BU111 - Final

Law of supply and demand

- affects businesses from marketing and input standpoint

PEST Economic factors

- cost of doing business
- identify growing markets
- direct impact on financial performance - regular consideration when making decisions
- Inflation/deflation, interest rates, employment rates, exchange rates
- affect export opportunities, HR availibility, input costs (measures per capita income, unemployment)

Economic factor: Inflation/Deflation

- inflation - increase in prices from one year to the next (YoY)
- standard of living is increasing
- if incomes stay relatively same, 5.5% increases indicates loss of purchasing power, consumer price index measures this

Interest Rates from Bank of Canada

- interest rates holding at 5% from Bank of Canada (target rate is 1.5%-2%)
- when inflation increases, interest rates change, current rate has increased 7%
- inflation due to demand and supply pressures coming out of the pandemic
- supply is highly impaired on a global scale, cutting back on production, clogged shipping route, supply chain disruptions
- demand - consumers picking up life again, working, more $ to spend

Economic Factor: Interest Rates

- increasing rates mean more expensive to borrow money
- borrowing less = less to spend = buying less = demand slows while supply catches up, shortage will decrease and prices stabilize
- paid more interest when saving money, borrow less and spend less
- lower rates stimulate borrowing, get economy going

Economic Factor: Exchange rates

- difference in valuation between currencies
- CAD$ is devalued; worth less (0.74)
- expectations with exchange rates; exchanging money in future provides uncertainty and risk

Exchange Rates - 2008 economic crisis

- CAD$ was 0.63, expensive to shop in the states and travel, in one year the USD$ got devalued and the CAD$ appreciated in value very rapidly (0.63 -> 1.10)
- buying became cheap but destroyed american industries
- Canada began producing products to sell to american customers but became expensive for them to buy
- Went out of business, had to downsize, subsidiaries closed down (cost 1000+ jobs in Ontario)
- Business did not have time to change strategies and prepare (inconsistency in external environment)

Arbitrage

- take advantage of differences in exchange rates
- advantage: buy something cheaper in one country and sell it for less in a country with a higher valued dollar to make profit

4 Pillars of the Canadian Financial systems

1. Banks and alternate banks
2. Specialized lending/saving intermediaries
3. Investment dealer
4. Charter banks

Banks and alternate banks

- make deposits, borrow
- SME - primary lending source
- credit unions - make money back, same service as bank
- functions: savings, chequing, loans, financial services
- Eg. in 2007-2009, Canada came out of recession very well because of banking industry, high potential for profit from an industry standpoint, Canada's are strongest globally

Specialized lending/saving intermediaries

- mid-large, private equity financing/borrow
- pension plans, insurance companies, venture capitalist, angel investors
- higher risk startups can only get money from these as banks require deposits and secure investments

Investment dealer

- going public; stocks and bonds
- large and established
- facilitate large-scale financial transactions
- must open an account and deposit money, and a licensed broker will purchase the bonds on your behalf

Debt financing

- must be repaid with interest (tax deductible), legally binding
- line of credit - short term loan
- home equity line of credit - borrowing money against the value of current home
- cost of capital - interest paid, cost of acquiring capital
- Risk and expectations are an important factor
- Debt capacity

Equity financing

- give up percentage of ownership for money
- no interest or repayment = lower cost
- going to a VC or investment community
- share control and profits
- Investors expect higher returns due to risk
- capital gain - buy low sell high in shares
- dividends
- few fixed assets = less debt for a company

Dividends

distributed to shareholders when the company has made a profit and has paid taxes on the profit

Bond characteristics

- legal, binding agreement
- fixed annual return (often paid semi-annually) COUPON
- fixed term - principal repaid at maturity MATURITY DATE
- priority over stockholders FACE VALUE

Types of investments: bonds

- debt instrument
- a company or government borrows money from you (investor), they pay interest (coupon) each year and pay off the debt (face value) on an agreed date (maturity date)
- traded on xx year exchanges
- low risk, high-level return
- once issued, bond coupon rate, maturity rate, face value cannot be changed

Stock characteristics

- voting rights
- no fixed term
- variable return (capital gain upon selling)
- discretionary payment (dividends)
- higher risk than corporation's bond

Types of investments: stocks

- represents ownership (equity)
Common stocks:
- buy low sell high
- shares that are paid last so biggest risk
- no legal obligation to pay
- expect largest return
- protected with votes
- Eg: An owner of Apple has a very small share. With one share, you get one vote on key decisions, nominate people to be on board of directors based on personal interests.
- expected return is difficult if length of investment unknown
- portfolio can be worth less in the end

Preferred share

- has face value
- primarily bought for dividends
- intention is to deliver regular payments
- get paid first

Yield - what and why?

- what do you get above what you invest, relative to what you invested
- calculated on an annual basis, expressed as a percentage
- what: percentage return expected or received on any investment (aka "return")
- why: enables comparison of investment returns and pricing of investments, i.e compare their expected yields
- combination of risk premium and risk-free rate

Yield of stock investment

- capital gain = selling price - purchase price - relevant expenses
- yield = (capital gain)/investment
- when risk increases? risk return trade off - higher expected yield

Bonds: approximate yield to maturity

- assumes you will hold the bond until maturity
- calculate "what you made" on an annual basis
- doesn't consider TVM therefore approximate

How to determine what a fair yield is?

risk free return + risk premium

Leverage for bonds

- value of initial investment is greater than dollars available to invest
- creates potential to make larger return: borrowing money to buy house, buying stocks on margin
- having a lot of debt, using debt to fund purchase, purchasing a stock using borrowed money
- bigger risk

Going long

investor has purchased a security, expecting to profit when the price of security increases and investor sells

Buying on margin

- investor is purchasing a security and will only make profit when security increases in price and is sold, borrowing part of investment purchase price from broker
- can make infinite profit - interest and comissions

Buying on margin rules

- must qualify for margin account
- must sign "hypothecation" agreement (margin account agreement form) - pledging of securities as collateral for loan
- must pay interest
- the investors % equity (margin) in the margined stock must always be >= the minimum margin requirement

What is maximum loss?

Price paid for stock (+ interest and commissions)

What happens with money paid on a marginal call?

broker uses money to reduce your loan

Annuities

- multiple but equal payments (PMT) over equal periods of time
- add up to a total value in present (PV) or future (FV)

Ordinary annuity

due at end of period

Annuity due

payments at start of period

Payment and compounding periods

- must correspond with one another and be =, otherwise calculate effective interest rate

Effective rate for payment period

- always calculated on number of payments per year
- account for effective quarterly, effective weekly, etc. interest rates

What type of formula is used for bonds

- series of coupon payments = annuity
- principal payment upon maturity = single payment

What is a mortgage?

- long term debt used to buy real estate (business, factory, plot of land, house)
- household equity - represents ownership, you only own the amount of equity you have in the house ( value of property - amount you owe)
- amortization up to 25 years, longer amortization = smaller payments but more interest paid
- annual household income x 8 = max loan you can qualify for

Components of a mortgage

1. Mortgage amount
2. Amortization period
3. Based on current interest rates, figure out payments over amortization period (ANNUITY!)
4. Sign mortgage agreement locking in payment terms for period up to 5 years
5. When agreement expires, repeat process

Project and firm valuation

- when new projects or proposals are being considered, what's the ROI and is the investment worth it?
- can use net present value (NPV), breakeven, payback or internal rate of return (IRR) - they consider TVM
- comparing present value of benefits vs present value of costs

Risk-return trade off

the expected yield on any investment is the risk-free return plus an appropriate risk premium

Sources of retirement income

- CPP: regular monthly payments around $13-$14k/year
- old age security
- private pension - employer or combination of continues to pay you (about half of regular salary) after you retire
- shares: employer can invest x% into stocks or bonds and use it to pay retired employees
- TFSA
- RRSP: gets taken off income before you pay taxes on it which lowers income and defers taxes
- personal savings
- lack of pension plans with employers today; alternate is RRSP matching program

Elements of social factors

- customs
- habits
- values/attitudes
- demographic characteristics; observable characteristics, gender, ethnicity, race, income levels, household size

why social factors? significance?

- help define who markets are and who we want markets to be
- similar wants, needs, behaviours
- significance: affect customer preferences and worker attitudes and behaviour, standards of business conduct, corporate social responsibility

Customers - case application

How do customers define "quality"?
How much is spent on a product or activity?
How are markets and market segments distinguished in their psychological, demographic and lifestyle characteristics?
What are the norms/cultural practices & do our products align?

Employees - case application

What motivates the cohort we want?
What is their preferred work style and job design?
What will it take to motivate them compared to older and younger cohorts?
What do I say and offer to attract them?
How do their habits and mindsets affect my hiring, training and/or motivation/retention approaches?

What are demographics?

study of human populations

Cohorts

homogeneous groups within the larger population:
- identified based on time period born
- Maturists (pre-1945), boomers (1945-1960), gen-x (1961-1980), gen-y (1981-1995), gen-z (1995+)

Why cohorts?

- powerful predictor of behaviour/trends
- certainty and simplicity of age data
- predicts supply and demand, informs environmental analysis, and human resource decisions
Linnomar - produce parts for car companies and tractors, industrial equipment:
- Accommodate retiring population by partnering with companies making medical devices and machines by making parts
- Identified societal trend and took advantage of the opportunity for increased demand
- Largest number of people by age approaching retirement, lifestyles and needs are changing, increased need for healthcare

What to look for in demographics

- cohort size - # people in each group
- factors affecting size: fertility rate, birth rate
- cohort participation - activity participation rate, percentage that engages in a behaviour
- future and trends - social issues
- generation/time period born
- higher/lower birth rates indicate social influence (war, uncertainty, roaring 20's, baby boom echo, blackout babies)

What determines characteristics?

- lifestyles: how you spend day, activities you engage in, locus of control
- habits: tools, resources, routines followed
- mindset: optimistic or pessimistic about the future, believe in destiny, introverted or extraverted, saving money and disposable income

Underlying factor of varying characteristics: Economy

- born/raised during great depression changes outlook on money
- expect to leave university with a well paying job
- 25% of people in Canada live in poverty

Underlying factor of varying characteristics: Technology

- gen-z has never seen a time without tech
- first blackberry phone was around before we were born
- integrated into everyday lifestyles
- parents did not have tech therefore have less comfort and trust

Underlying factor of varying characteristics: World event

Local, Nationally, Internationally

Underlying factor of varying characteristics: Parenting

- Each generation takes certain parenting aspects and retains or changes them
- Signing up for activities, tutoring
- Helicopter parents, Bulldozer parents - lack of independence and coping
- Trends that parents and children should be friends

Gen-Z and work

- Meaningful work
- Digital natives
- Work-life balance
- Competitive wages & benefits
- Career advancement
- Several careers
- Civic-minded/CSR
- Feedback & Recognition

Canadian population distribution

- surpassed 40 million
- uneven distribution of ages (sandwich with baby boomers)
- labour force: fewer incoming than outgoing
- economy: fewer supporting pensions
- market: children of boomers = relatively large group
- moving back = more disposable income because parents provide essentials

Implications of canadian pop. distribution

- echo has greater market impact
- vulnerable seniors - demand for care, increasing strain on pension
- potential labour shortages
- senior managers and leaders are exiting the workforce at the same time period; creating gaps, crisis of leadership, hard to replace someone with experience, replace a lot more, prepare for succession
- large gaps in distribution - declining market, intense competition, narrow and fewer customers

Opportunities in canadian pop. distribution

- baby boomers retiring over the next 10 years while our generation begins graduating
- more attractive job market, looking for hires, good quality people with experience and skills (problem-solving, contextual intelligence, leadership skills)

Ethnic combination

- face of industries, important objective to lead and manage diverse workforce
- immigration increasing, they are younger and more likely to live in cities over avg. Canadian
- support service, jobs, many small communities that are ethnically based (little italy/portugal, chinatown, ukrainian descent)

Implications of ethnic combination

many consumers having difficulty interacting with marketplace, affects geographic distribution

Opportunities in ethnic combination

- Difference market segments to provide different solutions, potential for more diverse workforce
- representing communities
- knowledge levels and skillsets from different regions, understand markets better, cultural intelligence
- Adjust strategic approach based on diversity - management style may only work for some employees
- immigration offsets decreasing birth rates

Canadian households

One person household's greater than one-family households:
- 2.5 people per household on average, but not uniformly distributed
- Baby boomers that have lost partners and younger people living on their own

Implications of Canadian households

- Lost economies of scale in living, shopping (xpenses are not shared between people)
- Families face time constraints
- Makes seniors vulnerable
- Multi-generational living (parents living with adult children and adult families to spread out costs; common in some cultures

Hoftstede's institute

- understand another country's culture through comparison to domestic culture (rank masculinity, individuality, etc.)

Opportunities in Canadian households

Individualistic (north america) vs collective viewpoints (eastern)

Geographic distribution

- rural living predominates in Atlantic Canada, Saskatchewan territories
- increasing urban concentration in 4 areas - Golden Horseshoe, MTL, BC, lower mainland and Vancouver, Calgary-Edmonton (donut effect)
- areas with high population density:
- rural communities shrinking (kids born and raised here leave for jobs, no return)
- people working in city need to stay close (donut around downtown)
- bedroom communities (cities during the day and home in suburbs at night)

Implications of geographic distribution

affects median age in rural areas and access to goods and services

Ethics

individual standards or moral values regarding what is right and wrong and good or bad; personally and culturally defined

Business ethics

ethical or unethical behaviours by a manager or employee of a business

Managerial ethics

- standards of behaviour that guide individual managers in their work
- Behaviour toward employees - hiring, firing, wages, working conditions, privacy
- Behaviour toward the organization - employees stealing, padding expense accounts
- Behaviour toward other economic agents - giving employees ultimatums for the benefit of the company, bribes

conflict of interest

occurs when an activity benefits the employee at the expense of the employer

Why does unethical behavior occur? (POR)

- Pressure - employee has a problem that cannot be solved through legitimate means
- Opportunity - employee uses his or her position in organization to secretly solve the problem
- Rationalization - employee sees themself as basically an ethical person caught up in an unfortunate situation

Fair trade movement

movement designed to help workers in developing countries receive fair pay for their work

Social return on investment

- helps companies understand, manage, and communicate the social value of their activities for stakeholders. Successful companies generally focus on these stakeholders:
- Customers
- Employees
- Investors
- Suppliers
- Local communities where they do business

Responsibility toward customers - consumer rights

1. The right to safe products
2. The right to be informed of all relevant aspects of a product
3. The right to be heard
4. The right to choose what they buy
5. The right to be educated about purchases
6. The right to courteous service

Responsibility toward customers - ethics in advertising

1. truth in claims - claims can be demonstrably true but it does not take much to find instances where the truth is violated
2. advertising counterfeit brands - perfume, luggage,
3. use of stealth advertising - companies pay individuals to extol the virtues of their products to other individuals
4. advertising that is morally objectionable - involves portrayals of individuals or products that offend customers' sense of decency

Responsibility toward investors

1. improper financial management
2. misrepresentation of finances
3. cheque kiting - writing a cheque from one account, depositing it into another account and then immediately spending the money from said account while the money is still in transit
4. insider trading - using confidential information from the purchase or sale of stock or info not available to the general investor by buying stock or selling just before its price goes down

Obstructionist Stance

do as little as possible to solve social or environmental problems

Defensive stance

doing everything legally required but nothing more

Accomodative stance

meets legal and ethical requirements but goes further in cases if/when asked

Proactive Stance

take to heart the arguments in favour of CSR, view themselves as good citizens of society and seek opportunities to contribute. Eg. setting up foundations to support social programs

Social audit

systematic analysis of how a firm is using funds earmarked for social responsibility goals and how effective these expenditures have been

Political legal factors - elements

- laws, regulations, policies
- taxes
- trade agreements or conditions - government facilitates globalization

Political legal factors - significance

- protection of consumers; ethical business; financial and physical safety
- support/protection and regulation of domestic businesses; fair competition; entrepreneurship
- opportunity creation in foreign markets

How Businesses influences Government - Lobbying

- Hired to represent company's/group's interest
- Lobbying act - must register and follow rules
- Ingredient lists, inspections, restrictions for businesses
- Trade associations - small businesses/individuals join and lobby as an industry lobby group
- Eg. Telus, Bell, Rogers all have direct connections to politicians; lobby on their own behalf to express priorities

How Businesses influences Government - Collaboration/input

- CRTC consults with industry members
- Canadian government called in CEOs of grocery chains to address high costs of food (inflation of over 10%); diverted it as a supplier problem and rising costs; threatened to regulate the industry if problem was not solved
- Government responds based on society's demands while being cautious of risks of closure; would cost jobs, reduce selection
- Hear nature of the problem, challenges to determine solution, solicit input from industries

How Businesses influences Government - Advertising

corporations influence voters

Government roles and impact on business environment

1. provide services
2. taxation
3. business support
4. laws, regulations

Government Role and impact - Providing services

- crown corporations - owned or controlled by government; provide necessity products and may compete with private businesses
- Eg. Canada Post has monopoly on daily mail but competes with FedEx, UPS
- healthcare services, education - paid for by taxes, quality decreasing due to privatization
- Eg. education heavily subsidized here but college and university are for-profit

Government Role and impact - Taxation

- sales tax, SIN taxes (cigarettes, gas, alcohol)
- different tax systems between countries

Government Role and impact - Business support

establish distribution systems and networks, insights into foreign markets

Government Role and impact - Laws, regulations

allowing domestic businesses to get access to other country's markets in exchange for access to your markets:
- easier to sell internationally
- eliminate trade barriers (tarrifs, duties, taxes, etc.)

Several Liability

1 may be liable for all

Sole Proprietorship

- 25% of businesses in Canada
- Business assets, revenues, resources and profits are the owners' personal property
- Very little regulation, administration
- Start at small-scale
- Business not separate from the owner, unlimited liability
- Pay taxes at personal tax rate
- Get all the benefits

Sole Proprietorship implications

- Harder for financing; need a good personal credit rating, personally responsible for loans
- Not seen as credible
- More risk involved

General Partnership

- All partners have joint and several liability
- Several people put money into company
- Partner capabilities compliment each other; better performance
- Accountability
- Share unlimited liability - only owing for a portion of the liabilities
- Report share as personal income, pay taxes at personal tax rate, share profits

Partnership implications

- Share control; disagreement conflicts
- Create a partnership agreement (legal contract)
- Shotgun clause with dissolving partnership

Limited partnership

- Limited partners liability - investment
- Limited partners cannot be active in management
- At least one general partner
- Strictly an investor, no say in how the business is run and decisions
- Benefits: limited liability, would only lose investment

Corporations

- 70% of businesses in Canada
- public vs private
- Not-for-profit incorporated vs. for profit incorporated

Command economy

- communist, socialist
- can't just open a business - heavy volume of control by government and would likely have to be in partnership