the strengths and weaknesses of each method and when each is most appropriate to use.
Glossary of Key Terms
Annuity: A series of equal cash flows occurring at regular intervals.
Basis Risk: The risk arising from mismatched interest rate changes between assets and liabilities.
Beta: A measure of a stock's volatility relative to the market.
Black-Scholes Model: A model for pricing options.
Blockchain: A distributed ledger technology that records transactions in blocks.
Bond: A long-term debt instrument where the borrower agrees to make payments of interest and principal on specific dates to the bondholder.
Capital Structure: The mix of debt and equity used to finance a company's assets.
Complementary Goods: Goods that are used together.
Cross-Elasticity of Demand: Measures the responsiveness of demand for one good to changes in the price of another good.
Data Lake: A large data repository that stores unstructured data.
Data Mart: A subset of a data warehouse focused on a particular line of business or department.
Data Warehouse: A system supporting business intelligence activities, mainly analytics.
Default Risk: The risk that a borrower will not repay a debt.
Degree of Financial Leverage (DFL): Measures the sensitivity of a company’s earnings per share (EPS) to changes in its earnings before interest and taxes (EBIT).
Degree of Operating Leverage (DOL): Measures the sensitivity of a company’s operating income to a change in sales.
Dividend Discount Model (DDM): A method for valuing a stock based on the present value of expected future dividends.
Economic Order Quantity (EOQ): The optimal order size to minimize inventory costs.
Economic Value Added (EVA): A measure of economic profit, considering the cost of capital.
Elastic Demand: Demand is responsive to price changes (Ed > 1).
Excess Reserves: Bank reserves exceeding required reserves.
Fed Funds Rate: The interest rate at which banks lend reserves to each other overnight.
Financial Leverage: The use of debt financing.
Gross Private Domestic Investment (Ig): Total investment spending in the economy.
Inelastic Demand: Demand is not very responsive to price changes (Ed < 1).
Interest Rate Risk: Risk arising from changes in interest rates.
Jensen Measure: Measures a portfolio’s risk-adjusted performance relative to the market.
Line of Credit: An agreement with a bank to have up to a specific amount of funds available as a short-term loan during a particular period.
Liquidity: The ability to meet short-term obligations.
Local Area Network (LAN): A network linking computers and devices in a limited area.
Market Risk Premium: The additional return required for investing in the market over a risk-free asset.
Monopolistic Competition: A market structure with many small firms selling differentiated products.
Monopoly: A market structure with a single seller and significant barriers to entry.
Normal Good: A good whose demand increases with income.
Oligopoly: A market structure with a few large firms.
Open Market Operations: The Fed buying or selling government securities.
Price Discrimination: Selling the same product at different prices to different customers.
Price Elasticity of Demand: A measure of consumer responsiveness to price changes.
Purchasing Power Risk: The risk that inflation will erode the value of money.
Required Reserve Ratio: The percentage of deposits banks must hold in reserve.
Reserves: Bank deposits held at the Federal Reserve plus vault cash.
Reorder Point: The inventory level at which a new order should be placed.
RFID (Radio Frequency Identification): Technology used for inventory tracking.
Risk-Free Rate: The rate of return on a risk-free investment.
Substitute Goods: Goods that can be used in place of each other.
Term Loan: A loan with a specific repayment schedule.
Total Revenue Rule: Guidelines relating price elasticity of demand to the effects on total revenue.
Unsecured Loan: A loan not backed by collateral.
WACC (Weighted Average Cost of Capital): The average cost of a company's financing, weighted by the proportion of each source.
Yield Curve Risk: Risk arising from changes in the shape of the yield curve.
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