Business Ethics, CSR, and Financial Principles for Students

Define social responsibility (CSR).

How a business balances its commitments to all stakeholder groups.

Who are considered internal stakeholders?

Employees, managers, and owners.

Who are considered external stakeholders?

Customers, suppliers, shareholders, government, and creditors.

What are the five primary stakeholder commitments?

Customers: fair prices; Employees: fair treatment; Investors: accurate reporting; Suppliers: fair pricing; Communities: charitable programs.

What does ESG stand for in relation to CSR?

Environmental, Social, and Governance.

What does the 'E' in ESG refer to?

Environmental aspects like water usage, carbon footprint, and emissions.

What does the 'S' in ESG refer to?

Social aspects like employee diversity, health, and safety.

What is the core definition of ethics?

Beliefs about right/wrong or good/bad; ethical behavior conforms to generally accepted social norms.

What are business ethics?

Ethical or unethical behaviors by employees and managers in job contexts.

What are two formal tools for company practices in ethics?

Written codes of ethics and ethics programs (training, hotlines, committees).

What does the 'G' in ESG refer to?

Governance aspects like board diversity and financial transparency.

What are the four stances on social responsibility?

Obstructionist, Defensive, Accommodative, Proactive.

What is the obstructionist stance on social responsibility?

Does as little as possible, may deny or cover up wrongdoing.

What is the defensive stance on social responsibility?

Does what is legally required, nothing more.

What is the accommodative stance on social responsibility?

Meets and sometimes exceeds legal/ethical minimums.

What is the proactive stance on social responsibility?

Actively seeks ways to contribute, sets up foundations, leads social programs.

What are the three formal dimensions of managing CSR?

Legal compliance, ethical compliance, and philanthropic giving.

What is a whistle-blower?

An employee who reports illegal/unethical behavior internally or to regulators.

What is greenwashing?

Publicly claiming environmental responsibility while actual practices undermine those claims.

What is IKEA's approach to sustainability?

IKEA promotes a circular economy through buy-back and recycling programs.

What are the pros of IKEA's circular economy model?

Addresses waste, builds customer loyalty, aligns with values.

What are the cons of IKEA's circular economy model?

Operationally complex, may reduce new sales.

What is the concept of 'degrowth'?

Purposefully scaling down production and consumption for human well-being rather than profit.

What is one criticism of IKEA's sustainability claims?

Allegations of selling furniture linked to illegal logging despite claims of sustainability.

What are the primary interests of stakeholders in a business?

Fair treatment, quality products, accurate reporting, and community welfare.

What can top management do to formalize ethical business practices?

Implement written codes of ethics and establish ethics training programs.

What are the four characteristics of money?

Portability, Divisibility, Durability, Stability

Define portability in the context of money.

Portability refers to money being easy to carry.

What does divisibility mean regarding money?

Divisibility means money can be broken into smaller units.

Explain durability as a characteristic of money.

Durability means money doesn't wear out or spoil and is easily replaced.

What does stability refer to in terms of money?

Stability refers to money having a predictable, consistent value.

List the three functions of money.

Medium of exchange, Store of value, Measure of worth

What is M1 in the context of measuring the money supply?

M1 is the actual purchasing power, including cash, checkable deposits, and traveler's checks.

What does M2 include in the money supply?

M2 includes M1 plus converted forms of spendable money like savings accounts and time deposits.

What are time deposits?

Time deposits are funds with a fixed term to mature that cannot be withdrawn earlier or transferred.

How do credit cards differ from debit cards in terms of money supply?

Credit cards create debt and are not included in M1 or M2, while debit cards transfer funds immediately and are included in M1.

Is cryptocurrency considered money?

Cryptocurrency is not typically considered money as it does not satisfy all four characteristics of money.

What is the role of stablecoins in the financial system?

Stablecoins function as a digital cash/hybrid payment mechanism but are not absolutely stable.

What percentage of deposits do commercial banks hold?

Commercial banks hold 85% of deposits.

What is the primary function of commercial banks?

Commercial banks accept deposits, make loans, earn profit, and pay interest and dividends.

What is the primary focus of Savings and Loan Associations (S&Ls)?

S&Ls are primarily focused on home mortgages.

What do mutual savings banks do?

Mutual savings banks are owned by depositors who share in the profits.

What is the function of pension funds?

Pension funds pool retirement savings for future payouts.

How do banks create money?

Banks create money by holding a fraction of deposits and lending the rest, following the reserve requirement.

What is the prime rate?

The prime rate is the lowest rate banks offer to their most creditworthy customers.

What does the Federal Deposit Insurance Corporation (FDIC) do?

The FDIC insures deposits up to $250,000 per account and oversees failed banks.

What are the key functions of the Federal Reserve System?

Conduct monetary policy, supervise financial institutions, promote consumer protection, foster payment system safety, maintain financial stability.

What is the reserve requirement?

The reserve requirement is the percentage of deposits that banks must hold in cash or at the Fed.

What is the discount rate?

The discount rate is the rate the Fed charges member banks for loans.

What are open market operations?

Open market operations involve the Fed buying or selling government securities to manage the money supply.

What is the FOMC's goal regarding the federal funds rate?

The FOMC aims for maximum employment and stable prices, targeting around 2% inflation.

How does a decrease in the fed funds rate impact the economy?

A decrease leads to cheaper borrowing for banks, lower lending rates, increased consumer spending, and higher demand for goods.

What is the difference between debt and equity financing?

Corporations raise far more through debt (bonds) than equity (stocks).

What is the Time Value of Money (TVM)?

The principle that a dollar today is worth more than a dollar in the future because it can be invested to grow.

What is the formula for Future Value (FV)?

FV = PV (1 + i/n)^(n t), where PV is present value, i is interest rate, n is compounding periods per year, and t is years.

How do you calculate Present Value (PV)?

PV = FV * 1/(1 + r)^n, where FV is future value, r is discount rate, and n is number of years.

What does the Rule of 72 estimate?

It estimates how long it takes to double your money by dividing 72 by the annual interest rate.

What are the two main types of securities?

Equity securities (ownership in a company) and debt securities (loans to a company).

What is a corporate bond?

A formal IOU obligating the issuer to pay periodic interest and repay principal at maturity.

What is the difference between a primary market and a secondary market?

The primary market is where new stocks/bonds are issued for the first time, while the secondary market is where existing securities are traded among investors.

What is a bull market?

A market condition characterized by rising prices lasting 12 months or more, indicating investor confidence.

What is a bear market?

A market condition where prices fall 20% or more from a peak, indicating investor pessimism.

What is systematic risk?

Risk that affects all investments, such as inflation and interest rates, and cannot be diversified away.

What is unsystematic risk?

Risk that affects only one company or industry and can be reduced through diversification.

What is the formula for total return percentage?

Total return % = (annual dividend + capital gain) / original investment * 100.

What is the impact of higher interest rates on wealth accumulation?

Higher interest rates lead to dramatically faster wealth accumulation due to compounding.

What is equity financing?

A method of raising capital by selling shares of ownership in a company, which dilutes ownership.

What is debt financing?

A method of raising capital through loans that must be repaid, allowing owners to keep full control.

What factors should a company consider when choosing between debt and equity financing?

The company's stage, credit quality, and how much control matters.

What is the role of banking in the economy?

Banks facilitate the flow of money, provide loans, and manage deposits, influencing the money supply.

What are the components of M-1 and M-2 in money supply?

M-1 includes cash and checking deposits, while M-2 includes M-1 plus savings accounts and other near-money assets.

What is the significance of the discount rate in present value calculations?

The discount rate accounts for the risk and time value of money when evaluating future cash flows.

How can diversification help manage investment risk?

By spreading investments across various companies, industries, and asset classes to reduce unsystematic risk.

What is a mutual fund?

A pooled investment in a portfolio of stocks and bonds managed by a firm.

What is an Exchange-Traded Fund (ETF)?

A bundle of stocks that are in an index but traded like a stock to track the overall movement of a market.

What is the dividend discount model?

A valuation method that calculates the present value of expected future dividends.

What is the free cash flow valuation model?

A method estimating future cash that could be paid to owners for firms reinvesting profits.

What is the earnings multiple valuation model?

A quick comparison method that multiplies company earnings by an industry-norm P/E ratio.

What is the discounted cash flow valuation method?

A valuation approach based on the total cash generated for its owners over time.

What factors should be considered when ranking investment risks?

Safety, potential gain or income, volatility, liquidity, and whether the investment is insured/guaranteed.

What are the lowest risk investments?

Investments backed by the government and insured, such as savings accounts, treasury bonds, and money market funds.

What types of investments fall under moderate risk?

Bonds (municipal, corporate), preferred stocks, Real Estate Investment Trusts (REITs), and convertible bonds.

What are examples of higher risk investments?

Common stocks, venture capital, and cryptocurrency.

What is a no-load mutual fund?

A mutual fund that does not charge a sales commission when buying or selling.

What distinguishes a load mutual fund from a no-load fund?

A load fund charges a commission (2-8%) when buying or selling.

What is an index/passive mutual fund?

A mutual fund that tracks a market index.

What is the primary difference between ETFs and mutual funds in terms of trading?

ETFs are traded like stocks throughout the day, while mutual funds are priced once at the end of the day.

What is the average fee for mutual funds compared to ETFs?

Mutual funds average 1.4% per year, while ETFs can go as low as 0.04% per year.

What are the sources of debt financing?

Secured loans, unsecured loans, and corporate bonds.

What are some sources of equity financing?

Initial public offerings (IPOs), angel investors, venture capital, and retained earnings.

What is a secured loan?

A loan where an asset is pledged as collateral.

What is a bond indenture?

A legal contract detailing all bond terms, maturity date, and obligations.

What does IPO stand for?

Initial Public Offering, the first sale of company stock to the general public.

What is the definition of an angel investor?

A wealthy individual investing in early-stage firms for equity, often up to 50% ownership.

What are retained earnings?

Profits kept by the firm rather than paid as dividends, with no borrowing costs.

What do bond risk ratings indicate?

The safety of bonds, with ratings like Aaa/AAA being the safest and C/CCC-D indicating junk bonds.

What is leverage in finance?

Using borrowed money alongside equity to amplify returns and risks.

What is an LBO?

Leveraged Buyout, acquiring a company primarily using debt financing.

What is the formula for market capitalization?

Market cap = stock price * shares outstanding.

What does the SEC do?

The Securities and Exchange Commission regulates securities markets and enforces laws against insider trading.