FINAL TEST – BUS. FUND.

FOR ENVIRONMENTAL PROFESSIONALS

CHAPTER 5 – How do we raise funds, reward shareholders, and manage out assets?
LO1:  Discuss the importance of a financing strategy to a company’s performance.
LO2:  Define the role of risk with regard to investment decisions.
LO3:  Differentiate between the two types of transactions used to gain access to additional funds.
LO4:  Describe the similarities and differences between loans and bonds.
LO5:  Describe how the bond market impacts bond value.
LO6:  Discuss how to evaluate the quality of bonds.
LO7:  Differentiate between common stock and preferred stock.
LO8:  Discuss why a company would choose to pay dividends.
LO9:  Describe the purpose of the Balance Sheet.
LO10:  Discuss the kinds of information found on the Balance Sheet.
LO11:  Differentiate between assets and liabilities.

1. Importance of a financing strategy to a company’s performance

- Financing strategies are important to a company’s performance in order to fuel their
growth. You can (1) take on debt (2) take on new owners. Your financial strategy
influences your risk.

2. Role of risk with regard to investment decisions

- Role: is the possibility of losing some or all of an investment. It represents the chance
that an investment’s actual return will be different than what is expected. The risk is the
degree of certainty (or uncertainty) that you will get your money back
- (eg) putting risk (your money) in the hope of high returns by giving it to someone that
will use it in a venture. – rent money or attract your interest = higher return on those
funds.
- (eg) if you have money to invest, it represents wealth that you have created in the past
and not yet consumed.
- The higher the risk, the greater the expected return

3. Two types of transactions used to gain access to additional funds

- (1) Liabilities/debt: if debt is too high, it threatens the company’s viability and hence the
owner’s investment. Building up equity in a business is important for a business can
grow. This consist of short-term bank loans, bonds and bond markets, return to lenders
in the form of interest. More debt = more risk
- (2) Owner’s Equity (common stock, retained earnings): the company’s debt will be
proportionally very low. Investors are equally concerned as to why managers are using
their equity rather than third-party borrowing to fund their assets. This part illustrates if
a business is growing
o Shares in the company purchased through an Initial Public Offerings (IPO)
brokered by financial services firms or post-IPO when traded in a stock market or
exchange
o Preferred vs common, Class A vs Class B
 o Return to shareholders in the form of capital appreciation (depreciation –
negative return) and dividends.

4. Loans vs Bonds
Loans: is a form of a rental agreement. The amount borrowed is the principal. The lender
gives you the money for a certain period and you pay them a free (interest) for the use of that
money. This money is not income. Paying back the loan reduces the balance in your cash
account (and the value of your company) and the balance in the appropriate liability account.
Paying down is not (principal of a loan) is not an expense. More your borrow = higher the
interest rate and higher payment.
- Short term loans = these need to be paid back within a year. Banks do this if businesses
have a reasonable risk profile

Bonds: is a form a long-term financing. Bonds are borrowing money directly from investors.

They are referred to as securities because they represent secured (asset-based) claims for the
investors. The bond market is where bonds are traded in - because are a secure claim,
investors who own them can buy and sell them to other investors. In the bond market, the
bond can trade above or below the face value of the bond. Bond prices move in the opposite
direction of interest rates (interest decreases, bond prices go up).

5. Quality of Bonds
- Can be determined in the financial press where information about outstanding bonds,
the value of their issue, their trading prices, yield, and the bond ratings of the
companies.

6. Common vs Preferred Stock

- Common stock represents a simple share of ownership and each common stock share
has one vote to cast when electing the corporation’s board of directors. (eg) if a
company goes bankrupt, the corporation would find no liability to common
shareholders, shares may become worthless.
- Preferred stock is a form of stock that is traded at a far lower volume than common
stock, does have privileges. Preferred shareholders, often those having some kind of
history or relationship within the company, may receive higher dividends and have a
first claim to as- sets if a company should go bankrupt

7. Paying Dividends
- When a company creates profits, the profit belongs to the owners (shareholders) and
must be paid back.
o The profit can (1) be kept in the company as retained earnings (2) can be
distributed to the owners in the form of a cash disbursement or payment. If it is
paid out to the owners, it reduces the amount of cash on hand.
- Company’s would want to pay back dividends in order to keep their shareholders happy.
- Shareholders hire board of directors and it is BD that determine the dividend payout.
8. Purpose of a Balance Sheet
- Is a financial snapshot of a business’ assets and liabilities at any one point in time. It’s a
“freeze frame”, giving you the exact financial position of company’s assets and liabilities
at a certain point in its history.
- It is a way to present a company’s financial information in a uniform way and it shows
not only how much cash you have in the bank at that time, but also the value of your
inventory, how much your creditors owe you in accounts receivable, the value of your
assets, and a lot of other information.
- Tells you if you have equity left in your company. (balance sheets always balance)
- Shows the value of your assests.

9. Assets vs Liabilities
- Assets: (what you owned) Current assets/long term assets -current assets are things that
can be converted into cash in less than a year such as cash itself, accountable receivable,
inventory. Long term assets are things in which your company has a long-term
investment such as land, buildings, plant and equipment.
- Liabilities: (what you owe) Current/long term liabilities – current liabilities are debts you
have to pay within a year such as accounts payable, accrued expenses. Expenses that
are owed and not yet paid.

10. What is in a balance sheet.

- 3 parts: assets, liabilities, equity
- On one side are the company’s Assets (what you own). On the other side are Liabilities (what
you owe) plus the owners’ Equity in the business.
- Assets: (long term: long term investments – buildings)/ (current: converted into cash in less
than a year, account receivables, inventory) -
Liabilities: (Current: debts you have to pay within a year/long term: you have more than a
year to pay)
Equity: what is left over after you deduct what is owed from what you own. (equity + liabilities
= assets) – common stock/retained earnings
 CHAPTER 6 – How does it all work together?

LO1:  Discuss the factors that influence strategic choices.

LO2:  Describe the components of a SWOT analysis and the common questions that are asked in each
component.
LO3:  Explain how a SWOT analysis informs business strategy.
LO4:  Describe the linkages between goals and strategy.
LO7:  Compare and contrast operational effectiveness and strategic positioning.
LO8:  Define competitive advantage and the kinds of business resources that create it.
LO9:  Describe the “five forces” that drive competition in an industry.
LO10:  Compare and contrast the two generic strategies of cost leadership and differentiation.
LO11:  Discuss ways a company can pursue a cost leadership strategy.
LO12:  Discuss ways a company can pursue a differentiation strategy.
LO13:  Describe the four quadrants of the Balanced Scorecard

1. Factors that influence strategic choices:

- Understanding the challenges, opportunities and future trends, both inside and outside
its chosen industry and market.
- Clearly define the industry and markets in which it exists as well as how it would like to
operate within this context
- Define the industry and markets is necessary for making choices about where to direct
and use human and financial resources.
- A company must always be ready and able to respond to industry and market changes.
- A company’s competitor can also influence strategic choices by forcing companies to
either exit particular markets or broaden their marketplace.

2. SWOT analysis: Strength, Weakness, Opportunities, Threats. This analysis forces on both
internal (strength/weakness) and external factors (opportunities/threats)

Questions to ask in a SWOT analysis:

Strength: what is the basis for our competitive advantage today and in the future?
Why do customers in our market choose our products or services?
What unique resources do we have that others do not?

Weakness: what could we do improve our operations?

Why haven’t we made these improvements already?
What do our competitors perceive as our vulnerabilities

Opportunity: what changes in technology and markers are we aware of?

What changes in government policies related to our industry improve our position?
What changes in social behaviour and lifestyle impact out business?
 Threats: What obstacles do we face due to changes in technology?
What adverse government policies will impact our operations?
What factors in products or services requirement are changing and impacting our
industry?

3. How does SWOT inform business strategies?

- It can summarize the company’s top-level goals and create a concise description of their
forces.
- Companies can then use this to determine how to align skills and capabilities the
company has, or needs to acquire, to achieve success.
- Look honestly at how you can use your strengths can outcompete your competition an
recognizing your weakness and how it can be dealt. (internal)
- Combining it with your external analysis = your strengths must align with your
opportunities and your weakness with your threats. However, strengths can be seen as
a threat and a weakness can be an opportunity.

4. Goal and strategy:

A company’s:
Vision: an aspirational description of what the leaders of the company want to
accomplish (ie) where are we going? It outlines core activities but typically far broader
than the available resources and competencies the company processes. If well
understood and executed, it will allow the company to reach the desired market leader
position. This vision underpins the company’s mission.

Mission: reflects the corporate values and fundamental beliefs provides direction to the
organization as to how to get to where the vision wants to take it (ie) who we are, what
we do, how we are going to get there.

This helps set a company’s direction and how it intends to operate in its chosen industry
and market. Once the strategy is understood and defined a company then needs firm
actions that can be monitored to implement its strategy, successfully. Once this is done,
a company can more effectively towards its strategic goal.

5. Compare and contrast operational effectiveness and strategic positioning

Operational effectiveness: means performing similar activities better than your rivals. (ie) a
challenger will benchmark and attempt to outperform the dominant company following a
similar value proposition... example an appeal to the marketplace.

Strategic positioning: means performing different or similar activities from your competitors
in different ways. This unique offering will be in tune with the company’s own resources and
competencies, making it more difficult for a competitor to respond
6. Define competitive advantage and the kinds of business resources that create it.
A sustainable competitive advantage occurs when a company uses its resources in a way that
allows it to gain a better, more profitable, long-term position in the markets in which it offers
products and services.

The kinds of business resources that creates a competitive advantage includes a company’s
financial, technological and human resources. Each resource is dependent on the rarity, easily
imitated or substitutable.

7. 5 forces that drive competition:

i. Threat of new entrants to a market
ii. Bargaining power of suppliers
iii. Bargaining power of customers
iv. Threat of substitute products
v. Degree of competitive rivalry

8. Compare and contrast the two generic strategies of cost leadership and differentiation.
1. On providing their products and services based on a low-cost approach
2. On differentiating their products and services from competitors in order to manage their
cost by setting different prices.
- This can be applied to any industry and any company.

9. Discuss ways a company can pursue a cost leadership strategy.

- By maintaining a market presence in a well-defined “niche” or by operating broadly
across all segments of the market.
- They can cycle its products through an entire “lifecycle” in order to maximize
profitability.
- Another approach is for companies to go in the opposite direction and begin in the low
end of the market.
- (eg) television panels, Blu-ray players, etc.) begins with product offerings at the high end
of the market and then trickles them down over time to all other customer segments

10. Discuss ways a company can pursue a differentiation strategy.

- Proving a luxury experience or unique experience could be derived from technology.
- A company gains competitive advantage through differentiation by distinguishing its
products with excellent designs, high awareness, easy accessibility to customers, and
new products offered regularly.
- Focusing on new designs of a given product in a particular market segment or by
maintaining a presence in every segment of the market
 11. Describe the four quadrants of the Balanced Scorecard
1. The Customer: to achieve our vision, how should we appear to our customers.
Concerns the quality, time, performance and service.
 Wide range of customer-focused parameter (awareness and parameters)
2. Internal Business Processes: to satisfy our shareholders and customers, what
business processes must we excel at in order to deliver the value propositions the
market needs and expects.
 Measures your contribution margin, plant utilization level
3. Learning & Growth: to achieve our vision, how will we sustain our ability to change
and improve in order to create value.
 Includes employee productivity and HR and TQM
4. Financial: to succeed financially and to translate into profitability and economic
viability, how should we appear to our shareholder.

Managing Organizational Adaptation and Strategic Change

- Undertaking a strategic change is difficult
o Organizational routines
o Social and political structures
o Conformity
o Limited search
o Complementarities between strategy, structure and system

Managing Strategic Change

- Tools of strategic Change management
o Creating perceptions of crisis
o Establishing stretch targets
o Creating organizational initiatives
o Reorganizations
 CHAPTER 7: Responsibility and Sustainability

LO1: Define what represents an ethical issue.

LO2: Describe the ethical decision-making process.
LO3: Define social responsibility.
LO4: Compare and contrast concepts such as triple bottom line and corporate philanthropy.
LO5: Discuss the four steps of the ethical decision-making process.
LO6: Describe the five major approaches (theories) of business ethics.
LO7: Differentiate between primary and secondary stakeholders.
LO8: Apply the ethical decision-making process to business situations

- Ethics operate on 2 levels; individual level and company level

1. Define what represents an ethical issue.

- an ethical issue is one where a person’s actions, when freely performed, may either harm or
benefit others or both.
- ethical issues come up at every level of business

2. Describe the ethical decision-making process.

- is a process through which determine what course of actions you will take. This process
involves making choices while considering the possible consequences of those choices for the
business and its stakeholders.
- decisions must be both legal and morally acceptable and is critical to avoid adverse
consequences to stakeholders or to the business.

3. Define social responsibility.

- is an ethical or ideological theory that holds that an organization or individual has an obligation
to society at large. Can also be referred to as the “social contract” between business and society.
It also includes the informal expectations that the public holds for business practices.
- involves 4 steps that start at:
1. Being profitable (the foundation upon which all others rest). This is required.
2. Obey the law (law id society’s codification of right and wrong). This is required.
3. Be ethical (obligations to do what is right and fair. Avoid harm). This is expected
4. Be a good corporate citizen. This is desired.

4. Compare and contrast concepts such as triple bottom line and corporate philanthropy.
- The triple bottom line: is the pressure to act in a more socially responsible way has led many
businesses to focus on more than just profits and to adopt a broader view of business success. It
involves businesses evaluating success in terms of financial, environmental and social
performance. (people, planet and profits)

-Corporate philanthropy: is the effort to increase social responsibility as companies seeks to

improve the communities and societies in which they reside and operate.
5.Discuss the four steps of the ethical decision-making process.
- it is important to follow a deliberate and systematic process:

1. investigate the ethical issue: gather relevant information about the situation and use the
information to identify the issue. To explore ethics of a situation, different ethical
theories can be applied to allow for multiple viewpoints which is essential. There ate
generally 5 general approaches that can be used

2. Identify the primary stakeholders

- To understand those who could be affected by your decision. You much allow for
different perspectives of each stakeholder.

3. Increase the number of alternative courses of action

- Expand the solution set to 3 or more alternatives.
- Is important to think creatively and generate as many courses of action as possible

4. Inspect the consequences of the alternative

- These steps encourage discussions and may uncover different viewpoints to allow for a
fair evaluation.

6.Describe the five major approaches (theories) of business ethics.

- Utilitarian: assesses possible action in terms of its consequences. The goal is to achieve
the greatest good for the greatest number while also creating the least amount of harm.
Might rely on a statistical analysis of probable outcomes.
- Individual Rights: to avoid actions that infringe on the rights of others. This focuses on
respect for human dignity (eg) right to privacy
- Fairness: to treat everyone equally; if there is unequal treatment it must have a just
cause (fair reason)
- Common good: to ensure and enhance benefits of an action for society as a whole. Ask
whether an action benefits a specific element of the common good for the entire
system.
- Virtue: is a given action reflective of the kind of person we are or want to be.