Business Essentials, Sixth Canadian Edition, with MyBusinessLab, 6E Ronald J. Ebert Solution Manual.

Part 5—Managing Financial Issues A. Primary and Secondary Markets for Securities—Primary securities markets handle the buying and selling of new stocks and bonds. Bringing a new security to market requires approval from the provincial securities commission and the services of an investment banker (whose three functions are described).

The secondary securities market handles the purchase and sale of existing stocks and bonds.

1.

Investment banking—Investment bankers provide specialized services when new securities are issued. They advise companies on the timing and financial terms for a new issue, bear some of the risk of issuing new securities, and create a distribution network that moves new securities through groups of other banks and brokers and into the hands of individual investors.

X.

STOCKS A. Common Stock—Stocks are bought in the hope of a capital gain and/or dividend income. Stock values are expressed in three ways: 1.

Par value—This is the face value of the stock, which has almost nothing to do with the real value of a share.

2.

Market value—The current price of a share in the stock market is its real value. Market capitalization is computed by multiplying the number of a company’s outstanding shares times the market value of each share.

3.

Book value—This represents shareholder's equity (i.e., the sum of all common stock, retained earnings, and additional paid-in capital) divided by the number of shares of common stock.

Preferred Stock—Usually issued with a stated par value, preferred stock pays B. dividends as a percentage of par value. Some preferred stock is callable so the issuing firm can require the shares be surrendered in return for a predetermined call price.

C. Stock Exchanges—A stock exchange is a voluntary organization (typically a non-profit corporation) formed to provide an institutional setting where its members can buy and sell stock in accordance with the exchange's rules.

A stockbroker receives buy and sell orders from those who are not members of the exchange and executes the orders. Online trading is increasing in popularity.

1.

Canadian stock exchanges—The Toronto Stock Exchange is the largest in Canada. The other two Canadian stock exchanges (The Canadian Venture Exchange and Montreal Stock Exchange are mentioned.

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Chapter 15—Money, Banking, and Securities Markets 2.

Foreign stock exchanges—Many countries have stock exchanges. a.

The New York and American Stock Exchanges—The most prominent of all U.S. stock exchanges (the New York Stock Exchange) is described. b.

Other foreign stock exchanges—London is the single largest exchange and foreign exchanges have become increasingly important to investors wishing to diversify (but some of them are very risky and volatile).

The over-the-counter (OTC) market—Securities not listed on any

3. exchanges are traded in this complex of investment dealers.

4.

NASDAQ—The National Association of Securities Dealers Automated Quotation is the world’s first electronic stock market.

XI.

BONDS All corporations issue common stock (which represent ownership), but not all issue bonds (which represent indebtedness). As well, bonds are issued by non- profit organizations and by governments. Bonds are defined and bond-rating services are described.

A. Government Bonds—These bonds (e.g., Canada Savings Bonds) are sold and backed by the federal government. Provincial and local governments also sell bonds.

B. Corporate Bonds—A major source of long-term financing for Canadian corporations, these corporate bonds have long maturities (10, 20, or 30 years) and, as such, are riskier than shorter-term bonds.

1.

Interest payment: Registered bonds—These register the names of the owners with the company, while Bearer Bonds require bondholders to clip coupons from the certificates and send them to the issuer to receive payment.

2.

Bond security—Assets are pledged as collateral in the event of non-payment. Unsecured bonds are called debentures and are often used by financially strong corporations.

3.

The Retirement of bonds—All bonds must be paid off or "retired" at some point. Most are callable but some are serial or convertible. a.

Callable bonds—The issuer can pay off the bond before the maturity date at a predetermined price (the call price). An example .

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Part 5—Managing Financial Issues is given. The sinking funds provision in the bond contract requires the issuing company to put enough money into a special bank account each year to cover the retirement of the bond issue on schedule. b.

Serial and convertible bonds—These are defined and an example is given.

XII.

OTHER INVESTMENTS A. Mutual Funds—A mutual fund is a company that pools investments from many investors to purchase a portfolio of stocks, bonds and short-term securities.

No-load funds and load funds are described. Funds differ in their investment goals (e.g., safety or higher income or growth).

1.

Ethical funds—These are mutual funds that avoid in investing in companies like cigarette manufacturers or companies that make weapons.

Instead, they focus on companies that produce safe and useful products and show concern for their employees and for the environment.

Hedge Funds—These are private pools of money that try to give investors

B. a positive return regardless of stock market performance. But these funds often engage in risky practices like short selling and leveraging.

C. Commodities—Buying and selling commodities as an investment is done on the commodities market through futures contacts. Futures trading is very risky.

1.

Margins—Buyers of futures contracts need not put up the full purchase amount; rather, they can post a smaller amount--the margin--that may be as little as 3 percent of the value of the contract. An example is provided, noting the use of a margin.

Stock Options—These give one the right to buy or sell a stock.

D. Specifically, a call option gives the right to buy a stock at a certain price up to a specific date whereas a put option gives the right to sell at a specified price until a certain date. These options are traded on some stock exchanges. An example illustrates the use of stock options.

XIII. BUYING AND SELLING SECURITIES This complex process begins with learning about possible investments and matching them to your investment objectives, then selecting a broker, opening an account, and placing orders for transactions.

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Using Financial Information Services .

Chapter 15—Money, Banking, and Securities Markets 1.

Stock quotations—Figure 15.5 shows how to read a newspaper stock quotation.

2.

Bond quotations—Bond prices change daily forming the coupon rate. The relationships among market value, face value and interest rates of bonds are discussed. Figure 15.6 shows how to read a newspaper bond quotation. a.

An example is used to illustrate the idea of bond yield.

3.

Market indexes—These provide a useful summary of trends in a specific industry or the stock market as a whole. Bull and bear market trends are described. a.

The Dow Jones Industrial average—This is the most widely cited market index. It is the sum of market prices for 30 of the largest industrial firms listed on the NYSE. b.

The S&P/TSX average—This is an index computed from 225 different large Canadian stocks. c.

The S&P 500—This index consists of 500 stocks, including 400 industrial firms, 40 utilities, 40 financial institutions, and 20 transportation companies. d.

The NASDAQ composite—Many observers regard this index as the most important one since it includes all the stocks listed on the NASDAQ. B. Buying and Selling Stocks—Due to major changes in the industry, more and more individuals are buying and selling stocks on the internet, and the traditional brokers are worried that before long their services will no longer be needed. In this section the discussion focuses on market orders, limited orders, stop orders, round lots and odd lots.

C. Financing Securities Purchases—A cash account with a broker can be used to cover the costs of purchases and commissions or credit can be used.

1.

Margin trading—The advantages and disadvantages (to both buyers and brokerages) of buying stock on margin are described.

2.

Short sales—This involves borrowing securities from your broker and then selling them in the expectation that they can be replaced later at a lower price. An example is used to illustrate short selling.

XIV.

SECURITIES REGULATION .

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Canadian regulation is not federal (as in the U.S.) but primarily through the provincial governments. Also, there is some self-regulation through the securities exchanges. Typical provincial regulations are described (e.g. blue-sky laws, the filing of a prospectus). The Ontario Securities Act and Toronto Stock Exchange regulations are discussed.

QUICK QUESTIONS 1.

Explain each of the following characteristics of money: portability, divisibility, durability, and stability.

2.

How is it that chequing accounts can be counted as part of M-1?

3.

Why are credit cards not a part of M-1 or M-2?

4.

What are ways in which financial institutions have diversified in recent years?

5.

Who are considered the owners of credit unions?

6.

How do consumers benefit from electronic funds transfer?

7.

How do chartered banks create money?

8.

How does the Bank of Canada control the money supply through open-market operations?

9.

For what purpose might an individual use a smart card?

10.

What are some potential drawbacks of using e-cash?

11.

When does money have to flow between two countries during the international payments process?

12.

For what purposes has the International Monetary Fund been designed?

13.

What is the role of an investment bank with regard to new issues of stock?

14.

Why might investment in shares of a preferred stock be less risky than an investment in shares of a common stock?

15.

What type of investor is most likely to be attracted to online trading?

16.

What type of investor would prefer the services of a full-service broker?

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What are some circumstances under which a corporation might want to sell bonds?

18.

Bearer bonds require bondholders to clip coupons from certificates and send them to the issuer to receive an interest payment. Why might this be risky?

19.

What are stock price trends in a bull market? What are stock price trends in a bear market?

20.

How do limit orders an stop orders provide investors with security?

21.

How do investors trade on margin?

22.

From the investor’s perspective, what are the risks associated with short selling?

23.

Who benefits from blue-sky laws? How do they benefit?

IN-CLASS EXERCISES

Exercise #1: How Much Would That Be in, Say, Chocolate Bars?

Activity Overview: This exercise asks students to consider the characteristics of money when making purchases using something other than “money.”

Time Limit: 30 minutes 1.

What toDivide Do: the class into groups of two.

2.

Ask each group to consider making the following purchases: (a) X number of cans of soda for X number of gallons of gasoline (b) X of overtime for of X number of extra days vacation per to X number number of of hours days without the use a cell phone for X number of days year (c) use of a car Ask each group member to interview his or her partner to determine just how 3. many cans of soda he or she would be willing to “pay” for a gallon of gas, how many hours of overtime would be worth an extra one day of vacation from work, and how many days he or she would be willing to give up the use of a cell phone in order to have access to a car. (15 minutes) 4.

Ask each group to discuss whether any “characteristics” of money are evident in these transactions. (5 minutes) .

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Reassemble to class and share some of the groups’ responses. (10 minutes) Don’t Forget: Students’ perceived values in each of the above transactions will vary greatly; for example, a student without a cell phone would not miss it much in order to use the car, etc.

Wrap Up: Bring the activity to a close by providing a brief overview of the characteristics of money, relating them to the previous transactions.

Exercise #2: Spare a Simec?

Activity Overview: This activity asks students to read a supplemental case study and to consider “nontraditional currencies.”

Time Limit: 30 minutes What to Do: 1.

Make copies of the material below and distribute to students in advance of the class when this exercise will be conducted.

------------------------------------------------------------------------------------------------------Have you ever spent a simec? Unless you’ve visited the hilltop village of Guardiagrele, Italy, you’ve probably never encountered this colorful local currency. But Giacinto Auriti, a retired law professor whose family has lived in the town for centuries, has been issuing simecs as his own legal currency for over a year.

In an eccentric battle against the Italian central bank, Professor Auriti has won many local converts to his legal tender, which he prints at his own expense and distributes from his home in exchange for Italian lire (the exchange rate is 2 lire to 1 simec). The result has been like a jolt of adrenaline for local businesses. One haberdasher reported doing the business of a month in a single day after the introduction of the simec. At the lire-simec exchange rate, all his shirts, suits, and topcoats were selling at half-price. Within a few months about 2 billion simecs (worth about $1.9 million) were in local circulation.

It was then that local officials stepped in to impound the homemade currency, but a provincial court overruled the decision, stating that while Italian law forbids counterfeiting, there is no law against printing one’s own currency. (An appeal is underway.)

Professor Auriti recently estimated that there were about 200 million simecs in circulation now, accepted mainly by clothing stores, shoe stores, and jewelers. Many 504

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Chapter 15—Money, Banking, and Securities Markets citizens of Guardiagrele have taken to carrying both lire and simecs in their wallets these days, including Mayor Franco Caramanico and his wife.

If the professor follows through on his theory of money—he believes that money should be distributed freely and not be rationed at interest through central banks, and that taxpayers should be compensated with simecs for what they pay in lire—then he will eventually require large amounts of currency to give to the town’s citizens, and he could risk inflation if he creates it. Another danger is the possibility that public confidence in the simec could slip. The professor is not legally bound to redeem simecs, and if there were a run on them some citizens could suffer losses.

“The basis of it all is trust,” says Mayor Caramanico. “If there is trust and the simec is accepted—fine. If not, there are risks.”

Questions for Discussion 1.

Should it be legal to print your own money? Why or why not?

2.

How could Professor Auriti prevent inflation, given his theory of money?

3.

Some 60 different U.S. communities have their own local “currencies,” some of which are measured in units other than money, such as “Ithaca hours” in upstate New York. What do you think allows these currencies to function in their communities, and how well do you think non-monetary units can function as money?

Sources: John Tagliabue, “A Legal Tender of One’s Own,” New York Times, January 30, 2001, W1; www.lightlink.com/hours/ithacahours/home.html.

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Divide students into three- or four-person groups and ask them to answer the questions for discussion in their small groups. (15 minutes) 3.

Once students have answered the questions, discuss their answers as a class. As students discuss their answers, make sure they bring up the following points: (15 minutes) (1) Students should recognize the simplicity of having a single currency as well as the creative options for barter that a many-currency system would offer.

(2) He would have to regulate the supply of simecs, which is apparently at odds with his other theories about money.

(3) All these currencies are based on trust that they have value. If people have confidence that their currency can be traded for goods and services they need and want, it can function as money.

.

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Part 5—Managing Financial Issues Don’t Forget: This activity can also be completed as a homework assignment.

Wrap Up: Close the activity with an overview of the characteristics of money and the functions of money; be sure to mention that a world economy, such as ours, cannot thrive on various forms of non-monetary units.

Exercise #3: Fixing the System on a National Scale Activity Overview: This activity asks students to consider the implications of the interest rate-setting policy Canada has adopted.

Time Limit: 30 minutes 1.

Make copies of the article below and distribute to students in advance of the class when this exercise will be conducted.

What to Do: ---------------------------------------------------------------------------------------------------Fixing The System On A National Scale Bankers and economists recently did a follow-up evaluation of the Bank of Canada’s fixed-date system, launched in December 2000, for announcing its key policy interest rate—the overnight rate that individual banks pay to borrow from one another.

The overnight rate is among the bank’s strongest tools for influencing short-term interest rates that, in turn, affect mortgage rates, prime rates charged by chartered banks, and other asset prices in Canada’s financial markets. Under the old system, the bank’s monetary policy decisions could be made on any business day, without warning, and were governed largely by tactical considerations. That’s quite different from today’s announcements on eight pre-specified or “fixed” dates each year.

The changeover to fixed dates was launched with four objectives in mind, including one that involves the bank’s accountability. First, policymakers wanted to reduce uncertainty in Canada’s financial markets by eliminating investors’ guesswork about when rate changes would be announced. Knowing that the bank would make changes only on specific dates would allow financial institutions to plan ahead without fear of unexpected rate changes. A second objective was to overcome an unfavorable public perception that Canada was taking its cues for monetary policies from those of the U.S. Federal Reserve. The new system would provide greater focus on Canada’s economic context rather than its relationship to U.S. conditions. The third objective was to increase the public’s awareness of the forward-looking nature of monetary policy, requiring 18 to 24 months to have its full impact on the economy instead of thinking only of its short-term results. The final objective concerns the bank’s accountability to the public. In addition to making monetary policy understandable by explaining clearly to 506

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Chapter 15—Money, Banking, and Securities Markets Canadians the how’s and why’s of its decisions, the bank has an obligation to let citizens know how well it’s doing its job and report its progress in meeting the objectives.

Follow-up evaluations on the first objective indicate a reduction of economic uncertainties resulting from reduced volatility of interest rates under the fixed-date system. For the second objective—greater focus on Canada’s economic context—media coverage has shifted more to Canadian economic issues as separate from U.S. conditions. Writing in the Globe and Mail on monetary policy two years into the fixeddate system, for example, Bruce Little commented, “Our economy has followed a different path than that of the United States. . . . [W]hat happens in the U.S. affects Canada, but Canada’s economy is not a clone of the U.S. economy.” Shifting of the public’s perspective from short- to medium-term still poses a significant challenge because the public tends to be impatient about looking beyond a week or month for monetary policy to take affect.

Regarding accountability, the fixed-date system has helped in several ways.

Among the bank, investors, and financial institutions, regularity of communications has brought a convergence of expectations on the overall direction of monetary policy. It has improved the predictability of Bank of Canada decisions by eliminating surprises in terms of timing and enables financial institutions to better anticipate the general direction of interest rates. Finally, fixed-announcement dates have given Canadians a regular opportunity to hear the bank’s recent views about the economy and its current thinking about monetary policy. The net effect is a more stable economic environment, an obligation for which the bank is accountable to the Canadian public.

Questions for Discussion 1.

The changes that have been made at the Bank of Canada seem very positive. Can you think of any negative aspects to announcing interest rate changes only on set dates?

Consider the following statement: “Because the U.S. has a much larger 2. economy than Canada does, it is not really realistic to think that Canada can chart a different economic course than the U.S. can. We really have no alternative but to move pretty much in lockstep with the U.S.” Do you agree or disagree with this statement?

Explain your reasoning.

Source: Nocolas Parent, Phoebe Munro, and Ron Parker, “An Evaluation of Fixed Announcement Dates,” Bank of Canada Review, Autumn 2003, p. 3.

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Divide the class into three-member groups and ask them to answer the questions for discussion within their groups. (15 minutes) 2.

After groups have had a chance to discuss their answers among themselves, reassemble the class and compare each group’s input. (15 minutes) Answers to the questions are as follows: .

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(1) One negative aspect is that changes in the state of the economy that occur between announcement dates may be significant enough to have an inflationary or deflationary effect on the economy before the next announcement date. This may cause distortions and in the system and speculation as people wait for the next announcement.

(2) Students who agree with this statement will point to the similarities and geographical closeness of the U.S. and Canada, as well as the long history of similar movements in the two economies. Students who disagree with the statement will point to the surprising divergence in the two economies in recent years. For example, Canada has become recognized as a world-class exporter of oil, the value of the Canadian dollar has risen to about par with the U.S. dollar, and the Canadian housing market is very strong, while the U.S. housing market has major problems.

Some additional suggestions for classroom discussion are as follows: The article indicates that the Bank of Canada has been successful in its objective of increasing its accountability to the public, giving Canadians a regular opportunity to hear the bank’s recent views about the economy, and its current monetary policy. At the same time, it has not been successful in shifting the public’s views about the time necessary for the effects of interest rate changes to occur. Have students discuss this apparent conflict. Is the fourth objective really one of simply making the information available or is the intention to increase the level of understanding? Are the target audiences the same for the third and fourth objectives?

Ask the students to evaluate the Bank of Canada’s success in meeting its four objectives from their perspective as part of the Canadian public.

Don’t Forget: This activity can also be completed as a homework assignment.

Wrap Up: Close the activity with an overview of the role of monetary policy.

Exercise #4: Your Cheque Is Not in the Mail Activity Overview: This activity asks students to consider the advantages and disadvantages of replacing traditional cheque writing with electronic payments.

Time Limit: 20 minutes What to Do: 1.

Ask students to work independently to make a list of pros and cons of using traditional cheque writing and a list of pros and cons of using debit cards. (10 minutes) 508

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Chapter 15—Money, Banking, and Securities Markets 2.

Bring the class together to discuss the pros and cons of each option. Which option does the class prefer? Why? (10 minutes) Don’t Forget: To come up with an overall class preference, you may want to take a vote. Note: Using debit cards might allow for an easier comparison since many students are more likely to use debit cards than cheques.

Wrap Up: Bring the debate to a close by highlighting some of the advantages and disadvantages mentioned for each option; remind students that cheque writing is expected to be completely replaced by electronic payments.

Exercise #5: What Should I Buy? Activity Overview: This activity asks students to make preliminary purchasing decisions about stocks based on what they already know about the companies and the stock market in general.

Time Limit: 30 minutes What to Do: 1.

Ask students to assume that they are being given $20,000 to invest in four company stocks but that they must choose from the following companies: • McDonald’s Corporation • Microsoft • Research-in-Motion • Ballard Power Systems • Marketing Technologies, Inc. • JDS Uniphase • Walmart • Amazon.com • Google 2.

Divide the class into three-member groups so students can discuss these companies before making their investment decisions. As students make their decisions, ask them to write down their rationale for selecting the stocks they did as well as how much they invested in each one. (15 minutes) 3.

Assemble the class as a whole to discuss their choices (15 minutes): (a)

How did students select their stocks?

(b)

How much did they know about the companies in which they invested? .

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Part 5—Managing Financial Issues (c)

Did the discussion with other group members affect their decisions?

(d)

What factors affected the allocation of the $20,000?

Don’t Forget: Some students will know more about investing than others.

Wrap-Up: Bring the activity to a close by discussing the importance of doing “homework” on a particular company before investing in it. Very few students (or potential investors) would know enough about any of the above companies to make a sound investment.

Company reputation can mean a lot when an individual chooses to make an investment, but this type of investing is not always prudent.

Exercise #6: Accountability Goes Professional Activity Overview: This activity asks students to consider the importance of professional designations among financial advisors.

Time Limit: 30 minutes What to Do: 1.

Make copies of the following material and distribute to students in advance of the class when this exercise is to be conducted.

-------------------------------------------------------------------------------------------------------Investment recommendations by financial advisors offer clients possibilities of both dire losses and hoped-for financial gains. As professionals, advisors should be, but sometimes haven’t been, trustworthy stewards of clients’ private information. That’s why the financial industry, as early as 1947, began establishing societies that later merged to become the Association for Investment Management and Research (AIMR). Today, its members include more than 60,000 investment practitioners—securities analysts, portfolio managers, financial strategists—and educators in more than 100 countries.

AIMR serves three broad areas for which members are accountable—continuing education, conduct and ethics, and standards of practice—to maintain high standards of professionalism in their field.

The association’s flagship activity is the Chartered Financial Analyst (CFA) program. Regarded as the industry’s premier certification, the CFA designation has been earned by more than 55,000 investment professionals, from among some 480,000 CFA exam-takers, since 1963. Commenting on the value of the CFA designation, Charles Ruifrok, Jr., CFA and portfolio management associate at Bank of America says, “Since becoming a CFA charterholder, I have become a resource to others I work with and a mentor to younger associates. The charter has expanded my visibility in my firm. Clients have taken notice, too.” Industry giants, such as Citigroup, Prudential Financial, 510

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Chapter 15—Money, Banking, and Securities Markets Morgan Stanley, and Deutsche Bank, encourage and compete for CFA professionals in banking, investments, mutual funds, insurance, and consulting.

Earning a charter involves a progression of postgraduate tests and three years of professional experience. The program’s three levels of study each requires 250 hours of preparation and an examination covering a broad-based “Body of Knowledge” for the investment community. Level 1 includes tools and concepts for determining the value of investments, portfolio management, and AIMR’s code of ethics and professional conduct.

Level 2 applies the tools from Level I in analyzing investments and applies the code of ethics and conduct in practical situations. Level 3 explores the portfolio management process, including ethics and conduct, in thorough detail. After meeting these requirements and signing a professional conduct statement, the AIMR member has the right to use the CFA designation.

While the testing hurdle is a one-time requirement, professional accountability is a never-ending obligation. Every year, members must disclose any customer complaints or disciplinary procedures about their professional conduct. The public, too, may file complaints against an AIMR member for unethical behavior, misconduct, or incompetence. Officials review each disclosure or complaint and conduct inquiries that could lead to disciplinary actions. Punishments range from letters of caution to public censure, and even removal from membership or revocation of the CFA charter.

Continuous accountability is a cornerstone for maintaining ethical and professional standards.

Questions for Discussion 1.

What might the CFA designation indicate to clients?

2.

How might a financial advisor benefit from having the CFA designation?

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Divide the class into groups of three and ask them to answer the questions for discussion in their small groups. (20 minutes) 3.

After groups have had a chance to discuss their answers among themselves, reassemble the class and compare each group’s input. (10 minutes) Don’t Forget: This activity can also be assigned as homework.

Wrap-Up: Wrap up the exercise by highlighting the purpose of the CFA designation and how a financial advisor might benefit from having it.

Exercise #7: Market Ups and Downs

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Part 5—Managing Financial Issues Activity Overview: This activity asks students to study a particular stock in order to understand the forces that affect fluctuations in stock prices.

Time Limit: 1 hour What to Do: 1.

Ask students to individually complete Steps 1 through 4 of the Building Your Business Skills exercise at the end of Chapter 15. In these steps, each student is asked to select a common stock that has experienced considerable price fluctuations in the past few years, study the stock’s trading pattern, and write a brief analysis of the internal and external factors that could have contributed to the stock’s price fluctuations. (30 minutes) Divide the class into small groups and ask them to discuss their individual 2. findings, as stated in Step 5 of the exercise. (15 minutes) 3.

Reassemble the class and discuss students’ input. (15 minutes)

Don’t Forget: If time is limited, Steps 1 through 4 can be assigned as homework prior to the discussion in Step 5.

Wrap-Up: Remind students that studying stock price fluctuations can sometimes be difficult since the causes of price fluctuations are not always evident. Bring the activity to a close by highlighting some of the generalizations made by students regarding their stocks and the industries in which the companies perform.

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Exercise #8: How Much Is That Violin in the Window? Activity Overview: This activity familiarizes students with types of investments other than securities that share some similar “features.”

Time Limit: 30 minutes What to Do: 1.

Make copies of the article below and distribute to students in advance of the class when this exercise is to be conducted.

--------------------------------------------------------------------------------------------------------If a wooden object appreciates in value from $1.2 million to $3.5 million, it must be very special indeed. Robert McDuffie, a rising U.S. violinist, would call it “an extension of my musical personality”—a rare 1735 Guarneri violin that he yearned to own but knew he would never be able to afford.

Mr. McDuffie finally found a way to play the treasured instrument when he put together a group of 16 investors who call themselves the 1735 del Gesù Partners LP. The 16 partners purchased the violin from its owner, Dietmar Machold, of Machold Rare Violins in New York, as an investment, by pooling shares in the venture of $100,000 each.

They are leasing it to Mr. McDuffie, but instead of paying monetary rent, he will play the violin, which enables it to maintain its value and continue to appreciate, and he will also pay for maintenance and insurance, totaling between $15,000 and $20,000 per year. At the end of the 25-year lease, the violin must be returned to the partnership, which will then sell it for a profit. One conservative estimate of the violin’s future value, if it appreciates at a reasonable 5.5 percent per year, is close to $10.3 million.

Mr. Machold holds 3.5 of the shares. “Prices never go down for these instruments,” he said. “They only go up.” While that has been true in the past, not all the investors are in the partnership for the money.

“That really isn’t what it’s about for me,” says John Townsend, another of the partners. “It’s about my friendship with Bobby [Mr. McDuffie] and my interest in his career.”

The financial prospects are certainly bright, however. And the investors have the satisfaction of seeing Mr. McDuffie further his budding musical future, in addition to which they can expect to hear two private concerts a year, receive a newsletter about the musician’s other performances, and attend an annual event at Mr. Machold’s castle in southern Austria. The arrangement is a bit unusual; in Europe, the Middle East, and Japan, musicians who play such venerated instruments are able to borrow them for little or no money from the governments and businesses that own them. But Mr. McDuffie hopes his idea catches on.

Questions for Discussion

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How is the 1735 del Ges Partners’ investment different from a traditional investment in securities like stocks or bonds? How is it the same?

2.

How much of a risk do you think the investors are taking? What do you they hope to get back for their money?

3.

think

Can you think of any other applications for this model of investing?

Source: Susan Elliott, “Investment Opportunity. Strings Attached,” New York Times, February 6, 2001, E1, E8.

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Divide students into groups and ask them to answer the questions for discussion in their small groups (15 minutes): 3.

Once students have answered the questions, discuss their answers as a class. As students discuss their answers, make sure they bring up the following points: (15 minutes) (1)is different in that it is a partnership, it is an investment in a rare object, It and it is also, in part, an investment in the violinist’s career, which has intangible returns. It is the same in that it is for a specified time limit and entails both risk and the opportunity for monetary return.

(2) Students’ views of the risk will vary. The investors hope to get back their money and a considerable profit; those who are close to Mr. McDuffie also hope to further his career.

(3) Answers will vary, but students will mention various investment options that are not included in securities markets.

Don’t Forget: There are many forms of investments whose market values fluctuate based on a variety of factors.

Wrap-Up: Wrap up the activity by mentioning that each student’s assessment of the risk inherent in the case, just as is the case in investing in market securities, will vary.

Exercise #9: What’s Wrong with a Little Inside Scoop?

Activity Overview: This activity asks students to debate the pros and cons and issues surrounding insider trading.

Time Limit: 30 minutes 514

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Chapter 15—Money, Banking, and Securities Markets

What to Do: 1.

Divide the class into four-member groups and ask each group to make a list of the disadvantages of insider trading. Then ask each group to make a list of the advantages facing the market, brokers, and stockholders if insider trading were to be declared legal.

Students can consider the following questions as conversation starters in their groups: (15 minutes) (a)

Would insider trading actually make the market more efficient?

(b)

Who is really hurt in most cases of insider trading?

(c)

Why is insider trading illegal?

2.

Assemble the class as a whole and debate the pros and cons of insider trading. (15 minutes) Don’t Forget: In advance, consider giving students some time to research specific cases of insider trading as a supplement to this debate. The class can then discuss specific cases and the levels of perceived fairness in the results of each case.

Wrap-Up: Bring the debate to a close by outlining some of the major arguments presented in the debate. Then, provide some reasons for the illegal nature of insider trading.

TEACHING TIPS 1.

Point out that just about any object that can serve as money if it is portable, divisible, durable, and stable.

2.

Students often confuse the characteristics of money with the functions of money.

At this point, a quick review of both may be helpful.

3.

Prior to the discussion of M-1 and M-2, it may be helpful to point out that the value of money depends on its supply— meaning how much is in circulation; the value of money drops when supply is high, for example.

4.

Students should keep M-2 separate from M-1. M-2 includes M-1 plus other forms of money that are not quite as liquid, such as time deposits, money market mutual funds, and savings accounts.

5.

For the average citizen, interest in making money has so fascinated us that we find it hard to look upon money as anything other than a means toward wealth and prosperity. Wealth itself is measured by the size of money one has accumulated. Given this, you may want to moderate a discussion that helps students see that money is nothing .

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Part 5—Managing Financial Issues more than another commodity, such as corn, cocoa, pork, or wheat. When a banker lends money, that banker is really saying: "I have some of the money commodity available for you to rent from us, and the rent we charge is 11 percent." And, as the textbook says, this particular commodity must be portable, divisible, durable, and stable.

6.

Down through all the years of recorded history—and perhaps during many years that we have no record of—money has taken various shapes. There were times when it was not portable, divisible, durable, or stable. Maybe things were better in a previous time. Suppose that money were not portable. This would mean that one would not have to fear that someone would steal your money. Is money in our modern era really stable?

Use the fluctuations in the Canadian dollar in the last year or so to make this point. On a more extreme scale, you can describe the hyperinflation that occurred in Germany after World War I. 7.

In the future, something will probably come along to replace the credit card, but for now, if is very much a part of our lives. It might be interesting to have a discussion of the students’ thoughts on the role of credit cards in our economy and are the credit card companies ethical in charging the interest rates that they do?

8.

Ask students why there are less than ten major banks in Canada, while there are over 11,000 in the U.S. 9.

The textbook lists some of the many, many services offered by chartered banks.

Here's a list: bank-issued credit cards; safe-deposit boxes; pensions; trusts; international brokerage; financial advice; automated teller machines (ATMs); and electronic money transfer. Can the students identify other services that a bank can perform for its clients?

10.

There's an old German saying which translates roughly as: "Money is always there. The only thing that changes is the possessor." This is similar to the scientific adage: "Matter can neither be created nor destroyed." So, when your boss says he or she doesn't have the money to give you a raise, that is a false statement. What the boss means is: "Yes, there is money here, but we have decided that we do not want to designate any of it for augmenting your salary."

11.

Economists differ on the matter of gold's relationship to a nation's currency. If the question is asked whether Canada is still on the Gold Standard, the official answer is no!

If you have knowledge of our nation's historical relationship to the Gold Standard, you may want to tell students about it. And here is a provocative question: Can a return to the Gold Standard insulate us from inflation?

12.

An old saying in finance is: "Pay slowly and collect quickly." The saying recognizes the “time value of money.” If every consumer had this in mind, how would such a philosophy affect the acceptance of the debit card? There's another old saying about “an idea whose time has come.” Could it be that the debit card is an idea whose time has not yet come?

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Chapter 15—Money, Banking, and Securities Markets 13.

As the students read through the section on the rapid changes that are occurring in the banking system, it seems reasonable to ask again this year: “Are we headed toward a cashless society?” This chapter opened with the four characteristics of money: portability, divisibility, durability, and stability. Can all four of these features apply to smart cards, debit cards, credit cards, and ATM innovations? If so, who needs cash?

14.

Occasionally there is talk in Canada regarding accepting the US dollar as our legal tender. This has happened in some countries already (e.g., Ecuador). Not considering the moral or patriotic issues, have a discussion of how this would affect our economy and financial institutions. Also ask students what impact the recent increase in the value of the Canadian dollar has had on this idea.

15.

Talking about money piques student interest. Help them clear up any misconceptions they may have about money—what it is, what it's used for, etc.

16.

Ask students who would want to know what the money supply is. Also ask them why these people would want to know.

17.

Ask students to write down how much currency they have with them. Add it up (including yours). Discuss what the results might mean.

18.

Collect literature from several different financial institutions about the different types of accounts they have. Try to categorize the types and compare them. This will be good practice for students as consumers.

19.

Ask your students why they think regular chequing accounts still exist if newer types of accounts offer the same features and higher returns. (Hint: convenience, habit, and fear are just a few of the possible reasons.)

20.

Find out how many of your students or their families deal with a credit union. Ask why they think dealing with a credit union is advantageous to them.

21.

Ask students to do a survey of local finance companies to find out the services they offer and the rates they charge. This is also a good exercise for students as consumers.

22.

Bring in a bank examiner to speak to the class. Be sure that students are prepared with appropriate questions.

23.

Before lecturing on this chapter, check the Globe and Mail's Report on Business section to determine up-to-date information on exchange rates of various currencies.

24.

Point out that there is not necessarily anything guaranteeing that a given investment is "secure." In fact, an investment in "securities" can turn out to be rather insecure and thus a source of discontent to investors. .

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Part 5—Managing Financial Issues 25. is merit in emphasizing the relationship between risk and return. If a There business wants to attract funds for a risky venture, it must pay a higher return than ventures that are of lower risk. As a result, an investor desiring a greater return on his or her investment must engage in riskier ventures. The term "risk" in finance really translates best as "uncertain outcome." This means that a "risky" venture can be very positive (generating profits for the owner) or very negative (in which the owner’s investment declines in value) or a very sad one. The beauty of a junk bond is that it pays much higher interest than will a high-rated bond. If the junk bond is eventually cashed in for its full face value and has paid the appropriate interest during it entire life, then it has turned out to be a superb investment. The risk, however, is that the issuer will default on the interest payments, principal repayment, or both.

26.

The use of examples can be very helpful for students in understanding the tradeoff between risk and return. Two alternative investments are available, with both companies projecting a 12% return in the upcoming year. One company is well established and has recorded 12% returns for the last five years. The second is a new start-up company with no track record at all. Ask the students which investment they prefer and why. The general rule is that when investments offer the same return, investors will select the one with the lowest risk, so students are expected to prefer the established company. Students can then be asked what the expected return for the startup company would have to be in order for them to invest their $10,000 in the new company. Student responses will vary with their personal level of risk aversion.

27.

Point out that the stock and bond pages of The Wall Street Journal or the Globe and Mail, or the financial page of a local newspaper are reporting on the secondary securities market, not the primary.

28.

It is the market value of a stock that is important to investors because that is what the stock can be bought or sold for on the exchanges. Market value is based on the investors’ expectations about the future performance of the firm, and therefore can change significantly when new information becomes available.

29.

The minimum value of the common shares should be the underlying resale value of the assets of the firm - how much money would be generated, after tax, if the assets of the company were sold off and all the liabilities paid and preferred shares redeemed. The remaining cash would be available to the common shareholders and, calculated per outstanding share, should provide the minimum value at which a stock trades.

Sometimes, however, the stock price can drop below this amount, making a company vulnerable for takeover. An illustration that students can often relate to is in the movie “Pretty Woman.” The character played by Richard Gere makes his money by purchasing corporations with undervalued stock and selling off the individual assets. Shares normally trade above the minimum value because of the earnings potential of the company.

30.

Students often have difficulty with the different types of values that can be assigned to common shares. Par value is usually the amount that the shares were 518

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Chapter 15—Money, Banking, and Securities Markets originally sold for when the corporation was created. Most jurisdictions in Canada no longer allow par value to be assigned to newly issued shares. To illustrate its irrelevance, present to the class a new company with 10 shareholders. Each pays $100 for a share with a par value of $100, for a total of $1,000 in share capital. The business is very successful and at the end of the year it has earned $2,000. The company is now worth $3,000 and each of the 10 shares has grown in value to $300. Par value remains at $100 and is irrelevant to the investors. If the company issued an additional 10 shares to new investors at this point in time, the share price should be $300, the current value of the shares, even though the par value remains at $100. In this situation, the book value of the shares becomes the $4,000 in total proceeds from issuing the shares ($1000 from the first share issue and $3000 from the second) divided by the 20 shares outstanding, for a book value per share of $200. This is also irrelevant to the amount the existing shareholders should demand if another investor wants to purchase his or her shares.

31.

To illustrate the risk of common shares it is useful to start with the description of common shares as residual interest shares. The assets of the corporation must first satisfy the claims by creditors and lenders, and then the interests of the preferred shareholders, with the common shareholders having an interest in the remaining or residual assets.

This creates risk for the common shareholders, for if the company does not do well, they are the last in line. The claims by the creditors and preferred shareholders are fixed in value, however. If the company does well, the amount owing to the bank and other creditors does not change. This increase in the value of the company through profitable operations does benefit the common shareholders, though. This explains why common shares are the most risky, yet also in high demand.

32.

Students often have difficulty with the difference between the market value and book value of a common share. It is useful to review the concept by presenting a scenario where a corporation originally issued shares at $20 per share, but the share is currently selling at $50 per share. If a shareholder decides to sell a share for $50, who gets the money? Does this sale affect the financial statements of the corporation? This is usually effective in helping the students understand that once the corporation issues its shares, it does not adjust its common share book value, as it is the individual shareholders who receive the cash from subsequent sales. The increase in value due to profits generated is reflected on the balance sheet through the growth in retained earnings.

A first glance by an untrained eye at a group of commodities traders leads to an 33. interpretation of what's happening as one totally confusing brawl. However, the experts assure us that what is happening is a very orderly process of buying and selling. Hard to believe, isn't it? Ask students to determine if this is really the case.

Students may be familiar with the movie “Trading Places,” in which two brothers 34. are trading in orange juice on the commodities market. Their method of dealing with the risk of trading in commodities futures is illegal, and consists of buying insider information.

.

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Part 5—Managing Financial Issues 35.

If you elect to show films or videos of a market in action, it will be noticed that the people on the floor are predominantly men. Why is this? One might argue that a woman would have an advantage in this setting because her voice, if sufficiently loud, could easily be distinguished from the other voices in the pit when everyone in the group is shouting while they are trying to complete a transaction.

36.

Not every stock exchange in the world features a sense of pandemonium on the trading floor. The Toronto Stock Exchange and the Paris stock exchange (called the "Bourse") are completely automated, and all of that shouting is done via computers located at distant points away from the Bourse. The opinion has been advanced numerous times that the New York Stock Exchange, the largest in the U.S., could be similarly automated. Ask students to consider the advantages and disadvantages of a computerized trading floor, as opposed to the traditional type.

37.

If you are interested in stock market history, make the point that in the famous crash of 1929, there was actually not one day on which the market crashed. Rather, the crash took nearly three years—from Tuesday, September 3, 1929 to July 8, 1932. On September 3, 1929 the Dow reached 381.17; on July 8, 1932 it bottomed out at 41.22. On September 3, 1929, no one was aware that the Dow Jones Industrial Average would take twenty-five years to be that high again. That's right. It was not until November 23, 1954 that the Dow came back to hit 382.74. The day that is remembered as "the day the market crashed" is Tuesday, October 29, 1929. Whatever damage the Dow absorbed on that day was quickly restored within two days, with the dramatic decline in the Dow beginning in early 1930. In the fall of 2007, the Dow had risen to over 13,000.

The Dow dropped 339.95 points in the stock market crash that began in 1929. The Dow dropped 3358.35 points, from 10644.62 on March 11, 2001, to 7286.27 on October 9, 2002. Ask students whether they consider the drop in 2001 to be a crash, and how this decline differed from the crash that began in 1929. Also ask students about the big decline that occurred in 2008-2009. The Dow Jones website is a terrific resource, with graphs indicating the monthly movement of the Dow from 1897 to the present. (Listed as Dow Data at the following link - http://averages.dowjones.com/mdsidx/?event=showAverages) 38.

Bonds are issued with terms that constitute a contract, specifying the principal amount that will be repaid, the interest rate used to calculate the interest payments, and the dates on which the interest payments and principal repayment will be made. All these are fixed and do not change over the term of the bond. Market interest rates do change, however, and the selling price of the bond is the only thing that can change to make the bond saleable when interest rates have risen.

39.

A bond buyer can be insulated from the bond market and thus not be concerned with bond "prices." Here's how. If a person buys a bond in a major corporation for $1,000, keeps the bond until maturity, and then cashes in the bond, the bond issuer pays to the buyer the sum of $l, 000. There is no "price" involved here. However, if somewhere in that 20-year span, the bond buyer needs cash and decides to sell the bond to another investor, then we have a "price" in the secondary bond market. The price is determined by the difference between the interest rate the bond pays and the current 520

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Chapter 15—Money, Banking, and Securities Markets market interest rate for other bonds with the same remaining term and level of risk.

If the market demands 10% and the bond pays 8%, it will sell for less than $1,000.

40.

The difference between a secured and unsecured bond can be emphasized by presenting the students with the purchase of a $10,000 bond with a 10% stated interest rate. Two bonds may be purchased, one secured by the assets of the corporation, the second unsecured. Students should be asked which bond they prefer and why. During the discussion it should come out that the security reduces risk by giving the bondholder the first claim on 100% of the secured assets, as the unsecured bondholder would have to wait until all the secured claims are satisfied and would then share in the remaining assets with other debt-holders. Students can then be asked what would have to change in the bond offering to make them buy the unsecured bonds. Some will be willing to accept the additional risk if the interest rate is increased.

41.

The text refers to bonds with a sinking fund provision as less risky, but doesn’t fully explain why. A corporation that fails to put the required funds into the sinking fund is in default. When in default, the bondholders can then take action to recover their investment immediately, rather than having to wait until maturity to do so. This ability to intervene early provides the bondholders with better protection therefore less risk.

42.

To help students understand why firms adopt different dividend strategies and mutual funds adopt different investment strategies, the following example may be useful.

Company A and Company B each have a fair market value of $100,000 and 2,000 shares outstanding, making each share worth $50. During 2007, each of the two companies earns $20,000. Company A does not pay dividends so the share price increases to $60.

Company B pays a $10 dividend per share at the end of 2007, as it does not have enough investment opportunities for the cash the firm generates. An investor who owns 10 shares in Company A shares has an investment worth (10 * $60) $600. An investor who owns 10 shares of Company B has shares worth (10*$50 ) $500 plus cash dividends of ($10*10) $100. A mutual fund that is classified as a dividend fund will invest in companies that regularly pay dividends. A mutual fund that is classified as an equity fund will invest in companies that do not pay dividends, but reinvest the funds in their own operations. Ask students what type of investors would prefer to invest in a dividend fund and those that would prefer to invest in an equity fund. Students should think of the type of investors for whom regular cash flow would be important, such as retirees or people planning to leave their jobs and go back to school. It is more convenient to receive dividends than have to sell off a portion of the shares on a regular basis. Students may also recognize that equity funds may be more desirable for long-term investments due to tax considerations, as the shares can increase in value tax-free until they are sold, while dividends are taxed when received.

43.

Hedging is a way of minimizing risk. Here is an example that may help students understand hedging. The Toronto Blue Jays are playing the Chicago White Sox on Saturday. You bet a friend ten dollars that Toronto will win. Then you have second thoughts, so you bet another friend twelve dollars that Chicago will win. When Chicago wins, your net winnings are two dollars. Had Chicago lost, your net losses would have .

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Part 5—Managing Financial Issues been two dollars. Not much, you say, but suppose the two bets had been, respectively, $l00,000 and $120,000.

44.

The Dow Jones Industrial Average is the most often-quoted stock market index.

However, it should be pointed out to the students that the Dow is composed of only thirty common stocks. Just how accurate is such a limited sample?

45.

The internet has had a significant impact on the securities trading, leaving traditional brokers concerned about whether there will be enough demand for their services in the future. This is similar to the concerns that travel agencies have, given the changes in the airline industry that allow customers to easily book their own flights. Ask the students to discuss the similarities and differences for these two service providers.

Have the students discuss the advantages and disadvantages of using a traditional broker, the types of investors who are likely to use or not use a traditional broker, and the alternatives available to the traditional brokers to increase the demand for their services.

46.

Invite a speaker from your municipal government to talk about municipal bonds and how they help the local community.

47.

Have your students follow the stock price of three companies over the course of the term. Ask them what they learned about stock prices over that period of time.

Invite a financial manager from a business firm to speak to the class about balancing debt and equity sources of funds. How does the firm decide how much stock to sell and how much debt to incur?

48.

Many Canadian firms are listed on both the TSE and the NYSE. Have a discussion of why Canadian corporations would want to be listed on an US stock exchange.

49.

Have the students visit the Web site for the TSE. Have them choose a stock of a well-known Canadian corporation and have them look at the line graph that shows the market value of its common shares over the past year.

Related to the above teaching tip, is the bar graph (directly below the line graph) 50. that shows the volume of trades corresponding to the same period. Have a discussion of the correlation between market price fluctuations and sales volumes.

51.

Remind students that securities include stocks as well as bonds and mutual funds; they represent secured, financially valuable claims on the part of investors.

52.

Remind students that new securities are bought and sold in primary markets; existing securities are sold in secondary markets.

53.

Reinforce that a stock is a portion of the ownership of a corporation. Common stocks represent the most basic form of ownership in a company.

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Chapter 15—Money, Banking, and Securities Markets 54.

Make sure that students understand that stock values can be expressed in three different ways: par value, market value, and book value. Review each of these concepts as they are often difficult for students to grasp.

55.

Common stocks are risky securities, but blue chip stocks are issued by the strongest, most financially sound firms that provide investors with steady income.

56.

Students often confuse this point: Preferred stock is so named because preferred shares have preference, or priority, over common shares when dividends are distributed.

57.

Remind students that a stock exchange is an organization of individuals formed to provide an institutional setting in which stock can be bought and sold.

58.

Students may not know that each stock exchange regulates the places and times at which trading may occur; the trading floor is the physical location where trading takes place.

59.

Make sure students understand the distinction between stock brokers, discount brokers, and full-service brokers.

60.

Point out that the over-the-counter market is so-called because its original traders buyers; acted like retailers; supplies of shares were sold over the counter to interested even today the OTC market has no trading floor.

61.

Bring to students’ attention that fantasy stock markets are games that teach people stock how to invest. Students may want to access StocksQuest to work with fantasy markets.

62.

Students often confuse stocks and bonds. A stock represents ownership in a corporation. A bond represents debt, an issuer’s promise to pay the buyer a certain amount of money by a specified future date.

63.

Make sure that students understand the differences between government bonds, municipal bonds, and corporate bonds.

64.

Point out that secured bonds are “backed” by company assets in case of default, whereas unsecured bonds—or debentures— pledge no property as security.

65.

It is important to point out that no-load mutual funds charge no commissions when investors buy into or sell out of funds; load funds generally charge a commission of 2 to 8 percent.

66.

Reinforce that mutual funds are an attractive investment since a drop in the price of one or two stocks in the pool is likely to have little impact on the total value of the fund. .

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Part 5—Managing Financial Issues 67.

Remind students that investors seek to strike a balance for risks and returns among their investment options. This risk-return balance can be achieved through diversification and asset allocation.

Reinforce that safer investments tend to offer lower returns; riskier investments 68. tend to offer higher returns.

69.

Students should recognize that investors can purchase stocks using several different types of orders: a market order, a limit order, a stop order, and an order for a round lot or an odd lot.

70.

Point out that insider trading is the use of special knowledge about a firm for profit or gain. It is illegal.

71.

Ask students to describe the type of person who would be interested in holding Canada Savings Bonds. Then ask them what type of person would be likely to buy junk bonds. How are these two types of people different?

USING THE BOXED INSERTS Opening Case: Money, Money, Money The opening case is designed to convey to students some interesting information about some rather odd forms of money (at least by Canadian standards). The key point that should be realized by students is that since the beginning of human interaction, people have realized the need for a medium of exchange to facilitate economic activity.

The box also contains some interesting facts about denominations of money that are used in different countries.

Possible analysis/discussion questions are as follows: 1.

Why do people in some countries keep using things other than coins or bills for money?

2.

As noted in the opening case, a variety of items are used for money. To what extent does each item satisfy the four characteristics that money should possess?

3.

Why is the barter system generally considered to be inferior to the use of money? Are there some ways in which the barter system may be superior?

E-Business and Social Media Solutions: Online and Mobile Banking Solutions Straight to the Consumer The boxed insert describes how technology is being embraced by Canadian banks.

Statistics are provided on the popularity of mobile devices with consumers, and how 524

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Chapter 15—Money, Banking, and Securities Markets these devices can be used by consumers to streamline their banking activities. For example, it is predicted that mobile banking will eventually surpass online banking.

Critical Thinking Question 1.

Have you used a banking Smartphone application or visited a bank sponsored social media group? How effective do you think these tools are for the consumer? For the banks?

Mobile devices are obviously extremely popular with students. But using a mobile device to do banking may or may not be popular with students. For those students who do have experience with mobile banking, ask them to state the criteria they use to determine how effective it is.

For those students who do not have experience with mobile banking, determine the reasons why. For example, do students have security concerns about mobile banking, or are uninterested because they simply don’t have much occasion to do banking?

The effectiveness of mobile banking for banks is best determined by having students interview individuals at several different banks.

Business Accountability: Canadian Vs. U.S. Banks: Quite a Difference The financial crisis that began in 2008 revealed some significant differences between Canadian and U.S. banks, and the reasons for these differences are noted in this boxed insert.

Critical Thinking Questions 1.

Is there a trade-off between bank accountability to customers and customer satisfaction with banks?

There appears to be something of a trade-off between bank accountability and customer satisfaction. The accountability of Canadian banks is higher because regulation of Canadian banks is much more stringent than the regulation of U.S. banks. In periods of economic prosperity, Canadian consumers may be frustrated by the conservative nature of Canadian banks, but when economic hard times come, consumers are happy that the Canadian banking system is sound. As noted in the insert, the very same characteristics of the Canadian banking system which have worked well during the financial crisis are the same characteristics that Canadian consumers have complained about for many years.

Consider the following statement: “Governments around the world should 2. continuously apply very strict standards for banks, even in good economic times, so that the kinds of financial problems that developed in the US. S will not happen again.” Do you agree with the statement? Explain your reasoning. .

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Part 5—Managing Financial Issues Student responses will be influenced by their risk preferences. Risk seeking students may disagree with the statement because conservative lending practices by banks would be the result, and risk seeking individuals want liberal lending practices so they can pursue their ideas. Students who are risk averse will agree with the statement because, by definition, they are not interested in activities like borrowing money to get involved in risky deals.

The Greening of Business: Green Trading Trading in carbon credits is driven by both the drive for profits and a sense of social responsibility. The insert describes how the trading of carbon trading works, and how it provides an incentive for companies to be more concerned about the environment.

Critical Thinking Questions 1.

What are the advantages of emissions trading? What are the disadvantages?

The main advantage of emissions trading is that it is part of an effort to clean up the environment. It is based upon the idea that people respond to incentives, in this case, companies that are not producing much pollution are able to sell their carbon “credits” to other companies that are in danger of exceeding their pollution cap. The companies that sell the credits are thereby able to improve their financial situation. The market that is created by emissions trading facilitates this activity.

The main disadvantage is the appearance that companies can simply pay to pollute the atmosphere by buying credits from other companies. Of course, the idea is that if companies have to pay for credits if they exceed their cap, that they will be motivated to pollute less so they won’t have to buy credits from other companies.

Unfortunately, it is often not clear whether the cost of pollution-control devices is more or less than the cost of credits.

2.

What has been the experience of the European Union to date with emissions trading?

As noted in the case, the European Union’s Emissions Trading Scheme (ETS) was designed to help meet the EU’s obligation to reduce carbon dioxide emissions as part of the Kyoto Protocol. The ETS has been in operation just since 2005, so it is difficult to know how well it is achieving its purpose. Have students do an internet research project to get current information on the operations of the cap and trade system of the European Union at the time they are taking their introduction to business course.

3.

What is the Canadian government doing about introducing emissions trading?

In 2009, the Canadian government began talking about adopting the idea of a carbon trading system in the wake of the election of Barack Obama as the U.S. president (he is promoting the idea in the U.S., and Canada may well have no choice to go that 526

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Chapter 15—Money, Banking, and Securities Markets route if the U.S. decides to go ahead with a cap and trade system. There is considerable controversy in both Canada and the U.S. about the wisdom of this approach to reducing air pollution. Also in 2009, the Ontario government announced legislation to introduce a cap and trade system, but no specific emissions quotas were set.

QUESTIONS AND EXERCISES Questions for Analysis 1.

What specific changes in banking are shifting banks away from their historical role?

The historical role of banks has been as intermediaries between depositors and borrowers. Deregulation is changing that role. Now, banks are diversifying to provide a wider array of financial services to customers. For example, banks are now selling commercial paper, as well as an array of corporate and government securities. The Canadian banks can actively pursue many areas they were traditionally banded from (e.g., insurance) International banking is also changing, and many American banks have begun to do business in Canada since the law lifted the barriers to this kind of activity.

2.

Do we really need all the different types of financial institutions we have in Canada? Could we make do with just chartered banks? Why or why not?

In a free enterprise system, organizations of various types arise to meet consumer demand. This has happened in the “money” business just like it has happened in many other industries. The existence of many different kinds of financial institutions is evidence of the diversity of needs in the Canadian economy. For example, venture capital firms serve a very specific market—entrepreneurs who need money to start up business firms. While these entrepreneurs could go to banks to get their money, they might not find a receptive audience for what they are trying to do. Venture capitalists, however, are often willing to invest in high-risk, start-up operations for part of the equity of the business. Other financial institutions like credit unions, life insurance companies, factoring companies, and pension funds also serve specific needs of customers.

3.

Should credit cards be counted in the money supply? Why or why not? Support your definition by using the definition of money.

The volatility of credit card debt is quite high. Adding this to M1 would tend to inflate the economy beyond all standards. The definition of money as a medium of exchange would tend to support the addition of credit cards to M1, but the card is not a measure of account, nor is it really a store of value. This question can provide a lively debate in class. If credit cards are replacing currency and cheques, then we have to ask the question “Are we up to date in our treatment and classification of credit cards?”

4.

Should banks be regulated, or should market forces be allowed to determine the money supply? Defend your answer. .

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Part 5—Managing Financial Issues

The existence of market forces is one of the most powerful ways of regulating any industry. However, the banking community, especially the chartered banking community is so important to the overall economy and survival of Canada that most people think it must be regulated in order to guide the activities of the banks and to protect the public. While consumers are sometimes annoyed at these regulations, the financial meltdown of 2008 showed the importance of banking regulations.

Canada’s banking system peroformed far better than the banking systems of most countries in the aftermath of the financial meltdown.

5.

Suppose you decided to invest in common stocks as a personal investment. and Which kind of broker-full-service or online discount-would you use for buying selling stock? Why? Answers will vary.

6.

Choose a stock from the TSE and find a newspaper listing a recent day’s transactions for the stock. Explain what each element in the listing means.

Answers will be subject to the particular items selected from the daily newspaper.

Application Exercises 7.

Start with a $1,000 deposit and assume a reserve requirement of 15 percent. Now trace the amount of money created by the banking system after five lending cycles.

Students should use Figure 15.2 to work through this problem. This will require some simple calculations based on a 15 percent reserve requirement, not the 10 percent requirement that is assumed in Figure 15.2. After the first cycle, the total supply with a 15 percent requirement is $185.00, after the second $257.25, and so on. A 15 percent requirement clearly means that the total supply after five cycles will be less than it was with a 10 percent reserve requirement.

8.

Interview several consumers to determine which banking services and productgs they use (debit cards, ATMs, smart cards, etc.). If interviewees are using these services, determine the reasons. If they are not, find out why not.

Answers will vary. The prime reason that is likely to be cited for use of these services is convenience (i.e., not having to go to the bank so often). The main reason for lack of use is security fears. Students may find that younger consumers are more comfortable with these services than older consumers are. Summarize student findings in order to get an overview of how these services are received by consumers and where improvements may be needed.

9.

Interview the manager of a local chartered bank branch. Identify the ways in which the Bank of Canada helps the bank and the ways in which it limits the bank.

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Have questions written up in advance of the interview. It may be necessary to probe to elicit specific complaints about the Bank of Canada from the bank manager.

Another approach is to invite a bank manager to speak to your class. Make sure the class has a variety of questions ready to ask the bank manager.

10.

Contact a broker for information about setting up a personal account for trading securities. Prepare a report on the broker's requirements for placing buy/sell orders, credit terms, cash account requirements, services available to investors, and commissions/fees schedules.

This exercise should be of interest to students. Encourage them to search various brokerage houses’ Web sites for the answer to this question. If this is not possible, they may have to directly contact a broker. It will also provide some realistic information for students to utilize in personal financial planning. A broker may be able to furnish printed material that will cover the items requested above. Remember that although a broker operates in the world of finance, he or she is very much a salesperson marketing a product.

TEAM EXERCISES Building Your Business Skills: Market Ups and Downs Follow-Up Questions 1.

Do you see any similarities in the movement of the various stocks during the same period? For example, did the stocks move up or down at about the same time? If so, do you think the stocks were affected by the same factors? Explain your thinking.

Many factors both internal and external affect stock prices, such as the firm’s earnings, layoffs, labour problems, management issues, and mergers, as well as the state of the industry in general and any threats of political crisis, weather conditions, interest rate changes, and inflation and unemployment data and forecasts.

2.

Based on your analysis, did internal or external factors have the greatest impact on stock price? Which factors had the longer-lasting effect? Which factors had the shorter effect?

Answers will vary.

Why do you think it is so hard to predict changes in stock price on a day-to-day 3. basis?

.

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Part 5—Managing Financial Issues Answers will vary but students should acknowledge the difficulty of both knowing all possible information about factors that affect stock price and judging accurately what kind of effect those factors will have.

Exercising Your Ethics: Team Exercise: Serving Two Masters: Torn Between Company And Client Activity Overview: This activity presents some ethical issues that can arise when employees of a financial services firm have to work to protect the interests of both the company and the customer.

Time Limit: 45 minutes What to Do: 1.

Divide the students into four- or five-member teams and ask them to turn to the Exercising Your Ethics: Team Exercise at the end of Chapter 15.

2.

After each group has assigned four or five of the roles outlined in the activity, ask everyone to complete Action Steps 1 through 5 from the perspective of their role. (30 minutes) 3.

Bring the class together as a whole to discuss the groups’ outcomes. For each of the ethical issues identified, decide as a group which one is the most important for Premier Power Investments to resolve. What does each group think should be done to solve that issue? (15 minutes) Don’t Forget: Role differences might result in dissimilar priorities on ethical issues so remind students to “stay” in their assigned roles when considering these issues.

Wrap-Up: Bring the activity to a close by highlighting some of the ethical issues identified in the exercise and how their importance is dictated from what perspective the individual is looking at the situation.

CASE ANALYSIS Business Case 15: Stock Market Games And The Dark Side Of Financial Advising 1.

What factors determine the market price of a share of stock? Which of those factors were at work in the cases described above which dealt with the issue of stock prices?

There are many factors that determine the market price of a share of stock, including the general state of the economy, investor willingness to buy the stock, the 530

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Chapter 15—Money, Banking, and Securities Markets company’s profit levels, rumours, investor relations (playing up the financial prospects of a company to financial analysts), stockbroker recommendations, fraud, manipulation of stock prices by traders who are trying to make it appear that the price of a given stock is going to go up, and consumer assumptions about new company initiatives that promise a big profit in the future.

It is apparent that many of these factors were at work in the situations described in the case. For example, rumour obviously played a big role in the Bre-X, Timbuktu, and Delgratia cases (and, of course, fraud). The RT Capital Management and Visa Gold cases (“wash trading” and “high closing,” respectively) are examples of manipulation of stock prices by traders. Insider trading and Ponzi schemes are simply examples of illegal behaviour.

2.

What is the difference between debt and equity financing? Are the situations described above examples of debt or equity issues? Explain.

Debt financing involves long-term borrowing from sources outside the company, with the two primary sources being long-term loans and the sale of corporate bonds.

Equity financing involves the issuance of common stock or retaining funds that have been earned by the company.

Most of the situations described in the case deal with equity financing because they involved the manipulation of the price of common stock. The individuals who were prosecuted for insider trading were involved in illegal activity with respect to common stock. Several other individuals who were prosecuted for illegal behaviour were also working with other financial instruments as well. Bernie Madoff bilked investors out of $50 billion, but apparently he wasn’t buying either debt or equity instruments.

3.

Consider the following statement: “Insider trading should not be illegal. In a freemarket economy, individuals who have the motivation and intelligence to gather information which allows them to make a lot of money should not be prevented from capitalizing on the information they have collected.” Do you agree or disagree with the statement? Explain your reasoning.

The statement is one of many possible variations on the “survival of the fittest” notion of the Social Darwinists. It still has an appeal for some ruthless individuals, but most people would argue that governments must try to create a level playing field or the stock market will be nothing but a gambling casino (some would already claim it is just that). Insider trading regulations are an attempt to create that level playing field.

Insider trading involves gaining monetarily not because of what you know but because of who you know (that is, someone who can give you information that most other investors can’t get their hands on). In Canada, this is widely seen as “unfair” and something that should be prevented. In some other societies, of course, interpersonal connections which can be used for financial gain would not be seen as unreasonable. .

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CHAPTER 16 FINANCIAL DECISIONS AND RISK MANAGEMENT CHAPTER SYNOPSIS This chapter begins with a discussion of the objectives and responsibilities of the financial manager. Then, reasons are given why businesses need funds (short- and longterm expenditures). The sources of short-term funds are noted (trade credit, secured short-term loans, and unsecured short-term loans), as are the long-term sources of funds (debt and equity financing). Financial management in small businesses is also examined.

The chapter concludes with a discussion of risk management, and describes the five steps in the risk-management process.

CHAPTER OUTLINE I.

THE ROLE OF THE FINANCIAL MANAGER Financial managers plan and control the acquisition and dispersal of a company's financial assets.

A. Objectives of the Financial Manager—The overall objective is to increase the value of the firm, thereby increasing shareholder wealth.

B. Responsibilities of the Financial Manager—These fall into three general categories: 1.

Cash flow management—Financial managers must ensure that the firm has enough funds on hand to purchase the materials and human resources it needs to produce goods and services.

2.

Financial control—This is the process of checking actual performance against plans to ensure that the desired financial status occurs.

3.

Financial planning—A financial plan, describing how a firm will reach a desired financial position, requires knowledge of what immediate funds are needed, when more will be needed, and what are the sources of these funds. Financial managers must know why their firm needs funds and be able to assess the pros and cons of potential sources of funds.

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Part 5—Managing Financial Issues II. WHY BUSINESSES NEED FUNDS A. Short-Term (Operating) Expenditures—These are incurred through everyday business activities and handled through careful attention to the following three areas.

1.

Accounts payable—This is the largest part of short-term debt for most companies. Good management means purchasing sufficient supplies in a timely manner but withholding payment as long as it can without jeopardizing its credit rating.

2.

Accounts receivable—Financial managers need to project both how much buyers will order and when they will pay. Credit policies are set in order to set payment terms and make payment times more predictable. a.

Credit policies—These contain the regulations governing a firm’s extension of credit to customers.

Inventories—Raw materials inventory, work-in-process inventory,

3. and finished goods inventory are described. All must be kept at appropriate levels.

Long-Term (Capital) Expenditures—These are used for fixed assets. They B. differ from short-term expenditures in that they are not normally sold or converted into cash, their acquisition requires a large investment of funds, and they represent an ongoing tie-up of company funds.

SOURCES OF SHORT-TERM FUNDS III. A. Trade Credit—Essentially a short-term loan, it describes the granting of credit by a seller to a buyer. The types discussed include open-book credit, a promissory note, a trade draft and a trade acceptance. The problems with trade credit are noted.

B. Secured Short-Term Loans—These require the borrower to put up collateral. The pros and cons of the various types of loans are discussed.

1.

Inventory as collateral—A firm's inventory is used as the collateral to secure a loan.

2.

Accounts receivable as collateral—They can be used as collateral by pledging accounts receivable. Service companies in particular depend upon this source of funds.

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Factoring accounts receivable—A firm can raise funds by factoring (i.e., selling) its accounts receivable.

Unsecured Short-Term Loans—Although no collateral is required, the C. borrower must maintain a compensating balance. This type of loan usually occurs within an established relationship with a bank and often takes the form of lines of credit or revolving credit agreements.

1.

Lines of credit—This is a standing agreement with a bank to lend a firm a maximum amount of funds on request.

2.

Revolving credit agreements—This guaranteed line of credit from a bank requires the firm to pay a commitment fee as well as interest on funds borrowed.

3.

Commercial paper—A company can raise short-term funds by selling unsecured notes for less than face value and then re-purchasing them at face value up to 270 days later.

IV.

SOURCES OF LONG-TERM FUNDS These may be from outside the firm (debt financing) or within the firm (equity financing).

A. Debt Financing—The two primary sources are described, and their usefulness and drawbacks noted.

1.

Long-term loans—Usually a loan from a bank extending for three to ten years. They are also available from credit companies, insurance companies, and pension funds. a.

Interest rates—Interest rates on loans are negotiated between the borrower and the lender.

2.

Corporate bonds—A corporate bond promises the holder a certain payment on a certain date with stated interest payments in the interim.

This is the major source of long-term debt financing for most corporations. a.

Bond indenture—The bond indenture spells out the terms of a bond, including the amount to be paid, the interest rate, and the maturity date.

Equity Financing—Sometimes this means the founders increase their B. personal investment but, more typically, it means issuing stock or retaining the firm's earnings.

.

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Part 5—Managing Financial Issues 1.

Issuing common stock—This pays dividends, which are not taxdeductible for the corporation (unlike interest paid on bonds).

2.

Retained earnings—This means less need to borrow money (and pay interest costs), but also lower dividends (therefore company stock is not as attractive to investors).

Hybrid Financing: Preferred Stock—Like bonds, preferred stock has

C. payments for fixed amounts, but unlike bonds, it never matures and can be held indefinitely. No dividends need be paid if there was no profit and when dividends are paid, preferred stockholders are paid before common stockholders.

D. Choosing Between Debt and Equity Financing—The mix of debt versus equity provides the capital structure of the firm. A wide variety of mixes are possible. Figure 16.1 summarizes the factors to be considered in deciding between debt and equity financing.

V.

E. The Risk-Return Relationship—The general relationship between risk and return is described. Different forms of financing will attract different investors because their risk/return relationships vary.

FINANCIAL MANAGEMENT FOR SMALL BUSINESSES New businesses often have insufficient funds, don't plan cash flow requirements, don't use trade credit effectively, and underestimate the value of establishing bank credit as a source of funds.

A. Establishing Bank Credit and Trade Credit—How to do this and the advantages of doing so are described. The business plan is an important document that tells potential lenders why money is needed and how it will be used.

B. Venture Capital—When newer businesses do not have enough funds through borrowing they may look to outside equity funding provided in return for part ownership of the borrowing firm.

VI.

C. Planning Cash for Requirements—The importance for small businesses is emphasized and an example is discussed (see Figure 16.3).

RISK MANAGEMENT Risk refers to uncertainty about future events. It is an important factor in every manager’s job.

A. Coping With Risk—Speculative and pure risks are defined and examples are provided. The risk management process involves five steps:

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Chapter 16—Financial Decisions and Risk Management 1. 2.Step 1: Identify risks and potential losses impactStep 2: Measure the frequency and severity of losses and their 3.

Step 3: Evaluate alternatives and choose the techniques that will best handle the losses. There are several alternative strategies that can be used. a. b. c. d.

4.

5.

Risk avoidance (ceasing to participate in a risky activity) Risk control (the use of loss-prevention techniques) Risk retention (self-insurance) Risk transfer (buying insurance)

Step 4: Implement the risk-management program Step 5: Monitor results

QUICK QUESTIONS 1.

What are the key objectives of the financial manager?

2.

What are the key responsibilities of the financial manager?

3.

What categories of short-term expenditures are particularly important for financial

managers to pay attention to?

4.

What categories of long-term expenditures are particularly important for financial managers to pay attention to?

5.

What are the main sources of short-term funds?

6.

What are the main sources of long-term funds?

7.

What are the advantages and disadvantages of debt and equity financing?

8.

What factors should be considered when a company is trying to decide whether to use debt or equity financing?

9.

What is the risk-return relationship?

10.

Why are so many new businesses under-funded? .

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12.

What is the difference between pure and speculative risk?

What are the five steps in the risk management process?

IN-CLASS EXERCISES Exercise #1: The Principle of Leverage Activity Overview: This exercise is designed to illustrate the concept of leverage. Students can be asked to do the number crunching, or this can be illustrated by the instructor.

Time Limit: 30 minutes What To Do: 1.

Divide students into three-person groups and ask them to read the following short problem: -------------------------------------------------------------------------------------------------------An individual has identified a business opportunity that requires an investment of $100,000 in assets. It is expected that these assets will generate an annual return of 15%. The individual is considering whether to use all his personal savings or to incur $50,000 in debt financing. Assume that there are not income tax implications, and that a loan can be obtained at an interest rate of 12%. What should the individual do?

-------------------------------------------------------------------------------------------------------2.

Ask the groups to decide which alternative—personal savings or debt financing would be best in this situation. (10 minutes) 3.

Reassemble the class and allow each group to present its findings. Then moderate a discussion on the concept of leverage. (20 minutes) Don’t Forget: The following points should be made during the discussion: Personal investment only

Expected revenue Interest cost Net income

$100,000 * 15% = $15,000 0 15,000

50% Debt financing $15,000 6,000 9,000

At first glance, it appears that the investor is better off to use personal funds, as the income earned is higher. This does not consider, however, the actual amount of the owner’s investment.

Net income .

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15,000

9,000

Chapter 16—Financial Decisions and Risk Management Divide by owner’s investment Return on investment

100,000 15%

50,000 18%

This increase in the rate of return is due to the use of leverage, which will increase the shareholders’ return whenever the cost of borrowing is less than the actual return generated.

This does not mean that debt financing would always be the best decision, as illustrated in the next example.

What if the actual return is only 8%?

Personal investment only Expected revenue $100,000 * 8% = $8,000 Interest cost 0 Net income 8,000 Net income 8,000 Divide by owner’s investment 100,000 Return on investment 8%

50% Debt financing $8,000 6,000 2,000 2,000 50,000 4%

Wrap-Up: Students can be asked for their opinions on the desirability of the use of leverage, and the circumstances under which they would, or would not, use leverage. The common theme should be that leverage is risky for businesses which find it difficult to accurately forecast sales and cash flows.

Exercise #2: Understanding Risk Management Issues Activity Overview: This activity asks students to analyze risk and return issues for a non-profit organization.

Time Limit: 30 minutes What to Do: 1.

Several days before the exercise is planned, have each student research one of the five companies listed in the Building Your Business Skills exercise at the end of Chapter 16. Each student should complete Steps 1 and 2 individually. (To ensure that all companies are researched, assign equal numbers of students to each company.)

2.

On the day when the exercise is to be completed, divide the class into five-person groups, making sure that each group is constructed such that all five companies have been researched. (5 minutes) 3.

Within their assigned groups, ask students to answer the Follow-Up questions at the end of the exercise. (15 minutes) .

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Part 5—Managing Financial Issues 4.

Bring the class together and discuss each group’s answers as a basis for discussion (see the Building Your Business Skills exercise at the end of the chapter for possible answers to the Follow-Up Questions). (10 minutes) Don’t Forget: Make sure that the discussion attempts to identify common themes. If there are few common themes, try to determine why this might be.

Wrap-Up: Remind students that risk management is an increasingly important element of finance managers’ jobs.

Exercise #3: The Commercial Paper Crisis Activity Overview: This activity is designed to help students understand what commercial paper is and why there was a commercial paper crisis in Canada.

Time Limit: 30 minutes What To Do: 1.

Have students read Business Case 16 in advance of the class when this exercise is to be conducted. The case study is found at the end of Chapter 16.

2.

Break the class into small groups and ask them to answer the questions found at the end of the case study. Assign each group one of the questions. (10 minutes) 3.

After the groups have completed their respective answers, reassemble the class and discuss each question. Answers to the questions are found near the end of this chapter. (20 minutes) Don’t Forget: Make sure that students understand the basic idea behind commercial paper and why the commercial paper crisis developed in Canada.

Wrap-Up: Remind students that only financially strong companies are able to issue commercial paper.

Exercise #4—Are You Endowed With Good Judgment?

Activity Overview: This activity asks students to make some difficult financial choices regarding the risk level of various investments.

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Chapter 16—Financial Decisions and Risk Management Time Limit: 40 minutes What To Do: 1.

Make copies of the following case study and distribute to students in advance of the class when the exercise is to be conducted.

------------------------------------------------------------------------------------------------------Case Study YDC Every organization faces decisions about whether to make conservative or risky investments. Let’s assume that you have been asked to evaluate the advantages and drawbacks of conservative versus risky investments—including all relevant ethical considerations—by Youth Dreams Charities (YDC), a local organization that assists lowincome families in gaining access to educational opportunities. YDC is a not-for-profit firm that employs a full-time professional manager to run daily operations. Overall, governance and policy making reside with a board of directors—10 part-time community-minded volunteers who are entrusted with carrying out YDC’s mission.

For the current year, 23 students receive tuition totalling $92,000 paid by YDC. Tuition comes from annual fund-raising activities (a white-tie dance and a seafood carnival) and from financial returns from YDC’s $2.1 million endowment. The endowment has been amassed from charitable donations during the past 12 years, and this year it has yielded some $84,000 for tuition. The board’s goal is to increase the endowment to $4 million in five years to provide $200,000 in tuition annually.

Based on the finance committee’s suggestions, the board is considering a change in YDC’s investment policies. The current rather conservative approach invests the endowment in low-risk instruments that have consistently yielded a 5 percent annual return. This practice has allowed the endowment to grow modestly (at about 1 percent per year). The remaining investment proceeds (4 percent) flow out for tuition. The proposed plan would invest one-half of the endowment in conservative instruments and the other half in blue-chip stocks. Finance committee members believe that—with market growth—the endowment has a good chance of reaching the $4 million goal within five years. While some board member like the prospects of faster growth, others think the proposal is too risky. What happens if, instead of increasing, the stock market declines and the endowment shrinks? What will happen to YDC’s programs then?

Questions for Discussion 1.

Why might a conservative versus risky choice be different at a not-for-profit organization than at a for-profit organization?

2.

What are the main ethical issues in this situation?

3.

What actions should the board take?

.

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2.

Divide the class into teams of four students and ask them to answer the questions for discussion in their small groups. (20 minutes) 3.

Reassemble the class and try to reach a consensus on answers to the questions. In the discussion, make sure the following points are made: (20 minutes) (1) The choice might be different since the ultimate goal of a business is to earn a reasonable profit, and the business routinely accepts various risks in its pursuit of profit. The ultimate goal of a not-for-profit organization is to provide a service within the available funds. The not-for-profit may not be willing to accept the risk that a downturn in the market could erode the endowment fund for two separate reasons. First, this would reduce or eliminate the funds available for tuition fees in a particular year. Second, a decrease in the endowment fund value could be compared to throwing away donors’ money, and the policy of investing in risky securities may discourage potential donors from making a donation.

(2) The main ethical issues in this situation are how to best fulfill YDC’s responsibility to the students it serves, while most effectively stewarding the money entrusted to the organization through charitable donations.

(3) Answers will vary, depending on students’ evaluation of the level of risk involved and the appropriateness of the charity accepting the risk.

Don’t Forget: Remind students that the management group of YDC has two constituencies to satisfy and it is difficult to satisfy them both.

Wrap-Up: Make the point there are always difficult trade-offs when making investment decisions, and there is no easy decision rule that can be used.

TEACHING TIPS 1.

It is often taught—sometimes in management chapters—that the three line functions of any business firm are production, sales and finance. But as students read the early pages of Chapter 20 dealing with what a financial manager does, there may be a tendency to feel that finance is the most important. It would seem that the wise manager would never make a move without closely consulting the financial manager. You might want to point out that in a small business, the manager, owner, financial manager, and the bookkeeper may be the same person.

2.

A manager who leans too heavily upon the advice of the financial manager may miss some tremendous opportunities for his or her firm. This is especially true of an 542

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Chapter 16—Financial Decisions and Risk Management overly-conservative financial manager. Ask students if they have ever worked at a firm in which it was difficult to even get money out of petty cash in order to purchase stamps for the firm. In such an operation, the handling of financial funds has been so systematized toward conservative security that the firm is strangled when it is time to make a quick move.

3.

The previous tip strongly suggests that even though the financial manager is extremely important to a firm, he or she must act in accordance with the spirit and character of the firm's top management. An overly-conservative financial manager who works for an aggressive, opportunistic, forward-thinking, state-of-the-art, risk-taking firm is out of place.

4.

In relation to the previous tip, unfortunately the financial manager may sometimes take blame that should be assigned elsewhere. A general manager may want to come across as the "good guy." He or she may say to a new spending opportunity: "Sure, that's a great idea. Let's do it! First, though, you better check it with the financial officer."

When the latter denies funding, he or she becomes the person standing in the way of progress.

5.

The credit customers of many firms pay their bills within 60, 90, or even 120 days. That doesn't sound too bad, but if all of these customers would pay up within 30 days, wouldn't that mean a much earlier inflow of cash? Of course. Ask students to identify methods a firm can use to bring in this early payment.

6.

A firm that extends credit to its customers does so for a reason, to increase its sales. Sometimes it must do so because its competitors offer credit terms, other times it is to obtain a competitive advantage. Any firm that extends credit knows that it will not collect 100% of its receivables. If, however, the profit on the additional sales obtained by extending credit exceed the losses incurred through bad debts, the firm is better off.

The purpose of credit policies is to reduce, not eliminate, the risk and amount of bad debts incurred by assessing the credit worthiness of the customers.

7.

There is a caution to be sounded not only in credit policy setting but also in inventory control. If inventory levels are kept too low, inventory costs such as warehousing, insurance and interest will be minimized and the amount of funds invested in inventory will be reduced. At some point, however, customers may decide that your firm has such a skimpy inventory that it is no longer worthwhile to shop there. In such a case, conservative inventory control has eliminated sales. A delicate balance must be struck.

8.

Students will often struggle with the idea that a company will sell on credit, knowing that it will not collect all of the money owing from all of the customers. The text refers to the use of credit terms such as 2/10, net 30 for accounts receivable. This encourages prompt payment because the cost of using the money for the extra 20 days is 2%. Annualized, this works out to an interest rate of 36.5%. (0.02 * 365/20). No wonder customers will pay within 10 days, as it is cheaper to borrow from the bank. .

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Part 5—Managing Financial Issues Remind students, however, that the firm is on the other side of the agreement with accounts payable. The firm will often have payment terms of 2/10 net 30 on its accounts payable, and the interest free debt is only for 10 days. Delaying payment for 20 days results in a cost of borrowing (no deduction for prompt payment) of 36.5% per year.

9.

Illustrating the function of a factor can usually take place better with middle-aged students than with college or university students. Nevertheless, here's how the illustration goes. Indicate that a newly married couple have just purchased a major appliance. The appliance dealer indicates that the purchase can be made in "six convenient payments."

Within a few days, the young couple receive in the mail a small coupon book containing six coupons from, let us say, Consolidated Finance Company, Limited. The man and wife wonder: "Who in the world is Consolidated, and why are they sending us this little booklet?" Well, the answer may well be that Consolidated is a factor that has purchased the accounts receivable of the appliance dealer.

10.

The textbook states that the credit policies of a firm can go a long way in determining how swiftly customers will act to reduce a firm's accounts receivables. Firms can also be more aggressive and go out and collect receivables. Here's a statement you might want to make: Sound credit policies are like keeping cholesterol low in your blood and getting plenty of aerobic exercise; collections is like open-heart surgery. This says that sound, perhaps strict, credit policies can prevent much of the painful task of collections.

11.

Related to the previous tip, there is a caution to be sounded not only in credit policy-setting but also in inventory control. If credit policies are too harsh and too demanding, then many profitable sales will be forfeited. The firm will simply scare off those customers deemed to be bad credit risks. A firm can work itself into a similar problem by too carefully handling inventory. No doubt about it, cutting back on inventory is a sure way to cut down the outflow of cash. But, at some point, customers may decide that your firm has such a skimpy inventory that it is no longer worthwhile to shop there. In such a case, conservative inventory control has eliminated sales. A delicate balance must be struck.

12.

Emphasize that a major portion of short-term financing involves the tug-of-war between accounts receivable and accounts payable. An old finance adage is this: pay slowly and collect quickly. This says that there must be methods devised to get customers to pay their bills quickly, thus keeping the figure for accounts receivable as low as possible and converting what is in those accounts to cash for the firm. Conversely, the old adage would inspire the firm to keep accounts payable as high as possible--without ruining your credit standing with your suppliers. The longer payment on those accounts can be delayed, the longer the firm has use of cash that really belongs to the suppliers.

In some industries, such as garment manufacturing, the sale of accounts 13. receivable to a factor is commonplace, and does not indicate that the business is having difficulty collecting its accounts receivable. Ask students to evaluate why a firm would sell on account and then turn around and factor the outstanding accounts. Why not just

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Chapter 16—Financial Decisions and Risk Management insist on payment in cash when the products are delivered? The objective is to have students understand that extending accounts receivable may be necessary to match competitors’ actions when many competitors exist. At the same time, a company may not have sufficient capital to be able to afford to wait 30 days to collect.

14.

Choosing between debt and equity financing is usually a challenge because each option will offer some advantages. It is unlikely that one option has only disadvantages and the other option has only advantages. This is very true in the long-term financing of a business. There are many reasons to avoid debt. Have students make a list of these. On the other hand, financing through equity--awarding a portion of the firm's ownership in order to acquire funds--has its drawbacks, too. Some of the students may have seen the movie Tucker, the saga of a man with a new idea to revolutionize the auto industry. The new concept started with Tucker, but in the middle of the film, we see that he is stymied by his board of directors. How could this be? Well, to obtain the funds to start the corporation, Tucker had to finance through equity, and he lost control of his own dream.

Provide the students with a list of the characteristics of preferred shares, and ask 15. them to evaluate each characteristic in terms of whether it is typical of debt or equity (common shares). Preferred shares always have a stated par value, a stated dividend rate.

Most preferred shares are non-voting, although voting preferred shares in private corporations are common. Some corporations issue term preferred shares that mature and must be redeemed at a specific date. Other preferred shares have no maturity date.

Still others are callable. This is an excellent exercise for reinforcing the differences between debt and equity. Students may be interested to know that preferred shares are classified as debt or equity on the balance sheet, depending largely on whether they have a fixed maturity date. If the corporation must redeem them, they are debt, not equity.

16.

Emphasize what the text says about retained earnings versus dividends. Ask the students to think about the type of investors that are looking for a firm paying generous, consistent and regular dividends. Other investors want to invest in a firm that knows how to wisely use profits for the expansion of the operation, and are happy to have the funds reinvested, rather than having to search out other investment opportunities for their funds. Students may be asked to consider how this differs from an investor using the dividends received to purchase additional shares in the company. Although the company does not get to deduct the dividends from taxable income, the shareholder must pay tax on dividends received, and will therefore have less to invest.

17.

The text provides a very brief introduction to the role of the financial manager in the purchase of long-term investments. This material can be expanded by explaining that there are a variety of tools available to the financial manager for evaluating investment opportunities, including discounted cash flow analysis and calculating the payback period. The financial manager will compare the expected future cash inflows to the expected cash outflows, and recommend the investment if the inflows are sufficiently greater than the outflows to provide the desired return on investment.

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Part 5—Managing Financial Issues 18.

In the discussion on sources of short-term funds, some forms of debt are evidenced by a written acknowledgement of the debt and others do not have specific acknowledgement. Ask the students to identify the benefit that the firm obtains by having a promissory note or trade acceptance signed, in contrast to open book credit which does not have that documentation. Without the signed documentation, the creditor must prove that the firm received the goods and therefore owed the debt. There is no impact on the collectibility of the debt, just convenience.

19.

Remind students of the fable of the Little Red Hen who did everything herself-because no one would help her. Then ask the students if this is a good approach for a small business getting started. When one reads in the textbook about venture capital firms, one cannot miss picking up the idea that such funders want in on the action (by acquiring ownership and/or by making decisions) in return for providing help.

20.

Venture capital firms can be considered lenders of last resort, as they invest in firms with excellent potential, but that are faced with significant cash flow needs as they expand. A common scenario is for a venture capital firm to act as a bridge financer for corporations that are going public, but need assistance before such a plan is feasible.

Once the corporation goes public, the venture capitalists dispose of their shares, providing additional funds for the next investment. Providing equity financing rather than debt financing is beneficial to both the venture capitalists, who are able to have a say in the operations of the high risk venture, and the business owners, who would otherwise not have sufficient funds and who can benefit from the expertise the venture capitalists have in successfully bringing such companies to the market.

21.

A new entrepreneur might say, in response to the previous tip: "I really don't care who owns a part of the firm or who makes the decisions, just so long as we do what we set out to do." Ask the class: "Why is the preceding an absurdly naive statement?" Of course, the answer is that when controlling ownership falls to someone other than the firm's founder, the firm can go in any number of directions, none of which is necessarily what the founder had in mind.

22.

The textbook lists four ways to handle risk and potential losses: avoid; control; retain; transfer. Lead the students in developing examples of each. Here are a few thoughts on automotive operation related to the four ways. If you want to avoid being in an auto accident, then never get inside a car, truck or van. To control risk, drive slowly on less-travelled streets in ideal weather conditions and make very few trips. To retain the risk, purchase no auto insurance (keep in mind that laws in some provinces forbid you to do this). To feel a little more financially secure, transfer the risk to an auto insurance firm (which is what most people do).

23.

Caution students that the term "transfer" of risk may need a little defining. A business can transfer to an insurance firm only as much coverage against potential loss as an insurance company is willing to take on or as a client thinks is necessary. There may be cases where that amount is insufficient. Sometimes in the news we will read that a firm is being sued for, say, $10 million and that the insurance firm is covering only $5 546

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Chapter 16—Financial Decisions and Risk Management million of that amount. Similarly, property insurance coverage may be less than the cost to repair or replace a damaged building.

24.

Invite a banker to come to your class and discuss the question of secured and unsecured loans. How do banks decide when each type of loan will be made?

25.

Invite several entrepreneurs to your class to have a roundtable discussion on how they secure financing for their businesses.

26.

Discuss the difference between personal and business credit. Why are credit cards to be considered negative but corporate credit OK? 27.

Debt is an acceptable method of acquiring funds. But students should be alerted to the fact that debt is almost always listed as a major cause when a firm finds itself forced out of business. How can debt be kept under control?

28. the class act as the board of directors of a company. Then present them with Have a scenario in which funds for expansion are needed at the same time that shareholders are demanding more dividends. How will they decide on the trade off between these two demands?

29.

In light of the firm relationship between risk and rate of return, students should be asked to take another look at the much-maligned "junk bonds." They should be reminded that in terms of nominal yield, junk bonds are not junk. But does this mean they should be used?

USING THE BOXED INSERTS Opening Case: The Source of a Meltdown, the Joy of a Bounce, and the Prospects Ahead The opening case describes the financial meltdown of 2008 as well as some more recent stock market movements. A key issue in the case is the level of risk that was evident in the financial system (often without investor knowledge of that risk). Because the meltdown was widely reported in the media, and because it had such an effect on the business cycle and on unemployment, the material should be of great interest to students.

Possible analysis/discussion questions are as follows: 1.

2.

What were the fundamental causes of the financial meltdown of 2008?

How does consumer psychology explain what went on before and during

the financial meltdown?

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Part 5—Managing Financial Issues 3.

Do you think that the continuation of low interest rates is going to create another financial meltdown?

4.

What are the implications of the huge government deficits that the government of the U.S. (and to a lesser extent Canada) have incurred?

Entrepreneurship and New Ventures: An Online Community for People 50 and Older Kelly and Jeff Lantz started a social networking site for users over 50 years old.

They have so far financed their business with their own money, but they are looking for $250,000 of outside funding to expand their site’s content and to hire an employee to help with sales ads.

Critical Thinking Questions 1.

What possible sources of financing are available to 55-Alive?

The main sources of funds that are available to a company like 55-Alive are debt sources (i.e., bank loans, love money, etc.). Even these may be difficult to get because the firm has little collateral. A small, new firm like this one will generally not find that it can get equity funds (i.e., selling shares of stock).

2.

How important is it that they develop a business plan to help secure this money?

A business plan (see Chapter 4) is very important because it forces the business owner to consider the marketing, production, finance, and HRM issues that need attention in order for the business to be a success. Without a good business plan, it will be difficult to convince lenders that the business idea is sound.

Managing in Turbulent Times: A Quicken Course in Accountability Scott Cook followed three core principles to make Intuit a success: (1) listen to the customer and design the product for customer value; (2) be open minded in identifying all competing ways the customer could perform the task, not just the obvious ones; and (3) simplify and improve the product so it provides the easiest way to accomplish the task. His concern for customer-friendly products extended to having computer store employees follow the customer home and note any indication that the product was not easy to open, install, or use. Entrepreneurs satisfied with the product’s performance for personal use began to use Quicken for their businesses and Intuit responded by creating Quickbooks, software specifically designed for business financial management.

Critical Thinking Questions

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Chapter 16—Financial Decisions and Risk Management 1.

Choose two consumer products that you use and come up with specific suggestions for pursuing accountability in the way that Cook did for his company’s products. Be specific.

Student answers will vary depending on the product chosen. Students might choose something like a personal computer because they see parallels between software and hardware. So, they might suggest that a computer store adopt the “Follow Me Home” approach used by Cook with respect to Quicken software.

2.

Does Cook’s view of “accountability” seem extreme? Is there a downside to such aggressive accountability?

Cook’s view may seem extreme to some students. For example, the “Follow Me Home” program may strike them as extremely expensive and time-consuming. But other students will argue that if such an approach can be used for a product like Quicken that costs only a few hundred dollars, why couldn’t the same approach be used for a personal computer which may cost 10 times that amount?

There may be a downside to such aggressive accountability if the approach is not cost-effective. There are limits to how much time and money can be spent trying to figure out what customers want.

Some additional questions and ideas for classroom discussion are as follows: 1.

This case demonstrates accountability to the customer, in contrast with the accountability to shareholder that is often first priority in business. How important was the accountability to the customer in the success of the business?

2.

What impact has this focus on accountability had on the welfare of the shareholders in Intuit? (Intuit went public in March of 1993 at $30 per share, and traded at $336 per share in April of 2007, after adjusting for the 3 stock splits that have occurred. ($28 per share * 2*3*2).) Have students check the current price of Intuit stock.

QUESTIONS AND EXERCISES Questions for Analysis 1.

In what ways do the two sources for debt financing differ from each other? How do they differ from the two sources of equity financing?

Long-term loans and corporate bonds differ in terms of source of money, term and ease of financing, and changeability of the financing conditions. Whereas long-term loans are with commercial banks, are from three to ten years in length, and usually contain clauses allowing changes to the loan's terms, corporate bonds are sold through bond markets and stock exchanges to anyone willing to buy them, have very long terms, tend to involve higher interest rates, but are more commonly used, with lenders more easily .

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Part 5—Managing Financial Issues found. Both these sources of debt financing differ from equity financing in that they get long-term funds from outside the firm whereas equity financing draws on internal financial sources. Also, debt financing requires the firm to pay interest regularly whereas equity financing does not.

2.

Describe the relationship between investment risk and return. In what ways might the risk-return relationship affect a company’s financial planning?

Investors expect a chance at greater financial returns for riskier investments.

When we consider investing, financial planning depends on the strategy and culture of the company. In a company that is risk adverse, more conservative financial planning will be the guide and vice versa. If we are looking at securing funding, the financial manager can gauge investors’ perceptions of their riskiness, and then estimate how much it should pay to attract funds.

3.

What is the basic relationship between the amount of risk associated with a project and the likelihood of gains (or losses) on the project? Explain how several financial instruments (GICs, common stocks, preferred stocks, corporate bonds) illustrate this basic relationship.

The higher the risk the higher the possible returns on the project but also the greater the possible loss.

GICs—no risk and limited possible gains Common stocks—higher risk and higher potential for gain Preferred stocks—less risk than common stock and therefore less potential for capital gain than common stocks

4.

Corporate bonds—low risk and low return How would you decide the best mix of debt and equity financing for a company?

The capital structure of the firm would be a function of how conservative or risk-

oriented the managers are. The most conservative method of financing is the use of all equity. The obligations of the company must be balanced against the needs for cash and other funding.

In responding to this question, students should keep in mind that as safe as it may sound, starting a business without owing a penny to anyone is not necessarily a sound approach.

5.

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Why would a business “factor” its accounts receivable?

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Chapter 16—Financial Decisions and Risk Management A business may factor its account receivable to raise some funds. Because factoring it actually means selling the accounts receivable. The amount of profit made depends on the quality of the receivables, the cost of collecting them and the interest rates.

6.

What are the risks and benefits associated with the sources of short-term funds (trade credit, secured and unsecured loans, and factoring accounts receivable)? How does these risks and benefits compare with those associated with sources of long-term funds (debt and equity)?

Short-term funds are costly but convenient. Long-term funds normally have lower interest rates than short-term funds.

Application Exercises 7.

Interview the owner of a local small business. Identify the types of short-term and long-term funding this firm typically uses. Why has the company made these particular financial management decisions?

An alternative to sending students out to interview is to invite some small business owners to your class to talk about funding. The owner of a small business will be a busy person. Make sure students have questions written down in advance, whether they go out to interview, or whether the businessperson comes to class. Be sure to ask how much risk the firm has decided to retain. How much did the cost of insurance affect this decision?

8.

Interview the owner of a small local business. Ask this person to describe the risk management process he or she follows. What role, for example, is played by risk transfer? Why has the company made the risk management decisions that it has?

Student answers will vary depending on the situation (e.g., company culture, etc.).

Have the students focus on the last part of the question.

9.

Go to Sedar.com and find the balance sheets of two different corporations operating in the same industry. Determine the relative emphasis each business has placed on raising money through debt versus equity. Why might these differences exist?

High debt means vulnerability to interest rate changes, but sometimes it is cheaper to finance through debt than equity. If interest rates increase then people will finance through equity.

10.

Interview a risk manger of a large firm and ask the following questions: What , risks do you think your firm faces? How does your firm manage these risks? How have your policies changed over the years to adjust for new risk levels?

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Part 5—Managing Financial Issues There are many risks that every company encounters. Some of the more common for large businesses are losing their reputation and liability caused by actions of the company or its employees. Summarize student responses to determine which risks are most common.

In terms of ways companies manage risks, summarize student responses to determine which approaches (risk avoidance, risk control, risk retention, risk transfer) are most commonly used.

In terms of new risk levels, students are likely to find risk managers complaining about escalating insurance rates. Once again, summarizing responses will give an insight into patterns of coping that companies are using.

TEAM EXERCISES Building Your Business Skills: Understanding Risk Management Issues Follow-Up Questions 1.

Were there common themes in the "big stories" in financial management?

Seek to find to what degree each of the five firms was facing unusual financial management challenges at this time, as opposed to being a firm with record high revenues and a net income up substantially over the previous year.

2.

What have the various companies done to minimize future risks and losses?

Try to understand how they have handled the mix of: avoiding, controlling, retaining, and/or transferring risk. Do you have helpful suggestions for some of these firms?

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Chapter 16—Financial Decisions and Risk Management

Exercising Your Ethics: Team Exercise: Doing Your Duty When Payables Come Due Activity Overview: This activity allows students to role-play and then share their views on ethics in a realworld situation.

Time Limit: 35 minutes What To Do: 1.

Divide the class into four-person teams and ask them to read and follow the instructions for the Exercising Your Ethics: Team Exercise found at the end of Chapter 16. Students should each choose one of the different roles in the exercise. (20 minutes) 2.

Reassemble the class as a whole and discuss what disagreements came up within the various groups. How did the role they played affect their perspective? (15 minutes) Don’t Forget: Remind students that what one individual or group considers unethical may not be considered unethical by another individual or group. Try to determine why different groups have different views about what is ethical or unethical.

Wrap-Up: Remind students that the situation in this exercise has real-world parallels. Ask them to do a little research and find out which companies have withheld supplier payments in an attempt to influence the price of the company’s stock. Have them report back at the next class.

CASE ANALYSIS Business Case 16: The Commercial Paper Crisis 1.

Why do investors buy commercial paper? Why did some investors buy non-bank commercial paper?

Investors buy commercial paper when they have excess cash that they don’t need in the very short-term (30-90 days). This cash earns interest that is paid by commercial paper sellers.

Investors bought non-bank commercial paper because they were promised a higher rate of return than investors who bought bank commercial paper. Unfortunately, investors in non-bank commercial paper did not know that the assets underlying their commercial paper included some high risk assets like subprime mortgages. They didn’t know this because DBRS rates the commercial paper as low risk. It might be argued that .

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Part 5—Managing Financial Issues these investors should have known that the commercial paper they were buying was riskier than traditional commercial paper simply because they were getting a higher rate of return. But it can also be argued that investors might have simply assumed that the non-bank commercial paper providers were more efficient than bank providers and were passing the savings on to investors in the form of higher rates of return. Consider a parallel situation: credit unions often pay higher interest on GIC’s than banks do. Does that make credit unions a riskier place to put your money? Perhaps, but many investors put their money in credit unions and very few of them ever lose any money. So, perhaps investors in non-bank commercial paper thought that even though they were promised a higher rate of return, they didn’t think that they were accepting a higher level of risk. Unfortunately, their assumption proved to be wrong.

How does the commercial paper crisis demonstrate the risk-return principle?

2.

The key point is this: as risk increases, investors demand higher returns to compensate for the increased risk they are taking. This means that investors who are very risk-averse may be willing to invest in GIC’s even though they will receive only 2 percent on their investment because they know there is virtually no chance they will lose their money. In contrast, investors who are risk-seeking may invest in highly speculative common stock and hope for a return of 15 or 20 percent annually. They know they might lose some or all of their money, but their risk preference is such that they are willing to accept the risk in return for possibly earning a great deal on their investment.

The commercial paper crisis demonstrates the risk-return principle because investors in non-bank commercial paper discovered that the higher returns they were promised came with an increased risk that they might lose money (or be unable to get their money when they wanted it). It is not clear whether investors in non-bank commercial paper paid much attention to the risk-return principle when they invested their money. Even if they had, it is not clear that they could have known what kind of assets were underlying the commercial paper they were buying. Most of them probably assumed that the commercial paper they were buying was typical commercial paper, that is, it was a very safe investment.

3.

Explain how problems in the U.S. subprime mortgage market caused difficulties in the Canadian commercial paper market.

In its most general terms, the problems in the U.S. subprime mortgage market caused difficulties in the Canadian commercial paper market because subprime mortgages were packaged together with less risky loans (for example, car loans and regular home mortgages) in CDO’s that were sold to investors. It is not only Canadian investors who had trouble getting back the money they had invested. The problematic CDO’s were sold in many different countries around the world.

The specific mechanism by which the subprime market caused difficulties is described in the case, and parts of that discussion are repeated here for convenience: [The subprime mortgage market is one where people who wouldn’t usually qualify for 554

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Chapter 16—Financial Decisions and Risk Management mortgage money go to get money to buy a house. This market became very active in the U.S. as interest rates dropped sharply beginning in 2001. Suppose the Smith family wants to buy a home, but they have a poor credit rating and can’t meet the normal criteria for a mortgage. They therefore get a subprime mortgage where unusually low interest “teaser” rates apply for the first two years, and then rise to market rates for the remaining years of the mortgage. Many of these subprime mortgages were sold in 2003 and 2004. When people with subprime mortgages started defaulting in 2006 because they couldn’t afford the higher interest rates, the subprime market collapsed. As the number of Americans defaulting on their mortgages surged further in 2007, foreclosures increased and the returns that normally would have been earned on these mortgages dropped sharply. And since these subprime mortgages were included in commercial paper that was sold to investors, the conduits couldn’t pay their investors as they had promised. Gradually, investors became aware that subprime mortgages were being packaged together with other, lower-risk debt and they became suspicious of all commercial paper.]

4.

Should Canada’s federal government become more involved in regulation of the commercial paper market so problems like the one described above won’t happen again?

As noted in the case, commercial paper transactions are currently not regulated by securities regulators because they are short-term in nature. Suggesting that the federal government should become involved in policing this market means changing a longstanding practice as well as contemplating major changes in the role of government in the financial transactions of a free society.

There will be two basic types of student answers to this question. Some students will argue that the government should stay out of business activities as much as possible and let the market determine what happens. They will argue that government involvement inevitably leads to distortions in the market that causes all sorts of unintended consequences and motivates individuals to become dependent on government for help instead of helping themselves. Other students will argue that government needs to get much more involved in financial markets because what we have seen during the last decade or so is that greedy and manipulative people in the financial sector are benefiting at the expense of the average investor.

There is obviously no simple answer to this question, and both viewpoints have some merit. Because there is no simple answer, it is best to ask students identify the pros and cons of government involvement in a financial market like commercial paper and then determine what steps might be taken to strike a reasonable balance between government involvement and investor freedom.

CRAFTING A BUSINESS PLAN PART 5: MANAGING FINANCIAL ISSUES Assignment Overview: The final part of the business plan project asks students to consider how they’ll finance their business. They are also asked to create an executive summary for their plan. Remind .

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Part 5—Managing Financial Issues students that although the executive summary is the final step in the project, it should be placed at the beginning of their completed business plans. Encourage your students to be concise as they write the executive summary, as investors look at the summary before reading the details of the plan. Because this is the final part of the plan, you will probably want to ask students to submit not just Part 5 but the entire plan at this point.

Files to Provide Students: • this part of the project, students will be asked to complete Part 5: Managing For Financial Issues. If students have already started working on the Business Plan Project, they should continue using the student template they began working on in Parts 1 through 4. The Microsoft Word Business Plan Project Student Template is located on the Web at www.pearsoned.ca/mybusinesslab.

Estimated At-Home Completion Time: If done well, this section will require a minimum of 1 to 3 hours.

Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected. You should expect about 3 to 5 pages in this section.

VIDEO CASES Video Case 5-1: Debt Nation 1.

Identify several reasons why people get into financial difficulty. Which reason applies to which family? Is there a common underlying reason for these three families?

There are several reasons why people get into financial difficulty. For example, they may not understand the implications of, say, credit card debt and the high interest rates that they are going to have to pay. Or, they may be undisciplined in their spending and avoid thinking about the implications of spending money that they don’t have at the moment. Or, they may be overoptimistic and assume that in the future their revenue will increase so they don’t have to worry about spending more money. The most general reasons, of course, is that people spend at a level that cannot be supported by their annual incomes.

Let’s look at the three cases. In the case of Wayne and Theresa, the amount of work that Wayne is able to get varies quite a bit, yet he and his wife continue to spend as if they had a steady (and larger) income. They have too many credit cards and are being forced to pay high interest rates on unpaid monthly balances, but they say they can’t give up their credit cards. As far as Joanne and Travis are concerned, Joanne is an admitted shopaholic in spite of the fact that Travis is a low-paid musician and Joanne is often unemployed. While they have property they could sell to get cash to pay off their highinterest debt, they refuse to do so. As far as Hannalaura is concerned, she also has a lot of debt but still has urges to spend money on things she cannot afford.

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Chapter 16—Financial Decisions and Risk Management The common underlying reason why each of these three families is in financial trouble is similar—they all spend more than they can afford. In all three cases, the solution to the problem is pretty simple (bring spending in line with revenue), but all three families have so far refused to do this. Why? Because they must change their behaviour patterns in order to get out of financial difficulty, and they seem unwilling to do so. The problem therefore continues.

2.

Consider the following statement: “Credit card companies should cancel the credit card of any consumer whose credit card balance exceeds $10,000. This will prevent the consumer from falling more deeply into debt.” Do you agree or disagree with this statement? Explain your reasoning.

Students who agree with the statement will take the position that a simple solution like this will go a long way toward solving the problem of consumer debt. They may also say that the $10,000 limit is too high (perhaps it should be set at, say, $2,000). They will argue that, by definition, this approach will stop consumers from getting too deeply into debt (at least with the specific credit card whose balance goes over the $10,000 limit).

But these arguments are too simplified. As implied in the preceding paragraph, this will not stop consumers (at least in the near term) from running up $10,000 limits on many different credit cards. As well, this approach does nothing to answer questions such as: “Why do consumers run up such big credit card debts?” and “How can consumers who get into debt so fast even qualify for a credit card?” What is needed are more checks at the front end of the process, and stricter rules about who can qualify for a credit card.

Of course, restricting the number of credit card holders is something that credit card companies want to avoid since it will obviously reduce the number of credit card transactions that will be evident each month. This will, in turn, reduce the revenues of credit card companies.

There are no easy solutions to this problem. What happens instead is a back-andforth debate about how to solve the problem. Meanwhile, much time goes by and the situation worsens while people on various sides of the argument try to reach a consensus.

These practical matters can be nicely demonstrated if an in-class debate among students is carried out. When students in the class hear the variety of different pro and con arguments, they will have a much better understanding of the complexity of this issue.

3.

Sherrell, the psychologist, says that very few people follow financial advice. Why do you think that people don’t follow financial advice?

The answer to this question was alluded to in question #1 above. That is, in order to resolve their financial problems, these three families must change their spending behaviour. But behaviour can be very difficult to change, so these families face an uphill climb. People who are financially disciplined have great difficulty understanding why people who are in financial trouble because of overspending don’t change their ways (this is similar to people who don’t have a weight problem having difficulty understanding why overweight people just don’t stop eating so much). The idea is simple—stop .

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Part 5—Managing Financial Issues spending so much money—but implementing it is very difficult. One of the difficulties is that the three families have gotten considerable satisfaction out of spending money in the past (even though doing so eventually got them in trouble), and to stop spending money now will reduce their satisfaction. So, they keep on with dysfunctional behaviour (just as overweight people do) and then have to deal with its consequences.

4.

How successful do you think each family will be as they attempt to resolve their financial problems? (After you have turned in your answers, your instructor will give you an update on the three families.)

Instructors: Follow-up information on the three families is provided in the Marketplace program entitled “Debt Nation, Part 2,” January 22, 2006.

Video Case 5-2: Card Tricks 1.

Credit cards are often referred to as “plastic money.” Explain why credit cards do not actually qualify as “money.”

Money has three functions: as a medium of exchange (to buy and sell things), a store of value (money can be used for future purchase and therefore “stores” value), and unit of account (money allows measurement of the relative values of goods and services).

Credit cards are not money, but a money substitute, i.e., they serve as a temporary medium of exchange, but they are not a store of value.

2.

Think about the situation that was encountered by each of the four individuals profiled above. Do you think the individual or the credit card company had the most defensible position? Explain your reasoning for each case.

Student opinions will vary. It is probably most effective to first poll students to get their opinions on each of the four situations. Post these voting results so everyone can see them. Then moderate a class discussion on the reasonableness of the views for each of the four situations. When doing this, ensure that equal time is given to both sides of the issue. For example, in the Paul Cassano situation, some students will argue that it is outrageous that he was charged a currency conversion fee (the fee that is in addition to the usual currency exchange rate). To support their argument, they will point to the fact that a similar lawsuit against CIBC cost the bank $19.5 million. But other students will argue that the services provided by credit card companies are not costless and someone has to pay for them. They will point to the fact that after CIBC lost its case, it raised its currency conversion fee, so there is nothing illegal about such a fee. Debates like this will give students insights into the complex issue of what businesses charge for products or services. Students will agree that businesses must charge for their products and services, but there will be great debate about how much is reasonable.

If “consumers don’t pay off their credit card Consider the following statement: 3. balance each month, that’s their decision, and they shouldn’t complain about the interest they are charged. They should just stop spending so much money and pay off their bill 558

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Chapter 16—Financial Decisions and Risk Management each month (or just stop using their credit card). Demanding more restrictive legislation on credit card companies is not the answer. Consumers get into debt because they spend more than they can afford.” Do you agree or disagree with the statement. Explain your reasoning.

Students who agree with the statement will argue that there is compelling logic about the statement. Who can argue with the claim that if people pay off their bill each month (or stop using their credit card entirely) there will be no problems? As well, these students will argue that restrictive government legislation always has unintended consequences, so it should be minimized. They will argue that the first thing some (unthinking) people do is to ask the government to impose rules to curb the supposed problem. But doing so, they will argue, ignores possible unintended consequences of the new rules. Proposing more restrictive legislation regarding credit cards might look straightforward on the surface, but credit card companies will react in ways that may actually be more detrimental to consumers. [Some creative students who agree with the statement may use the following analogy to make their point about unintended consequences of restrictive legislation: In the 1960s and 1970s, anti-nuclear groups were very successful at completely halting the construction of new nuclear plants on the grounds that storing nuclear waste was a big problem. But the unintended consequence of that was that many coal-fired electric generating plants were built and they have dramatically increased carbon dioxide levels in the atmosphere. Now environmental groups are becoming more accepting of nuclear power because carbon dioxide is now seen as a bigger culprit.]

Students who disagree with the statement will argue that it is based on the assumption that consumers who get into credit card trouble are just being reckless with their spending, or are consciously trying to scam the system. But they will argue that that assumption is clearly not reasonable because consumers get into difficulty for various reasons (they may make poor purchasing decisions, or they don’t understand the credit card service charges, or they unexpectedly lose their job and can’t make the payments they intended to make). It is not reasonable to punish such people in situations like these.

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CHAPTER 1 The Canadian Business System

Business Essentials, Sixth Canadian Edition, by Ebert

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1-1

Neha’s Coffee House sold 10 000 cups of coffee at $1.75 each. Her operating expenses were $1500 for rent, $500 for insurance, $8000 for wages, and $5000 for materials. Neha’s profit is: A) $1500 B) $2000 C) $2500 D) $3000

Business Essentials, Sixth Canadian Edition, by Ebert

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1-2

Neha’s Coffee House sold 10 000 cups of coffee at $1.75 each. Her operating expenses were $1500 for rent, $500 for insurance, $8000 for wages, and $5000 for materials. Neha’s profit is: A) $1500 B) $2000 C) $2500 D) $3000

Business Essentials, Sixth Canadian Edition, by Ebert

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1-3

The most important difference between command economies and market economies is______.

A) access to human rights B) who controls the factors of production C) the government in power

D) freedom of the press

Business Essentials, Sixth Canadian Edition, by Ebert

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1-4

The most important difference between command economies and market economies is______.

A) access to human rights B) who controls the factors of production C) the government in power D) freedom of the press

Business Essentials, Sixth Canadian Edition, by Ebert

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1-5

Karl Marx envisioned a system reflected by the statement, “from each according to their ability, to each according to their need.” This statement implies that: A) Rewards should be allocated based on the value of contributions to society.

B) All citizens are equal, and should be rewarded equally.

C) Everyone should do their best to contribute, and in exchange society will address their needs.

D) To be truly equal, those with greater need must receive more.

Business Essentials, Sixth Canadian Edition, by Ebert

.

1-6

Karl Marx envisioned a system reflected by the statement, “from each according to their ability, to each according to their need.” This statement implies that: A) Rewards should be allocated based on the value of contributions to society.

B) All citizens are equal, and should be rewarded equally.

C) Everyone should do their best to contribute, and in exchange society will address their needs.

D) To be truly equal, those with greater need must receive more.

Business Essentials, Sixth Canadian Edition, by Ebert

.

1-7

When Henry Ford adopted the assembly line to mass produce the Model-T in 1913, he decided to pay his workers a relatively high wage because he believed that workers should be able to afford to buy what they make.

This is consistent with the idea of _______________.

A) communism B) input and output markets C) socialism D) privatization Business Essentials, Sixth Canadian Edition, by Ebert

.

1-8

When Henry Ford adopted the assembly line to mass produce the Model-T in 1913, he decided to pay his workers a relatively high wage because he believed that workers should be able to afford to buy what they make.

This is consistent with the idea of _______________.

A) communism B) input and output markets C) socialism D) privatization Business Essentials, Sixth Canadian Edition, by Ebert

.

1-9

A typical demand curve illustrates that: A) B) C) D)

As people earn more income, they buy more of a good.

As supply increases, the amount that a consumer wants will tend to decrease.

People will always buy more than they really want as a result of a low price.

People tend to buy more of a good when its price decreases.

Business Essentials, Sixth Canadian Edition, by Ebert

.

1-10

A typical demand curve illustrates that: A) B) C) D)

As people earn more income, they buy more of a good.

As supply increases, the amount that a consumer wants will tend to decrease.

People will always buy more than they really want as a result of a low price.

People tend to buy more of a good when its price decreases.

Business Essentials, Sixth Canadian Edition, by Ebert

.

1-11

If the Black Eyed Peas have a sold out concert this Friday night but tickets are still in high demand, concert-goers are likely to buy tickets from ‘scalpers’ at prices considerably higher than the original price. This situation can be described as a: A) shortage; in which quantity demanded exceeds quantity supplied.

B) surplus; in which quantity demanded exceeds quantity supplied.

C) shortage; in which quantity supplied exceeds quantity demanded.

D) surplus; in which quantity supplied exceeds quantity demanded.

Business Essentials, Sixth Canadian Edition, by Ebert

.

1-12

If the Black Eyed Peas have a sold out concert this Friday night but tickets are still in high demand, concert-goers are likely to buy tickets from ‘scalpers’ at prices considerably higher than the original price. This situation can be described as a: A) shortage; in which quantity demanded exceeds quantity supplied.

B) surplus; in which quantity demanded exceeds quantity supplied.

C) shortage; in which quantity supplied exceeds quantity demanded.

D) surplus; in which quantity supplied exceeds quantity demanded.

Business Essentials, Sixth Canadian Edition, by Ebert

.

1-13

In a private enterprise system, firms decide where to acquire materials, what products to produce, and what price to charge customers. Which two elements of private enterprise have the greatest impact on these decisions?

A) private property and freedom of choice B) freedom of choice and competition C) freedom of choice and profits D) private property and competition Business Essentials, Sixth Canadian Edition, by Ebert

.

1-14

In a private enterprise system, firms decide where to acquire materials, what products to produce, and what price to charge customers. Which two elements of private enterprise have the greatest impact on these decisions?

A) private property and freedom of choice B) freedom of choice and competition C) freedom of choice and profits D) private property and competition Business Essentials, Sixth Canadian Edition, by Ebert

.

1-15

The markets for laundry detergents, soda pop and cars are all dominated by just a few producers. In terms of competition these markets are described as: A) perfect competition B) oligopoly C) monopoly D) monopolistic competition

Business Essentials, Sixth Canadian Edition, by Ebert

.

1-16

The markets for laundry detergents, soda pop and cars are all dominated by just a few producers. In terms of competition these markets are described as: A) perfect competition B) oligopoly C) monopoly D) monopolistic competition

Business Essentials, Sixth Canadian Edition, by Ebert

.

1-17

The presence of competition in free markets: A) is undesirable because it results in unnecessary redundant expenses.

B) often results in better quality and lower prices for consumers.

C) is rarely experienced since competition is forced out by monopolies.

D) is undesirable, because large firms are always more cost efficient than smaller ones.

Business Essentials, Sixth Canadian Edition, by Ebert

.

1-18

The presence of competition in free markets: A) is undesirable because it results in unnecessary redundant expenses.

B) often results in better quality and lower prices for consumers.

C) is rarely experienced since competition is forced out by monopolies.

D) is undesirable, because large firms are always more cost efficient than smaller ones.

Business Essentials, Sixth Canadian Edition, by Ebert

.

1-19

During this time in Canada’s history there was an abundance of business people who were willing to bear high levels of risk for the potential of earning high rewards. The government’s attitude of “laissez-faire” encouraged their endeavors.

A) The Industrial Revolution B) The Production Era C) The “decade of greed” D) The Entrepreneurial Era Business Essentials, Sixth Canadian Edition, by Ebert

.

1-20

During this time in Canada’s history there was an abundance of business people who were willing to bear high levels of risk for the potential of earning high rewards. The government’s attitude of “laissez-faire” encouraged their endeavors.

A) The Industrial Revolution B) The Production Era C) The “decade of greed” D) The Entrepreneurial Era Business Essentials, Sixth Canadian Edition, by Ebert

.

1-21

CHAPTER 2 The Environment of Business

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-1

Environmental protection laws, interest rates, societal values, and the emergence of new technologies can significantly impact the profitability of a firm. These types of issues can not be controlled by a business as they are considered to exist in the ________.

A) external environment B) internal environment C) organization’s boundary D) global context

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-2

Environmental protection laws, interest rates, societal values, and the emergence of new technologies can significantly impact the profitability of a firm. These types of issues can not be controlled by a business as they are considered to exist in the ________.

A) external environment B) internal environment C) organization’s boundary D) global context

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-3

If improvements in standard of living depend on greater productivity per worker, what can the government do to help make workers more productive?

A) Lower taxes.

B) Create more jobs.

C) Invest in training and education.

D) Protect the environment.

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-4

If improvements in standard of living depend on greater productivity per worker, what can the government do to help make workers more productive?

A) Lower taxes.

B) Create more jobs.

C) Invest in training and education.

D) Protect the environment.

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-5

Tim Horton’s is attempting to expand its coffee chain into the United States. The total value of U.S. sales generated by this Canadian firm contribute to Canada’s ______.

A) purchasing power parity B) standard of living C) Gross Domestic Product (GDP) D) Gross National Product (GNP)

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-6

Tim Horton’s is attempting to expand its coffee chain into the United States. The total value of U.S. sales generated by this Canadian firm contribute to Canada’s ______.

A) purchasing power parity B) standard of living C) Gross Domestic Product (GDP) D) Gross National Product (GNP)

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-7

You earned $10 per hour working for a retailer last year. You have just been given a raise to $10.25. How will this effect your lifestyle if the rate of inflation was 3%?

A) I can afford to buy more now that I will be bringing home more money.

B) There is no impact from the wage increase; it will only cover the higher taxes I must pay.

C) I cannot afford to buy as much, since prices are increasing quicker than my wages.

D) I could increase my savings with my additional earnings.

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-8

You earned $10 per hour working for a retailer last year. You have just been given a raise to $10.25. How will this effect your lifestyle if the rate of inflation was 3%?

A) I can afford to buy more now that I will be bringing home more money.

B) There is no impact from the wage increase; it will only cover the higher taxes I must pay.

C) I cannot afford to buy as much, since prices are increasing quicker than my wages.

D) I could increase my savings with my additional earnings.

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-9

The federal government manages the Canadian economic system through two sets of policies: fiscal and monetary.

Fiscal Policy refers to: A) the control of the money supply B) the control of interest rates C) the government’s approach to its spending and taxation D) the effective management and control of the national debt

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-10

The federal government manages the Canadian economic system through two sets of policies: fiscal and monetary.

Fiscal Policy refers to: A) the control of the money supply B) the control of interest rates C) the government’s approach to its spending and taxation D) the effective management and control of the national debt

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-11

Apple’s iPhone created competition that crossed many industry boundaries by enabling users to make phone calls, surf the internet, play music, and take photos with a single device. Some competitors were dismayed by the new competition because they failed to recognize the dynamic nature of the _____________.

A) Political-Legal Environment B) Economic Environment C) Socio-Cultural Environment D) Technological Environment Business Essentials, Sixth Canadian Edition, by Ebert

. 2-12

Apple’s iPhone created competition that crossed many industry boundaries by enabling users to make phone calls, surf the internet, play music, and take photos with a single device. Some competitors were dismayed by the new competition because they failed to recognize the dynamic nature of the _____________.

A) Political-Legal Environment B) Economic Environment C) Socio-Cultural Environment D) Technological Environment Business Essentials, Sixth Canadian Edition, by Ebert

. 2-13

Yun is considering opening a restaurant in the city. He understands that he will need to work with the city health and zoning departments to obtain permits. Yun’s obligation to secure the necessary permits are examples of the ___________.

A) Political-Legal Environment B) Economic Environment C) Socio-Cultural Environment D) Technological Environment Business Essentials, Sixth Canadian Edition, by Ebert

. 2-14

Yun is considering opening a restaurant in the city. He understands that he will need to work with the city health and zoning departments to obtain permits. Yun’s obligation to secure the necessary permits are examples of the ___________.

A) Political-Legal Environment B) Economic Environment C) Socio-Cultural Environment D) Technological Environment Business Essentials, Sixth Canadian Edition, by Ebert

. 2-15

Many older managers complain about the lack of work ethic in today’s youth. In reality, today’s young workers do have work ethic but they place greater value on work-life balance than previous generations. Firms that wish to attract and retain highly skilled young workers must understand the_________.

A) Political-Legal Environment B) Economic Environment C) Socio-Cultural Environment D) Technological Environment Business Essentials, Sixth Canadian Edition, by Ebert

. 2-16

Many older managers complain about the lack of work ethic in today’s youth. In reality, today’s young workers do have work ethic but they place greater value on work-life balance than previous generations. Firms that wish to attract and retain highly skilled young workers must understand the_________.

A) Political-Legal Environment B) Economic Environment C) Socio-Cultural Environment D) Technological Environment Business Essentials, Sixth Canadian Edition, by Ebert

. 2-17

McDonalds Restaurant was quick to respond to society’s concerns about health and nutrition. It was the first among popular fast-food chains to provide nutritional information about its product, reduce the fat in its french fries and add a variety of salads to its menus. This behaviour shows McDonalds was responding to the _______________.

A) Political-Legal Environment B) Economic Environment C) Socio-Cultural Environment D) Technological Environment Business Essentials, Sixth Canadian Edition, by Ebert

. 2-18

McDonalds Restaurant was quick to respond to society’s concerns about health and nutrition. It was the first among popular fast-food chains to provide nutritional information about its product, reduce the fat in its french fries and add a variety of salads to its menus. This behaviour shows McDonalds was responding to the _______________.

A) Political-Legal Environment B) Economic Environment C) Socio-Cultural Environment D) Technological Environment Business Essentials, Sixth Canadian Edition, by Ebert

. 2-19

Simon would like to buy a Valentines gift for his girl friend as a sign of his affection. To his dismay he discovers that roses cost $75 a dozen. Luckily, he can buy chocolates for $20. According to Porter’s Five Forces Model, chocolates are a less costly _________.

A) option B) substitute C) replacement D) complement Business Essentials, Sixth Canadian Edition, by Ebert

. 2-20

Simon would like to buy a Valentines gift for his girl friend as a sign of his affection. To his dismay he discovers that roses cost $75 a dozen. Luckily, he can buy chocolates for $20. According to Porter’s Five Forces Model, chocolates are a less costly _________.

A) option B) substitute C) replacement D) complement Business Essentials, Sixth Canadian Edition, by Ebert

. 2-21

Jomal is a popular interior decorator who charges his clients $100 an hour for his services. When he pays a neighbourhood kid $20 each week to cut his lawn, Jomal is effectively _________.

A) outsourcing B) subcontracting C) trading D) financing

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-22

Jomal is a popular interior decorator who charges his clients $100 an hour for his services. When he pays a neighbourhood kid $20 each week to cut his lawn, Jomal is effectively _________.

A) outsourcing B) subcontracting C) trading D) financing

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-23

An organization’s core competenciesrefers to: A) The company’s strategies to increase market share B) The company’s product offerings which achieve the highest profit levels C) The training programs used to increase employee productivity D) The skills and resources with which they compete best and create the most value for owners.

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-24

An organization’s core competenciesrefers to: A) The company’s strategies to increase market share B) The company’s product offerings which achieve the highest profit levels C) The training programs used to increase employee productivity D) The skills and resources with which they compete best and create the most value for owners.

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-25

If Bling Jewelers and Northern Diamond Mining Corp. consolidated into a single larger corporation, we would say that they engaged in a __________.

A) strategic alliance B) horizontal merger C) conglomerate merger

D) vertical merger

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-26

If Bling Jewelers and Northern Diamond Mining Corp. consolidated into a single larger corporation, we would say that they engaged in a __________.

A) strategic alliance B) horizontal merger C) conglomerate merger

D) vertical merger

Business Essentials, Sixth Canadian Edition, by Ebert

. 2-27

CHAPTER 3 Conducting Business Ethically and Responsibly

Business Essentials, Sixth Canadian Edition, by Ebert

.3-1

Most people agree that taking a candy bar from the corner store without paying is wrong. Yet, many of those same people frequently take home pens and other office supplies from their workplace. This illustrates that: A)

It is illegal to steal from a store, but not from your employer.

B) Employers accept that employees are stealing office C) supplies and factor this into their costs.

A person’s beliefs about ethical behaviour varies depending on the situation.

D) Workplaces expect that employees will use company supplies for personal use.

Business Essentials, Sixth Canadian Edition, by Ebert

.3-2

Most people agree that taking a candy bar from the corner store without paying is wrong. Yet, many of those same people frequently take home pens and other office supplies from their workplace. This illustrates that: A) It is illegal to steal from a store, but not from your B) employer.

C) Employers accept that employees are stealing office supplies and factor this into their costs.

A person’s beliefs about ethical behaviour varies depending on the situation.

D) Workplaces expect that employees will use company supplies for personal use.

Business Essentials, Sixth Canadian Edition, by Ebert

.3-3

We start to form ethical standards: A) when we enter school where we are influenced by our peers.

B) as children, in response to our perception about our parents’ behaviour and that of other adults.

C) in the workplace, as we gain experience in a business environment.

D) when we are caught doing something wrong; the consequences of our actions are the impetus for ethical reasoning.

Business Essentials, Sixth Canadian Edition, by Ebert

.3-4

We start to form ethical standards: A) when we enter school where we are influenced by our peers.

B) as children, in response to our perception about our parents’ behaviour and that of other adults.

C) in the workplace, as we gain experience in a business environment.

D) when we are caught doing something wrong; the consequences of our actions are the impetus for ethical reasoning.

Business Essentials, Sixth Canadian Edition, by Ebert

.3-5

When you apply the three-step model to assess the ethical issues of a business decision, the first step is to:

A) determine if there are legal implications.

B) collect the relevant facts.

C) consider your personal values.

D) judge the rightness or wrongness of the decision.

Business Essentials, Sixth Canadian Edition, by Ebert

.3-6

When you apply the three-step model to assess the ethical issues of a business decision, the first step is to:

A) determine if there are legal implications.

B) collect the relevant facts.

C) consider your personal values.

D) judge the rightness or wrongness of the decision.

Business Essentials, Sixth Canadian Edition, by Ebert

.3-7

The view that the duty of business is to maximize profits for shareholders while at the same time obeying the law, is called ___________.

A) mercantilism B) a market economy C) capitalism

D) managerial capitalism

Business Essentials, Sixth Canadian Edition, by Ebert

.3-8

The view that the duty of business is to maximize profits for shareholders while at the same time obeying the law, is called ___________.

A) mercantilism B) a market economy C) capitalism

D) managerial capitalism

Business Essentials, Sixth Canadian Edition, by Ebert

.3-9

_____________ implies a need to balance the interests of all stakeholders and the environment.

A) Socialism B) Corporate social responsibility C) Ethical management C) Business ethics

Business Essentials, Sixth Canadian Edition, by Ebert

.3-10

_____________ implies a need to balance the interests of all stakeholders and the environment.

A) Socialism B) Corporate social responsibility C) Ethical management C) Business ethics

Business Essentials, Sixth Canadian Edition, by Ebert

.3-11

__________ is promoted by the United Nations as a way to help fund clean-air projects in developing countries. Under this system the heavier polluting companies from industrialized nations have to buy credits which give them the right to pollute the environment with carbon dioxide.

A) Free trade B) Kyoto Summit C) Cap and Trade D) Global Warming Prevention Business Essentials, Sixth Canadian Edition, by Ebert

.3-12

__________ is promoted by the United Nations as a way to help fund clean-air projects in developing countries. Under this system the heavier polluting companies from industrialized nations have to buy credits which give them the right to pollute the environment with carbon dioxide.

A) Free trade B) Kyoto Summit C) Cap and Trade D) Global Warming Prevention Business Essentials, Sixth Canadian Edition, by Ebert

.3-13

An employee who discovers and tries to put an end to a company’s unethical, illegal, and/or socially irresponsible actions by publicizing them is called a ___________.

A) Ethics Captain B) Inside Agent C) Whistleblower D) Profiteer

Business Essentials, Sixth Canadian Edition, by Ebert

.3-14

An employee who discovers and tries to put an end to a company’s unethical, illegal, and/or socially irresponsible actions by publicizing them is called a ___________.

A) Ethics Captain B) Inside Agent C) Whistleblower D) Profiteer

Business Essentials, Sixth Canadian Edition, by Ebert

.3-15

If a CEO sells most of his shares in the company a few days before disastrous results are made public, he is likely guilty of ___________.

A) collusion B) misrepresentation of finances C) insider trading

D) profiteering

Business Essentials, Sixth Canadian Edition, by Ebert

.3-16

If a CEO sells most of his shares in the company a few days before disastrous results are made public, he is likely guilty of ___________.

A) collusion B) misrepresentation of finances C) insider trading

D) profiteering

Business Essentials, Sixth Canadian Edition, by Ebert

.3-17

Mountain Equipment Co-Op (MEC) allocates a portion of profits to community development programs, will not sell products produced by child or forced labour, and is a leader in environmentally friendly store design. MEC’s approach to social responsibility is the __________ stance.

A) accommodative B) defensive C) proactive D) obstructionist Business Essentials, Sixth Canadian Edition, by Ebert

.3-18

Mountain Equipment Co-Op (MEC) allocates a portion of profits to community development programs, will not sell products produced by child or forced labour, and is a leader in environmentally friendly store design. MEC’s approach to social responsibility is the __________ stance.

A) accommodative B) defensive C) proactive D) obstructionist Business Essentials, Sixth Canadian Edition, by Ebert

.3-19

You own a small painting company that is barely breaking even. You have been storing used paint thinner in a 50 gallon drum in your garage. The drum is now full. Proper and safe disposal costs $500. What would you do?

A) Pay the $500 B) Abandon the drum in an industrial area, but risk being caught C) Dump the drum in a remote forest, with no chance of being caught D) Break the disposal into smaller bins and distribute in uninhabited areas to minimize environmental damage Business Essentials, Sixth Canadian Edition, by Ebert

.3-20

You own a small painting company that is barely breaking even. You have been storing used paint thinner in a 50 gallon drum in your garage. The drum is now full. Proper and safe disposal costs $500. What would you do?

A) Pay the $500 B) Abandon the drum in an industrial area, but risk being caught C) Dump the drum in a remote forest, with no chance of being caught D) Break the disposal into smaller bins and distribute in uninhabited areas to minimize environmental damage Business Essentials, Sixth Canadian Edition, by Ebert

.3-21

CHAPTER 4 Entrepreneurship, Small Business, and New Venture Creation

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-1

Deepa dreams of building a chain of hair salons where she will sell her own line of hair-care products. Her sister Reza is happy earning a good living running her own salon.

Deepa would be considered a (n) ________; while Reza is a (n) ________.

A) large business owner; small business owner B) entrepreneur; small business owner C) entrepreneur; intrapreneur D) risk taker; risk avoider

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-2

Deepa dreams of building a chain of hair salons where she will sell her own line of hair-care products. Her sister Reza is happy earning a good living running her own salon.

Deepa would be considered a (n) ________; while Reza is a (n) ________.

A) large business owner; small business owner B) entrepreneur; small business owner C) entrepreneur; intrapreneur D) risk taker; risk avoider

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-3

Approximately what amount of all employer businesses in Canada are considered small?

A) 55 % B) 68 % C) 75 % D) 98 %

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-4

Approximately what amount of all employer businesses in Canada are considered small?

A) 55 % B) 68 % C) 75 % D) 98 %

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-5

Which provinces account for the largest proportion of business establishments in Canada ?

A) Ontario and British Columbia B) British Columbia and Quebec C) Ontario and Quebec D) Ontario alone has the highest proportion of business establishments in Canada

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-6

Which provinces account for the largest proportion of business establishments in Canada ?

A) Ontario and British Columbia B) British Columbia and Quebec C) Ontario and Quebec D) Ontario alone has the highest proportion of business establishments in Canada

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-7

The entrepreneurial process is like a journey which is influenced by social, economic, political, and technological factors. The three key elements in the entrepreneurial process are: A) The product, the promotions and the place or location of B) the venture C) The entrepreneur, the size of the market and the scale D) of the business The market, the capital investment and the growth potential The entrepreneur, the opportunity, and the resources Business Essentials, Sixth Canadian Edition, by Ebert

. 4-8

The entrepreneurial process is like a journey which is influenced by social, economic, political, and technological factors. The three key elements in the entrepreneurial process are: A) The product, the promotions and the place or location of B) the venture C) The entrepreneur, the size of the market and the scale of the business D) The market, the capital investment and the growth potential The entrepreneur, the opportunity, and the resources Business Essentials, Sixth Canadian Edition, by Ebert

. 4-9

When identifying a business opportunity, ideas should be screened by asking:

A) Do I have the necessary skills?

B) Can I acquire the necessary financing?

C) Does it solve a problem for the customer?

D) Have I sufficiently researched the market?

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-10

When identifying a business opportunity, ideas should be screened by asking:

A) Do I have the necessary skills?

B) Can I acquire the necessary financing?

C) Does it solve a problem for the customer?

D) Have I sufficiently researched the market?

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-11

Abdul is considering purchasing a franchise because he knows he will benefit from the _____________.

A) receipt of royalties B) flexibility C) higher profits D) management support

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-12

Abdul is considering purchasing a franchise because he knows he will benefit from the _____________.

A) receipt of royalties B) flexibility C) higher profits D) management support

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-13

Matt would like to open a consignment store for used sporting gear and equipment. He has decided to start his new business from scratch. An advantage of this decision versus buying an existing business is ____________.

A) predictable cash flow B) less risk C) a chance to create his own identity D) established customers and suppliers

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-14

Matt would like to open a consignment store for used sporting gear and equipment. He has decided to start his new business from scratch. An advantage of this decision versus buying an existing business is ____________.

A) predictable cash flow B) less risk C) a chance to create his own identity D) established customers and suppliers Business Essentials, Sixth Canadian Edition, by Ebert

. 4-15

Rather than starting his business from scratch Matt decides to purchase an existing business called “Play it Again Sports”. In this case he is more likely to benefit from: A) unlimited liability that accompanies this form of business ownership B) established relationships with suppliers and customers C) the operating model which was generously shared by the previous owner D) the low-risk guarantee that always accompanies the transfer of ownership

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-16

Rather than starting his business from scratch Matt decides to purchase an existing business called “Play it Again Sports”. In this case he is more likely to benefit from: A) unlimited liability that accompanies this form of business ownership B) established relationships with suppliers and customers C) the operating model which was generously shared by the previous owner D) the low-risk guarantee that always accompanies the transfer of ownership Business Essentials, Sixth Canadian Edition, by Ebert

. 4-17

Andy and Darryl have built a profitable home renovation business over the past few years, but now wish to sever the relationship due to a personal conflict. Terminating the partnership is turning out to be stressful and complex.

They might have avoided this situation had they created a _______________.

A) corporate charter B) termination agreement C) partnership agreement D) joint venture Business Essentials, Sixth Canadian Edition, by Ebert

. 4-18

Andy and Darryl have built a profitable home renovation business over the past few years, but now wish to sever the relationship due to a personal conflict. Terminating the partnership is turning out to be stressful and complex.

They might have avoided this situation had they created a _______________.

A) corporate charter B) termination agreement C) partnership agreement D) joint venture Business Essentials, Sixth Canadian Edition, by Ebert

. 4-19

One disadvantage of incorporating a business is ____________.

A) double taxation B) unlimited liability C) ambiguous ownership D) government interference

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-20

One disadvantage of incorporating a business is ____________.

A) double taxation B) unlimited liability C) ambiguous ownership D) government interference

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-21

A ___________ is an organization that is owned and controlled by the people who use it - producers, consumers and workers with similar needs who pool their resources for mutual benefit.

A) private corporation B) joint venture C) co-operative D) public corporation

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-22

A ___________ is an organization that is owned and controlled by the people who use it - producers, consumers and workers with similar needs who pool their resources for mutual benefit.

A) private corporation B) joint venture C) co-operative D) public corporation

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-23

You have an idea for a new business and are prepared to work hard to be successful. To improve your chances of success you should ___________.

A) discuss the idea with your banker B) be cautious about delegating the work C) secure adequate financing

D) gain experience in the industry

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-24

You have an idea for a new business and are prepared to work hard to be successful. To improve your chances of success you should ___________.

A) discuss the idea with your banker B) be cautious about delegating the work C) secure adequate financing

D) gain experience in the industry

Business Essentials, Sixth Canadian Edition, by Ebert

. 4-25

CHAPTER 5

The Global Context of Business

Business Essentials, Sixth Canadian Edition, by Ebert

.5-1

Economies around the world are becoming a single interdependent system. This is called ___________.

A) geographic clustering B) free trade C) globalization D) international business

Business Essentials, Sixth Canadian Edition, by Ebert

.5-2

Economies around the world are becoming a single interdependent system. This is called ___________.

A) geographic clustering B) free trade C) globalization D) international business

Business Essentials, Sixth Canadian Edition, by Ebert

.5-3

In early 2010, ________ officially passed Germany as the world’s top merchandise exporter.

A) Canada B) China C) United States D) Korea

Business Essentials, Sixth Canadian Edition, by Ebert

.5-4

In early 2010, ________ officially passed Germany as the world’s top merchandise exporter.

A) Canada B) China C) United States D) Korea

Business Essentials, Sixth Canadian Edition, by Ebert

.5-5

Canada grows and exports wheat, but imports coffee from Brazil. The benefits of this exchange can be explained by the economic concept of _________________.

A) national competitive advantage B) comparative advantage C) balance of trade D) international competitiveness

Business Essentials, Sixth Canadian Edition, by Ebert

.5-6

Canada grows and exports wheat, but imports coffee from Brazil. The benefits of this exchange can be explained by the economic concept of _________________.

A) national competitive advantage B) comparative advantage C) balance of trade D) international competitiveness

Business Essentials, Sixth Canadian Edition, by Ebert

.5-7

If a country exports more than it imports this is called a trade ___________.

A) deficit B) surplus C) quota D) embargo

Business Essentials, Sixth Canadian Edition, by Ebert

.5-8

If a country exports more than it imports this is called a trade ___________.

A) deficit B) surplus C) quota D) embargo

Business Essentials, Sixth Canadian Edition, by Ebert

.5-9

Among the options of international organizational structure, __________ is the most risky, but also yields the greatest profit potential.

A) strategic alliances B) exporting/ importing C) licensing arrangements D) foreign direct investment

Business Essentials, Sixth Canadian Edition, by Ebert

.5-10

Among the options of international organizational structure, __________ is the most risky, but also yields the greatest profit potential.

A) strategic alliances B) exporting/ importing C) licensing arrangements D) foreign direct investment

Business Essentials, Sixth Canadian Edition, by Ebert

.5-11

Gagandeep’s company is considering exporting freezers from Canada to France. He has read that Canadians prefer to shop once every week or two; while many Europeans prefer to shop daily and prepare fresh meals. This will require costly product adaptations due to ____________.

A) social and cultural differences B) economic differences C) legal and political differences D) local content laws Business Essentials, Sixth Canadian Edition, by Ebert

.5-12

Gagandeep’s company is considering exporting freezers from Canada to France. He has read that Canadians prefer to shop once every week or two; while many Europeans prefer to shop daily and prepare fresh meals. This will require costly product adaptations due to ____________.

A) social and cultural differences B) economic differences C) legal and political differences D) local content laws Business Essentials, Sixth Canadian Edition, by Ebert

.5-13

Quotas, tariffs and subsidies are used by governments mainly to _______________.

A) restrict importation of illegal products B) generate revenues to fund social programs C) protect domestic industries D) protect natural resources

Business Essentials, Sixth Canadian Edition, by Ebert

.5-14

Quotas, tariffs and subsidies are used by governments mainly to _______________.

A) restrict importation of illegal products B) generate revenues to fund social programs C) protect domestic industries D) protect natural resources

Business Essentials, Sixth Canadian Edition, by Ebert

.5-15

__________ is the practice of selling a product in foreign countries for a lower price than the good is sold domestically.

A) Market Penetration B) Market Expansion C) Dumping D) Deflating

Business Essentials, Sixth Canadian Edition, by Ebert

.5-16

__________ is the practice of selling a product in foreign countries for a lower price than the good is sold domestically.

A) Market Penetration B) Market Expansion C) Dumping D) Deflating

Business Essentials, Sixth Canadian Edition, by Ebert

.5-17

The mandate of the _______________ is to encourage trade by helping members to resolve disagreements, promote free trade agreements, and encourage fair trade practices.

A) North American Free Trade Agreement B) International Monetary Fund C) United Nations D) World Trade Organization

Business Essentials, Sixth Canadian Edition, by Ebert

.5-18

The mandate of the _______________ is to encourage trade by helping members to resolve disagreements, promote free trade agreements, and encourage fair trade practices.

A) North American Free Trade Agreement B) International Monetary Fund C) United Nations D) World Trade Organization

Business Essentials, Sixth Canadian Edition, by Ebert

.5-19

The purpose of the General Agreement on Tariffs and Trade (GATT) is to:

A) encourage Europe to participate in a trading block.

B) monitor the level of international protectionism.

C) reduce or eliminate trade barriers.

D) monitor the level of international dumping and impose fines to those countries who offend.

Business Essentials, Sixth Canadian Edition, by Ebert

.5-20

The purpose of the General Agreement on Tariffs and Trade (GATT) is to:

A) encourage Europe to participate in a trading block.

B) monitor the level of international protectionism.

C) reduce or eliminate trade barriers.

D) monitor the level of international dumping and impose fines to those countries who offend.

Business Essentials, Sixth Canadian Edition, by Ebert

.5-21

CHAPTER 6 Managing the Business Enterprise

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-1

The management function concerned with anticipating future market trends and then trying to determine which strategies will best achieve an organization's goals and objectives is known as: A) leading B) planning C) controlling D) organizing

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-2

The management function concerned with anticipating future market trends and then trying to determine which strategies will best achieve an organization's goals and objectives is known as: A) leading B) planning C) controlling D) organizing

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-3

Tactical planning is concerned with: A) finding the optimal solution for an emergency situation.

B) developing specific short-run strategies about what needs to be done, who will do it, and how it will be accomplished.

C) devising alternative courses of action to be used if the original plan does not work out.

D) setting long-run goals that will dictate the strategic plan of the organization.

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-4

Tactical planning is concerned with: finding the optimal solution for an emergency situation. developing specific short-run strategies about what needs to be done, who will do it, and how it will be accomplished.

C) devising alternative courses of action to be used if the original plan does not work out.

D) setting long-run goals that will dictate the strategic plan of the organization.

A) B)

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-5

When Jasmine analyzes monthly sales figures for her flower shop, and uses this information to determine the optimal variety of flowers to order for next month, she is involved in the _________ function of the management process.

A) leading B) planning C) controlling D) organizing

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-6

When Jasmine analyzes monthly sales figures for her flower shop, and uses this information to determine the optimal variety of flowers to order for next month, she is involved in the _________ function of the management process.

A) leading B) planning C) controlling D) organizing

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-7

Gary is a manager at OBR Manufacturing and is responsible for implementing strategies and policies to help the company achieve its goals. Gary is most likely a ___________.

A) top manager B) middle manager C) first-line manager D) operations manager

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-8

Gary is a manager at OBR Manufacturing and is responsible for implementing strategies and policies to help the company achieve its goals. Gary is most likely a ___________.

A) top manager B) middle manager C) first-line manager D) operations manager

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-9

All managers require human relations, conceptual, time management, and decision-making skills, but top managers depend most on ______________.

A) human relations skills B) conceptual skills C) time management skills D) decision-making skills

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-10

All managers require human relations, conceptual, time management, and decision-making skills, but top managers depend most on ______________.

A) human relations skills B) conceptual skills C) time management skills D) decision-making skills

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-11

________ is the most needed skill by managers and leaders because all the other functions depend on it.

A) human relations skills B) conceptual skills C) time management skills D) decision-making skills

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-12

________ is the most needed skill by managers and leaders because all the other functions depend on it.

A) human relations skills B) conceptual skills C) time management skills D) decision-making skills

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-13

While forming a strategy for his sports equipment company, Adam’s environmental analysis reveals that more women are playing hockey. This information would likely be identified as a (n) __________ in the SWOT analysis.

A) strength B) weakness C) opportunity D) threat Business Essentials, Sixth Canadian Edition, by Ebert

. 6-14

While forming a strategy for his sports equipment company, Adam’s environmental analysis reveals that more women are playing hockey. This information would likely be identified as a (n) __________ in the SWOT analysis.

A) strength B) weakness C) opportunity D) threat Business Essentials, Sixth Canadian Edition, by Ebert

. 6-15

Wal-Mart is a good example of a company pursuing a __________ competitive strategy.

A) focus B) differentiation C) concentration D) cost leadership

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-16

Wal-Mart is a good example of a company pursuing a __________ competitive strategy.

A) focus B) differentiation C) concentration D) cost leadership

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-17

Employees often work with managers to develop a (n) __________ that outlines the fundamental purposes of their organization.

A) SWOT analysis B) organizational chart C) mission statement

D) operational strategy

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-18

Employees often work with managers to develop a (n) __________ that outlines the fundamental purposes of their organization.

A) SWOT analysis B) organizational chart C) mission statement

D) operational strategy

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-19

Hanadi owns a successful wedding planning business.

Many of her clients order elaborate outdoor garden weddings in the spring, but the weather is unpredictable.

To be safe, Hanadi keeps large tents on standby incase it rains. Hanadi is wise because she has a ____________.

A) crisis management plan B) contingency plan C) backup strategy D) disaster plan Business Essentials, Sixth Canadian Edition, by Ebert

. 6-20

Hanadi owns a successful wedding planning business.

Many of her clients order elaborate outdoor garden weddings in the spring, but the weather is unpredictable.

To be safe, Hanadi keeps large tents on standby incase it rains. Hanadi is wise because she has a ____________.

A) crisis management plan B) contingency plan C) backup strategy D) disaster plan Business Essentials, Sixth Canadian Edition, by Ebert

. 6-21

Toyota’s response to the dire situation that occurred in 2010 when consumers began reporting that some models of its cars were accelerating out of control is an example of a ___________________.

A) crisis management plan B) contingency plan C) backup strategy D) disaster plan

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-22

Toyota’s response to the dire situation that occurred in 2010 when consumers began reporting that some models of its cars were accelerating out of control is an example of a _______________.

A) crisis management plan B) contingency plan C) backup strategy D) disaster plan

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-23

Brandon is an entrepreneur who created NatureScape, a landscaping business that has grown remarkably in just four years. He attributes the success of the business to his attention to detail, focus on client satisfaction, and personal integrity. To establish these values within the corporate culture he should:

A) hire employees who share his values B) reward employees who complete projects ahead of schedule C) discipline employees for making mistakes D) provide customer service training

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-24

Brandon is an entrepreneur who created NatureScape, a landscaping business that has grown remarkably in just four years. He attributes the success of the business to his attention to detail, focus on client satisfaction, and personal integrity. To establish these values within the corporate culture he should:

A) hire employees who share his values B) reward employees who complete projects ahead of schedule C) discipline employees for making mistakes D) provide customer service training

Business Essentials, Sixth Canadian Edition, by Ebert

. 6-25

CHAPTER 7 Organizing the Business Enterprise

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-1

Organizational charts illustrate: A) positions of seniority within an organization.

B) only those reporting relationships between middle management and top management.

C) organizational structure, employee titles and their relationship to one another.

D) operational plans.

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-2

Organizational charts illustrate: A) positions of seniority within an organization.

B) only those reporting relationships between middle management and top management.

C) organizational structure, employee titles and their relationship to one another.

D) operational plans.

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-3

When an organization grows it is commonly organized into separate functional areas such as sales, accounting, and production. This form of structure is known as _______ departmentalization.

A) process B) geographic C) functional D) customer

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-4

When an organization grows it is commonly organized into separate functional areas such as sales, accounting, and production. This form of structure is known as _______ departmentalization.

A) process B) geographic C) functional D) customer

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-5

Rogers Canada has divided its operations into wireless, internet, cable and telephone services.

In what way has Rogers departmentalized?

A) Customer departmentalization B) Product departmentalization C) Process departmentalization D) Functional departmentalization

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-6

Rogers Canada has divided its operations into wireless, internet, cable and telephone services.

In what way has Rogers departmentalized?

A) Customer departmentalization B) Product departmentalization C) Process departmentalization D) Functional departmentalization

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-7

Specialization permits higher levels of productivity through efficiency gains. However, a potential risk of excessive specialization is: A) higher training costs B) employee boredom, dissatisfaction and isolation C) higher wage rates to compensate for poor working conditions D) excessive product defects

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-8

Specialization permits higher levels of productivity through efficiency gains. However, a potential risk of excessive specialization is: A) higher training costs B) employee boredom, dissatisfaction and isolation C) higher wage rates to compensate for poor working conditions D) excessive product defects

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-9

Delegation of work to subordinates is most effective when the delegating employee has _________ and subordinates are _________.

A) training; responsible B) clear goals; accountable C) accountability; highly skilled D) authority; accountable

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-10

Delegation of work to subordinates is most effective when the delegating employee has _________ and subordinates are _________.

A) training; responsible B) clear goals; accountable C) accountability; highly skilled D) authority; accountable

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-11

A company that emphasizes superior customer service needs to respond quickly to satisfy customers. They are likely using ____________.

A) line authority B) centralized decision making C) decentralized decision making

D) functional authority

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-12

A company that emphasizes superior customer service needs to respond quickly to satisfy customers. They are likely using ____________.

A) line authority B) centralized decision making C) decentralized decision making

D) functional authority

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-13

Decision-making authority in a centralized organization: A) exists at all levels within the organizational chart including top, middle and first-line management.

B) generally resides with top management.

C) resides at the middle management level since they have a wider span of control.

D) decision-making authority is a collaborative issue that requires the consensus of the Board of Directors.

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-14

Decision-making authority in a centralized organization: A) exists at all levels within the organizational chart including top, middle and first-line management.

B) generally resides with top management.

C) resides at the middle management level since they have a wider span of control.

D) decision-making authority is a collaborative issue that requires the consensus of the Board of Directors.

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-15

Beta Engineering uses the _________ corporate structure, where teams of specialists from various functional areas work together on specific challenges and report to both a project manager and a line manager.

A) functional B) matrix C) divisional D) project

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-16

Beta Engineering uses the _________ corporate structure, where teams of specialists from various functional areas work together on specific challenges and report to both a project manager and a line manager.

A) functional B) matrix

C) divisional D) project

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-17

Which of the following is a good example of a company characterized as a learning organization?

A) Rogers Wireless B) Shell Canada C) Sunny’s Gas Bar D) Toronto Ski Club

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-18

Which of the following is a good example of a company characterized as a learning organization?

A) Rogers Wireless B) Shell Canada C) Sunny’s Gas Bar D) Toronto Ski Club

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-19

Unionized labour sometimes ‘work-to-rule’ to pressure management to concede to their demands.

With this tactic all official processes and procedures are followed exactly. Following all formal rules often brings production to a ‘snail’s pace’. This illustrates the importance of the _______________.

A) decentralized organization B) grapevine C) corporate structure D) informal organization

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-20

Unionized labour sometimes ‘work-to-rule’ to pressure management to concede to their demands.

With this tactic all official processes and procedures are followed exactly. Following all formal rules often brings production to a ‘snail’s pace’. This illustrates the importance of the _______________.

A) decentralized organization B) grapevine C) corporate structure D) informal organization

Business Essentials, Sixth Canadian Edition, by Ebert

. 7-21

CHAPTER 8 Managing Human Resources and Labour Relations

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-1

____________ is the process of evaluating human resource needs, attracting the appropriate people to fill those needs, developing them to get the best work out of each employee and maintaining an effective workforce through incentives and a rewarding working environment.

A) Staffing B) Human resource management C) Employee performance evaluations D) Promotion assessment Business Essentials, Sixth Canadian Edition, by Ebert

. 8-2

____________ is the process of evaluating human resource needs, attracting the appropriate people to fill those needs, developing them to get the best work out of each employee and maintaining an effective workforce through incentives and a rewarding working environment.

A) Staffing B) Human resource management C) Employee performance evaluations D) Promotion assessment Business Essentials, Sixth Canadian Edition, by Ebert

. 8-3

Jacob is trying to determine the skills, abilities and credentials needed by potential candidates for a new employment position being created at his firm. It also requires that he determine the specific duties that will be performed in the job. Jacob has been given the task of creating a _________________.

A) job description B) job specification C) job analysis D) skills inventory Business Essentials, Sixth Canadian Edition, by Ebert

. 8-4

Jacob is trying to determine the skills, abilities and credentials needed by potential candidates for a new employment position being created at his firm. It also requires that he determine the specific duties that will be performed in the job. Jacob has been given the task of creating a _________________.

A) job description B) job specification C) job analysis D) skills inventory Business Essentials, Sixth Canadian Edition, by Ebert

. 8-5

The staff recruitment process begins when a vacant position is identified, and ends with a _______________.

A) pool of qualified applicants B) newly hired employee D) recruitment strategy D) complete job description

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-6

The staff recruitment process begins when a vacant position is identified, and ends with a _______________.

A) pool of qualified applicants B) newly hired employee D) recruitment strategy D) complete job description

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-7

Promotions and transfers are forms of __________ recruiting available to human resource managers in their effort to fill employment vacancies.

A) external B) internal D) lateral

D) progressive

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-8

Promotions and transfers are forms of __________ recruiting available to human resource managers in their effort to fill employment vacancies.

A) external B) internal D) lateral

D) progressive

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-9

Workopolis.ca and Monster.ca are examples of: A) internet search engines.

B) national public employment unions which help unionized labour find suitable jobs.

C) internet services which help match potential employees with firms in the recruitment process.

D) internet services which help employers determine the appropriate wage rates for certain high skilled occupations.

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-10

Workopolis.ca and Monster.ca are examples of: A) internet search engines.

B) national public employment unions which help unionized labour find suitable jobs.

C) internet services which help match potential employees with firms in the recruitment process.

D) internet services which help employers determine the appropriate wage rates for certain high skilled occupations.

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-11

The method below for appraising employee performance is an example of a ____________.

A) simple ranking system B) critical incident method C) graphic rating scale

D) forced distribution

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-12

The method below for appraising employee performance is an example of a ____________.

A) simple ranking system B) critical incident method C) graphic rating scale

D) forced distribution

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-13

Mountain Climbing Co. has just hired two new employees.

Before being permitted on the mountains, they must complete four weeks of training at a local facility which simulates the dangerous natural environment in which they will work. They will be using the tools and equipment found on the job, in a controlled environment. This form of training is called: A) Orientation B) Vestibule training C) Apprenticeship D) Union Initiation Business Essentials, Sixth Canadian Edition, by Ebert

. 8-14

Mountain Climbing Co. has just hired two new employees.

Before being permitted on the mountains, they must complete four weeks of training at a local facility which simulates the dangerous natural environment in which they will work. They will be using the tools and equipment found on the job, in a controlled environment. This form of training is called: A) Orientation B) Vestibule training C) Apprenticeship D) Union Initiation Business Essentials, Sixth Canadian Edition, by Ebert

. 8-15

One of the newer forms of performance appraisals is called the ___________ because it encourages feedback from all directions.

A) Environment Review B) Emotional Intelligence Inventory (EQ-i) C) 360-degree feedback

D) Cognitive Aspect Assessment

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-16

One of the newer forms of performance appraisals is called the ___________ because it encourages feedback from all directions.

A) Environment Review B) Emotional Intelligence Inventory (EQ-i) C) 360-degree feedback

D) Cognitive Aspect Assessment

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-17

Marianne has been allocated $3000 to spend on her employee benefit plan. She is able to create an individual package that suits her needs. Since she has four kids, all needing braces, she is likely to opt for more dental benefits then most others in her workplace. Her vision is perfect, so unlike her co-worker, who wears glasses, Marianne will not select any vision benefits at all. This is a: A) wellness program B) gain-sharing plan C) customized benefits plan D) cafeteria-style benefits plan Business Essentials, Sixth Canadian Edition, by Ebert

. 8-18

Marianne has been allocated $3000 to spend on her employee benefit plan. She is able to create an individual package that suits her needs. Since she has four kids, all needing braces, she is likely to opt for more dental benefits then most others in her workplace. Her vision is perfect, so unlike her co-worker, who wears glasses, Marianne will not select any vision benefits at all. This is a: A) wellness program B) gain-sharing plan C) customized benefits plan D) cafeteria-style benefits plan Business Essentials, Sixth Canadian Edition, by Ebert

. 8-19

Blue Skies Airlines will not employ visually impaired applicants when selecting pilots. This is permitted, without appearing discriminatory, because of ___________________.

A) the bona fide occupational requirement B) the Human Rights Act C) duty to accommodate D) the Employment Equity Act

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-20

Blue Skies Airlines will not employ visually impaired applicants when selecting pilots. This is permitted, without appearing discriminatory, because of ___________________.

A) the bona fide occupational requirement B) the Human Rights Act C) duty to accommodate D) the Employment Equity Act

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-21

Many industries rely on knowledge workers to remain competitive. An HR challenge in managing these employees is that they _____________.

A) often lack experience B) quit to accept work elsewhere C) often lack interpersonal skills D) demand unreasonable pay

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-22

Many industries rely on knowledge workers to remain competitive. An HR challenge in managing these employees is that they _____________.

A) often lack experience B) quit to accept work elsewhere C) often lack interpersonal skills D) demand unreasonable pay

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-23

The biggest issue facing modern unions in Canada is _________________.

A) pay B) worker productivity C) job security D) safety

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-24

The biggest issue facing modern unions in Canada is _________________.

A) pay B) worker productivity C) job security D) safety

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-25

Which occupations are most heavily unionized?

A) finance and securities B) teaching and nursing C) food and pharmaceuticals D) all private sector occupations are highly unionized

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-26

Which occupations are most heavily unionized?

A) finance and securities B) teaching and nursing C) food and pharmaceuticals D) all private sector occupations are highly unionized

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-27

The Canada Labour Code ___________________.

A) protects the rights of all workers in Canada B) does not cover all workers in Canada C) clearly distinguishes between managers and workers D) supersedes collective agreements

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-28

The Canada Labour Code ___________________.

A) protects the rights of all workers in Canada B) does not cover all workers in Canada C) clearly distinguishes between managers and workers D) supersedes collective agreements

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-29

___________ is the use of a neutral third party to encourage labour and management to continue negotiating in good faith, in an effort to settle a dispute and reach a mutually acceptable agreement.

A) Arbitration B) Mediation C) Grievance Option D) Strike Mandate

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-30

___________ is the use of a neutral third party to encourage labour and management to continue negotiating in good faith, in an effort to settle a dispute and reach a mutually acceptable agreement.

A) Arbitration B) Mediation C) Grievance Option D) Strike Mandate

Business Essentials, Sixth Canadian Edition, by Ebert

. 8-31

CHAPTER 9 Motivating, Satisfying, and Leading Employees

Business Essentials, Sixth Canadian Edition, by Ebert

.9-1

Benoit stays late to complete his work, eagerly helps his colleagues, and makes helpful suggestions. He is displaying ________________.

A) conscientiousness B) model employee behaviours C) organizational citizenship D) organizational commitment

Business Essentials, Sixth Canadian Edition, by Ebert

.9-2

Benoit stays late to complete his work, eagerly helps his colleagues, and makes helpful suggestions. He is displaying ________________.

A) conscientiousness B) model employee behaviours C) organizational citizenship D) organizational commitment

Business Essentials, Sixth Canadian Edition, by Ebert

.9-3

Which personality trait is the best predictor of high employee performance in a variety of occupations?

A) Agreeableness B) Conscientiousness C) Emotionality D) Extroversion

Business Essentials, Sixth Canadian Edition, by Ebert

.9-4

Which personality trait is the best predictor of high employee performance in a variety of occupations?

A) Agreeableness B) Conscientiousness C) Emotionality D) Extroversion

Business Essentials, Sixth Canadian Edition, by Ebert

.9-5

Studies have shown that employees who possess a higher level of emotional intelligence: A) have higher rates of absenteeism B) are better performers in the workplace C) are more effective in occupations will little or no interpersonal contact D) quite often score much lower on traditional measures of intelligence (IQ)

Business Essentials, Sixth Canadian Edition, by Ebert

.9-6

Studies have shown that employees who possess a higher level of emotional intelligence: A) have higher rates of absenteeism B) are better performers in the workplace C) are more effective in occupations will little or no interpersonal contact D) quite often score much lower on traditional measures of intelligence (IQ)

Business Essentials, Sixth Canadian Edition, by Ebert

.9-7

In a psychological contract, there is no written agreement or explicitly negotiated terms. Instead, this type of contact reflects: A) the implicit set of expectations between the employee and employer B) the terms and conditions under which the employee agrees to work C) the expectations of the employer regarding worker productivity D) the commitment of the organization regarding job security Business Essentials, Sixth Canadian Edition, by Ebert

.9-8

In a psychological contract, there is no written agreement or explicitly negotiated terms. Instead, this type of contact reflects: A) the implicit set of expectations between the employee and employer B) the terms and conditions under which the employee agrees to work C) the expectations of the employer regarding worker productivity D) the commitment of the organization regarding job security Business Essentials, Sixth Canadian Edition, by Ebert

.9-9

______________ is the highest level described by Maslow’s hierarchy of needs.

A) Esteem B) Social C) Physiological D) Self-actualization

Business Essentials, Sixth Canadian Edition, by Ebert

.9-10

______________ is the highest level described by Maslow’s hierarchy of needs.

A) Esteem B) Social C) Physiological D) Self-actualization

Business Essentials, Sixth Canadian Edition, by Ebert

.9-11

In which motivational theory does the employee subconsciously ask themselves: “Can I do what is required?” and “Do I want the reward?”

A) Goal-setting B) Equity C) Maslow’s hierarchy of needs

D) Expectancy

Business Essentials, Sixth Canadian Edition, by Ebert

.9-12

In which motivational theory does the employee subconsciously ask themselves: “Can I do what is required?” and “Do I want the reward?”

A) Goal-setting B) Equity C) Maslow’s hierarchy of needs

D) Expectancy

Business Essentials, Sixth Canadian Edition, by Ebert

.9-13

________ emphasizes motivating the worker through the characteristics of the job itself.

A) Job redesign B) Flexible scheduling C) Job enrichment

D) Job engineering

Business Essentials, Sixth Canadian Edition, by Ebert

.9-14

________ emphasizes motivating the worker through the characteristics of the job itself.

A) Job redesign B) Flexible scheduling C) Job enrichment

D) Job engineering

Business Essentials, Sixth Canadian Edition, by Ebert

.9-15

Your manager has agreed to allow you to work an additional 2 hours per day from Monday to Thursday and then take every Friday off. Your modified work schedule is called ____________.

A) flextime B) compressed workweek C) job sharing D) self directed scheduling

Business Essentials, Sixth Canadian Edition, by Ebert

.9-16

Your manager has agreed to allow you to work an additional 2 hours per day from Monday to Thursday and then take every Friday off. Your modified work schedule is called ____________.

A) flextime B) compressed workweek C) job sharing D) self directed scheduling

Business Essentials, Sixth Canadian Edition, by Ebert

.9-17

When comparing management to leadership, it is sometimes said that management promotes _______, while leadership promotes _________.

A) results; systems B) planning; strategy C) stability; change D) mission; goals

Business Essentials, Sixth Canadian Edition, by Ebert

.9-18

When comparing management to leadership, it is sometimes said that management promotes _______, while leadership promotes _________.

A) results; systems B) planning; strategy C) stability; change D) mission; goals

Business Essentials, Sixth Canadian Edition, by Ebert

.9-19

At Humber Lumber and Building Centers, department heads usually make decisions after meeting with employees and seeking their ideas and suggestions.

Department heads at Humber Lumber make extensive use of the ___________ style of leadership.

A) autocratic B) diplomatic C) democratic D) free-rein Business Essentials, Sixth Canadian Edition, by Ebert

.9-20

At Humber Lumber and Building Centers, department heads usually make decisions after meeting with employees and seeking their ideas and suggestions.

Department heads at Humber Lumber make extensive use of the ___________ style of leadership.

A) autocratic B) diplomatic C) democratic D) free-rein Business Essentials, Sixth Canadian Edition, by Ebert

.9-21

____________ leaders are self confident and expect a lot from their employees. A problem however is that sometimes their followers may go to far to please their leader.

A) Transactional B) Transformational C) Charismatic D) Task-focused

Business Essentials, Sixth Canadian Edition, by Ebert

.9-22

____________ leaders are self confident and expect a lot from their employees. A problem however is that sometimes their followers may go to far to please their leader.

A) Transactional B) Transformational C) Charismatic D) Task-focused

Business Essentials, Sixth Canadian Edition, by Ebert

.9-23

CHAPTER 10 Operations Management and Quality Control

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-1

Production has been the traditional term used to for the set of activities managers perform to help their firms create goods. Today the concept as we now use it also includes __________.

A) utility B) services C) the factors of production D) economic resources

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-2

Production has been the traditional term used to for the set of activities managers perform to help their firms create goods. Today the concept as we now use it also includes __________.

A) utility B) services C) the factors of production D) economic resources

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-3

Many of us will pay an extra $1.50 service fee to get cash from private ATM machines because of the ________ utility it provides.

A) place B) time C) form D) ownership

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-4

Many of us will pay an extra $1.50 service fee to get cash from private ATM machines because of the ________ utility it provides.

A) place B) time C) form D) ownership

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-5

Many airlines offer very inexpensive flights to those willing to wait for a last-minute empty seat. These airlines offer below-cost standby seats because they understand that services are: A) intangible B) un-storable C) personal D) price sensitive

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-6

Many airlines offer very inexpensive flights to those willing to wait for a last-minute empty seat. These airlines offer below-cost standby seats because they understand that services are: A) intangible B) un-storable C) personal D) price sensitive

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-7

Magic Music Machines obtains components from a variety of suppliers and puts them together according to customer specifications to create custom-made MP3 players. This process is an example of: A) continuous production B) fabrication process C) assembly process D) low-contact service process

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-8

Magic Music Machines obtains components from a variety of suppliers and puts them together according to customer specifications to create custom-made MP3 players. This process is an example of: A) continuous production B) fabrication process C) assembly process D) low-contact service process

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-9

Toyota invests in their capacity to produce high quality cars; while Zellers invests in processes to minimize costs. Both firms are aligning their operations with their ___________.

A) corporate culture B) long-term goals C) business strategy D) core competencies

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-10

Toyota invests in their capacity to produce high quality cars; while Zellers invests in processes to minimize costs. Both firms are aligning their operations with their ___________.

A) corporate culture B) long-term goals C) business strategy D) core competencies

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-11

Which of the following statements about facility location is most accurate?

A) Advances in information technology permits firms to locate in expensive metropolitan areas.

B) Manufacturers seek to reduce time-to-market by selecting a location which will lower transportation costs.

C) Most companies locate major facilities within a few miles of where they began operations.

D) Most firms are uninterested in labour costs when making decisions about where to locate.

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-12

Which of the following statements about facility location is most accurate?

A) Advances in information technology permits firms to locate in expensive metropolitan areas.

B) Manufacturers seek to reduce time-to-market by selecting a location which will lower transportation costs.

C) Most companies locate major facilities within a few miles of where they began operations.

D) Most firms are uninterested in labour costs when making decisions about where to locate.

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-13

What kind of layout is this bakery using?

A) flexible B) product C) cellular

D) process

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-14

What kind of layout is this bakery using?

A) flexible B) product C) cellular

D) process

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-15

___________ utilizes a computer system to estimate production needs so that required resources are available when needed.

A) Just-in-Time (JIT) production systems B) Material Requirements Planning (MRP) C) Quality control

D) Materials management

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-16

___________ utilizes a computer system to estimate production needs so that required resources are available when needed.

A) Just-in-Time (JIT) production systems B) Material Requirements Planning (MRP) C) Quality control

D) Materials management

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-17

The standard of living of Canadians is at risk because our productivity has not kept pace with competing nations. To improve this situation Canada needs to place a greater emphasis on ___________.

A) reducing costs B) managing natural resources C) innovation D) modernizing tax laws

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-18

The standard of living of Canadians is at risk because our productivity has not kept pace with competing nations. To improve this situation Canada needs to place a greater emphasis on ___________.

A) reducing costs B) managing natural resources C) innovation D) modernizing tax laws

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-19

___________ standards are concerned with the best practices for managing an organization's environmental impact. This standard extends the traditional ISO approach into the arena of environmental protection and hazardous waste management.

A) Enviro 2010 B) ISO Enviro 901 C) ISO 14000 D) ISO 9002 Business Essentials, Sixth Canadian Edition, by Ebert

. 10-20

___________ standards are concerned with the best practices for managing an organization's environmental impact. This standard extends the traditional ISO approach into the arena of environmental protection and hazardous waste management.

A) Enviro 2010 B) ISO Enviro 901 C) ISO 14000 D) ISO 9002 Business Essentials, Sixth Canadian Edition, by Ebert

. 10-21

British Airways examined its work processes to improve efficiency and customer satisfaction. They conducted a value-added analysis by looking directly at every element in their ___________.

A) competitive advantage B) SWOT assessment C) quality reports D) supply chain

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-22

British Airways examined its work processes to improve efficiency and customer satisfaction. They conducted a value-added analysis by looking directly at every element in their ___________.

A) competitive advantage B) SWOT assessment C) quality reports

D) supply chain

Business Essentials, Sixth Canadian Edition, by Ebert

. 10-23

CHAPTER 11 Understanding Accounting

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-1

The general purpose of accounting for an organization is to: A) compute the profit or loss of the business B) meet the legal requirements of the Financial Accounting Standards Board (FASB) C) allow the government to observe and regulate company transactions D) provide financial information to assist decision makers

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-2

The general purpose of accounting for an organization is to: A) compute the profit or loss of the business B) meet the legal requirements of the Financial Accounting Standards Board (FASB) C) allow the government to observe and regulate company transactions D) provide financial information to assist decision makers

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-3

__________ accounting supports the decisions of internal clients; while _________ accounting provides information to external users such as shareholders, banks, and the government.

A) Financial; managerial B) Managerial; financial C) AIS; administrative D) Public; private

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-4

__________ accounting supports the decisions of internal clients; while _________ accounting provides information to external users such as shareholders, banks, and the government.

A) Financial; managerial B) Managerial; financial C) AIS; administrative D) Public; private

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-5

A (n) ___________ is an evaluation and examination of a company’s financial statements in order to ensure that they comply with generally accepted accounting principles (GAAP).

A) cash flow analysis B) income statement C) audit D) mission statement

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-6

A (n) ___________ is an evaluation and examination of a company’s financial statements in order to ensure that they comply with generally accepted accounting principles (GAAP).

A) cash flow analysis B) income statement C) audit D) mission statement

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-7

Which of the following steps does not appear in the sixstep accounting cycle?

A) recording information into journals B) forecasting of expenses and revenues C) posting journal information into ledgers D) preparing a trial balance

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-8

Which of the following steps does not appear in the sixstep accounting cycle?

A) recording information into journals B) forecasting of expenses and revenues C) posting journal information into ledgers D) preparing a trial balance

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-9

What term is missing from the accounting equation: Assets = ___________+ Owners’ equity A) Revenues B) Fixed assets C) Liabilities D) Shareholder’s equity

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-10

What term is missing from the accounting equation: Assets = ___________+ Owners’ equity A) Revenues B) Fixed assets C) Liabilities D) Shareholder’s equity

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-11

Owners’ equity is the amount of money : A) that a firm has tied up in inventory B) that a firm has in fixed capital assets C) that owners would receive if they sold all of a company’s assets and paid all of its liabilities D) that a firm owes to creditors

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-12

Owners’ equity is the amount of money : A) that a firm has tied up in inventory B) that a firm has in fixed capital assets C) that owners would receive if they sold all of a company’s assets and paid all of its liabilities D) that a firm owes to creditors

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-13

Gary’s Auto purchased a new drill-press for $3000 and expects to use it for 10 years. The value of this asset will decrease each year on the balance sheet due to_________.

A) maintenance expenses B) depreciation C) wear and tear D) market value

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-14

Gary’s Auto purchased a new drill-press for $3000 and expects to use it for 10 years. The value of this asset will decrease each year on the balance sheet due to_________.

A) maintenance expenses B) depreciation C) wear and tear D) market value

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-15

When you decided to attend college, you likely created a detailed estimate of your personal income and estimated expenses for the year. You created a _________.

A) draft balance B) profit-and-loss-statement C) budget

D) balance sheet

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-16

When you decided to attend college, you likely created a detailed estimate of your personal income and estimated expenses for the year. You created a _________.

A) draft balance B) profit-and-loss-statement C) budget

D) balance sheet

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-17

A balance sheet lists assets in order of their _________.

A) liquidity – the least liquid appears first B) liquidity – the most liquid appears first C) value – from highest dollar value to the lowest dollar value D) value – from lowest dollar value to the highest dollar value

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-18

A balance sheet lists assets in order of their _________.

A) liquidity – the least liquid appears first B) liquidity – the most liquid appears first C) value – from highest dollar value to the lowest dollar value D) value – from lowest dollar value to the highest dollar value

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-19

A (n)___________ provides details about the generation of cash and the use of cash in a given time period.

A) statement of cash flows B) profit-and-loss-statement C) income statement D) balance sheet

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-20

A (n)___________ provides details about the generation of cash and the use of cash in a given time period.

A) statement of cash flows B) profit-and-loss-statement C) income statement D) balance sheet

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-21

The financial ratios that measure a firm's ability to pay its short-term debts are called: A) short-term solvency ratios B) earnings per share ratios C) debt-to-equity ratios D) equity ratios

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-22

The financial ratios that measure a firm's ability to pay its short-term debts are called: A) short-term solvency ratios B) earnings per share ratios C) debt-to-equity ratios D) equity ratios

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-23

The _________ ratio is an indicator of how efficiently the firm’s managers utilized investor resources.

A) solvency B) earnings per share (EPS) C) inventory turnover D) return on equity

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-24

The _________ ratio is an indicator of how efficiently the firm’s managers utilized investor resources.

A) solvency B) earnings per share (EPS) C) inventory turnover D) return on equity

Business Essentials, Sixth Canadian Edition, by Ebert

. 11-25

CHAPTER 11 Understanding

Marketing Processes and Consumer Behaviour

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-1

When David Suzuki appears on television commercials to promote energy conservation, these advertisements are an example of __________ marketing.

A) relationship B) social C) idea D) social

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-2

When David Suzuki appears on television commercials to promote energy conservation, these advertisements are an example of __________ marketing.

A) relationship B) social C) idea D) social

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-3

According to the _________ concept, a firm must (1) get to know what customers want, (2) serve both present and potential customers, and (3) provide goods and services that will earn a profit.

A) sales B) marketing C) production D) promotional

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-4

According to the _________ concept, a firm must (1) get to know what customers want, (2) serve both present and potential customers, and (3) provide goods and services that will earn a profit.

A) sales B) marketing C) production D) promotional

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-5

When a firm creates unique features or promotes a special image to make its product look different from the competition, it is using ____________.

A) product differentiation B) a marketing mix C) market segmentation D) a focused strategy

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-6

When a firm creates unique features or promotes a special image to make its product look different from the competition, it is using ____________.

A) product differentiation B) a marketing mix C) market segmentation D) a focused strategy

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-7

A firm's marketing mix refers to the combination of: A) products and services that a firm offers to various market segments.

B) advertising media, print and TV, that a firm utilizes to promote its products.

C) strategies regarding product, price, place, and promotion.

D) people and products that will yield the highest profit.

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-8

A firm's marketing mix refers to the combination of: A) products and services that a firm offers to various market segments.

B) advertising media, print and TV, that a firm utilizes to promote its products.

C) strategies regarding product, price, place, and promotion.

D) people and products that will yield the highest profit.

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-9

Ford designs and builds pickup trucks, SUVs, sports cars, and luxury cars. This allows them to appeal to a broader range of customer needs. Ford is using ______________.

A) a differentiation strategy B) market segmentation C) a marketing mix D) experimentation

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-10

Ford designs and builds pickup trucks, SUVs, sports cars, and luxury cars. This allows them to appeal to a broader range of customer needs. Ford is using ______________.

A) a differentiation strategy B) market segmentation C) a marketing mix D) experimentation

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-11

Automobile companies like Hyundai and Kia are winning entry-level customers with high quality vehicles, comprehensive warranties and reasonable financing options. They have targeted their marketing efforts specifically on young drivers and first time buyers.

They have effectively segmented the market based on: A) geographic variables B) product-Use Variables C) psychographic variables D) demographic variables

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-12

Automobile companies like Hyundai and Kia are winning entry-level customers with high quality vehicles, comprehensive warranties and reasonable financing options. They have targeted their marketing efforts specifically on young drivers and first time buyers.

They have effectively segmented the market based on: A) geographic variables B) product-Use Variables C) psychographic variables D) demographic variables

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-13

When a telemarketer calls you and asks questions about your shopping patterns, they are collecting __________ data.

A) secondary B) survey C) market

D) primary

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-14

When a telemarketer calls you and asks questions about your shopping patterns, they are collecting __________ data.

A) secondary B) survey C) market

D) primary

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-15

______________ is a widely used, and perhaps the oldest, technique for collecting primary data which is also relatively less costly compared to other methods.

A) A focus group B) Benchmarking C) The observation method

D) Statistics Canada

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-16

______________ is a widely used, and perhaps the oldest, technique for collecting primary data which is also relatively less costly compared to other methods.

A) A focus group B) Benchmarking C) The observation method D) Statistics Canada

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-17

Before deciding to attend college, you may have spoken with a guidance counselor, visited websites, or went on campus tours to help you select a program and faculty.

You were involved in the _________ stage of the buying process.

A) evaluation of alternatives B) purchase decision C) information seeking D) post-purchase evaluation Business Essentials, Sixth Canadian Edition, by Ebert

. 12-18

Before deciding to attend college, you may have spoken with a guidance counselor, visited websites, or went on campus tours to help you select a program and faculty.

You were involved in the _________ stage of the buying process.

A) evaluation of alternatives B) purchase decision C) information seeking D) post-purchase evaluation Business Essentials, Sixth Canadian Edition, by Ebert

. 12-19

Which of the following products would likely require the least adaptation if sold overseas?

A) Text books B) Beer C) Home appliances D) Magazines

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-20

Which of the following products would likely require the least adaptation if sold overseas?

A) Text books B) Beer C) Home appliances D) Magazines

Business Essentials, Sixth Canadian Edition, by Ebert

. 12-21

CHAPTER 13 Developing and Promoting Goods and Services

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-1

Rolex and Timex watches both do a good job of telling the time, but Rolex marketers understand that their customers will pay high prices for the status and reputation that accompanies a Rolex watch. This illustrates _________.

A) specialty goods criteria B) the value package C) expense items D) brand equity Business Essentials, Sixth Canadian Edition, by Ebert

. 13-2

Rolex and Timex watches both do a good job of telling the time, but Rolex marketers understand that their customers will pay high prices for the status and reputation that accompanies a Rolex watch. This illustrates _________.

A) specialty goods criteria B) the value package C) expense items D) brand equity Business Essentials, Sixth Canadian Edition, by Ebert

. 13-3

Vending machines are an effective way to sell: A) specialty goods B) shopping goods C) convenience goods D) well-recognized brands

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-4

Vending machines are an effective way to sell: A) specialty goods B) shopping goods C) convenience goods D) well-recognized brands

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-5

A major textbook publisher is working hard to complete a new edition of an accounting textbook to be used by college students. It is important that the book is available and marketed earlier than other competitor’s titles to help establish this text as a market leader. This strategy appreciates _________ as an important element in product development.

A) product mortality rates B) speed to market C) the product life cycle D) competitive advantage Business Essentials, Sixth Canadian Edition, by Ebert

. 13-6

A major textbook publisher is working hard to complete a new edition of an accounting textbook to be used by college students. It is important that the book is available and marketed earlier than other competitor’s titles to help establish this text as a market leader. This strategy appreciates _________ as an important element in product development.

A) product mortality rates B) speed to market C) the product life cycle D) competitive advantage Business Essentials, Sixth Canadian Edition, by Ebert

. 13-7

You have determined that an idea for a new product has profit potential. Using the Seven-Step Development Process, what should you do next?

A) Develop a prototype B) Sell the product in a test market C) Conduct focus groups

D) Analyze the product’s life cycle

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-8

You have determined that an idea for a new product has profit potential. Using the Seven-Step Development Process, what should you do next?

A) Develop a prototype B) Sell the product in a test market C) Conduct focus groups

D) Analyze the product’s life cycle

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-9

Cereal, cell phones, and hair salons are in the _______ stage of their product life cycles.

A) introduction B) growth C) maturity D) decline

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-10

Cereal, cell phones, and hair salons are in the _______ stage of their product life cycles.

A) introduction B) growth C) maturity D) decline

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-11

A brand that has been given legal protection, such as the stylized “A” symbol on all lululemon athletic wear is a: A) private brand B) trademark C) licensed logo

D) patent

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-12

A brand that has been given legal protection, such as the stylized “A” symbol on all lululemon athletic wear is a: A) private brand B) trademark C) licensed logo

D) patent

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-13

You have developed a new recipe for chocolate chip cookies that actually helps dieters in their efforts to lose weight! To ensure that your recipe is protected, you should seek a ___________.

A) license B) copyright C) trademark D) patent

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-14

You have developed a new recipe for chocolate chip cookies that actually helps dieters in their efforts to lose weight! To ensure that your recipe is protected, you should seek a ___________.

A) license B) copyright C) trademark D) patent

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-15

Many pay-per-view events advertise on free television and ask interested viewers to “contact your cable provider”. This is an example of a ___________.

A) pull strategy B) push strategy C) promotional mix D) direct marketing strategy

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-16

Many pay-per-view events advertise on free television and ask interested viewers to “contact your cable provider”. This is an example of a ___________.

A) pull strategy B) push strategy C) promotional mix D) direct marketing strategy

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-17

Marketing efforts directed at designing the best , personal combination of these four tools - advertising selling, sales promotions, and publicity and public relations - is called the: A) push strategy B) media mix C) promotional mix D) marketing mix

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-18

Marketing efforts directed at designing the best , personal combination of these four tools - advertising selling, sales promotions, and publicity and public relations - is called the: A) push strategy B) media mix C) promotional mix D) marketing mix

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-19

This medium accounts for the largest share of total advertising expenditure. In 2008, total spending on _______ advertising in Canada totalled $3.3 billion.

A) radio B) magazines C) direct mail

D) television

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-20

This medium accounts for the largest share of total advertising expenditure. In 2008, total spending on _______ advertising in Canada totalled $3.3 billion.

A) radio B) magazines C) direct mail

D) television

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-21

The medium that allows the advertiser to target consumers who share a common interest, and provides plenty of space to explain the product is ____________.

A) radio B) magazines C) direct mail

D) television

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-22

The medium that allows the advertiser to target consumers who share a common interest, and provides plenty of space to explain the product is ____________.

A) radio B) magazines C) direct mail

D) television

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-23

When products are expensive and complicated, the most effective promotional tool is likely ____________.

A) publicity B) infomercials C) magazine advertising D) personal selling

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-24

When products are expensive and complicated, the most effective promotional tool is likely ____________.

A) publicity B) infomercials C) magazine advertising D) personal selling

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-25

Which type of sales promotion is Tim Horton’s using when they launch their annual “Roll up the Rim” campaign?

A) coupons B) premiums C) contests

D) free samples

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-26

Which type of sales promotion is Tim Horton’s using when they launch their annual “Roll up the Rim” campaign?

A) coupons B) premiums C) contests

D) free samples

Business Essentials, Sixth Canadian Edition, by Ebert

. 13-27

CHAPTER 14 Pricing and Distributing Goods and Services

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-1

Michael’s landscaping company is a newly formed business, just entering its second season. Michael is offering significantly lower prices than the competition resulting in much lower profit per job. Michael’s current pricing objective is to: A) minimize costs B) gain market share C) maximize sales D) develop his brand image Business Essentials, Sixth Canadian Edition, by Ebert

. 14-2

Michael’s landscaping company is a newly formed business, just entering its second season. Michael is offering significantly lower prices than the competition resulting in much lower profit per job. Michael’s current pricing objective is to: A) minimize costs B) gain market share C) maximize sales D) develop his brand image Business Essentials, Sixth Canadian Edition, by Ebert

. 14-3

________ analysis provides an assessment of how many units must be sold at a given price before the company begins to make a profit.

A) Cost-benefit analysis B) Competitive pricing analysis C) Cost-based pricing analysis

D) Break-even analysis

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-4

________ analysis provides an assessment of how many units must be sold at a given price before the company begins to make a profit.

A) Cost-benefit analysis B) Competitive pricing analysis C) Cost-based pricing analysis

D) Break-even analysis

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-5

Many retailers have adopted the use of “BOGO” sales.

This slogan stands for “Buy One Get One” for half price. When retailers advertise “BOGO” they are applying ____________.

A) psychological pricing B) price lining C) price skimming D) penetration pricing

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-6

Many retailers have adopted the use of “BOGO” sales.

This slogan stands for “Buy One Get One” for half price. When retailers advertise “BOGO” they are applying ____________.

A) psychological pricing B) price lining C) price skimming D) penetration pricing

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-7

Lays Chips is about to introduce a new brand of low fat, low-sodium potato chips to the market. They wish to ensure as many customers try them as possible. What pricing strategy should they use?

A) price skimming B) price lining C) market price D) penetration pricing

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-8

Lays Chips is about to introduce a new brand of low fat, low-sodium potato chips to the market. They wish to ensure as many customers try them as possible. What pricing strategy should they use?

A) price skimming B) price lining C) market price D) penetration pricing

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-9

______________ are those individuals and organizations that aid in the movement of goods and services through the channel of distribution, from producer to final consumer.

A) Wholesalers B) Direct sales agents C) Intermediaries D) Retailers

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-10

______________ are those individuals and organizations that aid in the movement of goods and services through the channel of distribution, from producer to final consumer.

A) Wholesalers B) Direct sales agents C) Intermediaries D) Retailers

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-11

Rolex watches are an example of _______ distribution, while Coca Cola uses a (n) ________ distribution strategy.

A) exclusive; intensive B) intensive; exclusive C) selective; intensive D) intensive; selective

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-12

Rolex watches are an example of _______ distribution, while Coca Cola uses a (n) ________ distribution strategy.

A) exclusive; intensive B) intensive; exclusive C) selective; intensive D) intensive; selective

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-13

While browsing for hair products at Shoppers Drug Mart, you notice a woman organizing L'Oreal hair colour products on a nearby shelf. You go over to ask about hair conditioners and she tells you that she does not work for Shoppers Drug Mart. This is when you realize that this woman is a _________.

A) cosmetic agent B) retail merchandiser C) broker D) marketing agent Business Essentials, Sixth Canadian Edition, by Ebert . 14-14

While browsing for hair products at Shoppers Drug Mart, you notice a woman organizing L'Oreal hair colour products on a nearby shelf. You go over to ask about hair conditioners and she tells you that she does not work for Shoppers Drug Mart. This is when you realize that this woman is a _________.

A) cosmetic agent B) retail merchandiser C) broker D) marketing agent Business Essentials, Sixth Canadian Edition, by Ebert . 14-15

Companies, such as Avon or Tupperware, illustrate the oldest form of retailing called ____________. These companies employ millions of sales representatives internationally who sell their products door-to-door or through home-selling parties.

A) micro marketing B) direct catalogue distribution C) direct selling D) direct distribution Business Essentials, Sixth Canadian Edition, by Ebert

. 14-16

Companies, such as Avon or Tupperware, illustrate the oldest form of retailing called ____________. These companies employ millions of sales representatives internationally who sell their products door-to-door or through home-selling parties.

A) micro marketing B) direct catalogue distribution C) direct selling D) direct distribution Business Essentials, Sixth Canadian Edition, by Ebert

. 14-17

When you perform a Google search for digital cameras, the first link that appears is for the Nikon website. Nikon pays Google a commission for being shown first. This is called ______________.

A) E-intermediaries B) syndicated selling C) electronic retailing D) shopping agents

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-18

When you perform a Google search for digital cameras, the first link that appears is for the Nikon website. Nikon pays Google a commission for being shown first. This is called ______________.

A) E-intermediaries B) syndicated selling C) electronic retailing D) shopping agents

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-19

Julia has just placed the first of many large orders to stock her specialty store with fine china for the upcoming holiday season. She anticipates such large shipments that she will require additional space to hold the stock. She decides to rent storage space from a local warehouse close to her retail store. Julia will be using the services of a _________ warehouse.

A) private B) general C) commercial D) public Business Essentials, Sixth Canadian Edition, by Ebert

. 14-20

Julia has just placed the first of many large orders to stock her specialty store with fine china for the upcoming holiday season. She anticipates such large shipments that she will require additional space to hold the stock. She decides to rent storage space from a local warehouse close to her retail store. Julia will be using the services of a _________ warehouse.

A) private B) general C) commercial D) public Business Essentials, Sixth Canadian Edition, by Ebert

. 14-21

Wassim sells books on the Internet and understands that customers expect quick and accurate delivery. To ensure his customers are satisfied, he outsources the _________ function to UPS to process orders.

A) warehousing B) invoicing C) order fulfillment D) customer service

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-22

Wassim sells books on the Internet and understands that customers expect quick and accurate delivery. To ensure his customers are satisfied, he outsources the _________ function to UPS to process orders.

A) warehousing B) invoicing C) order fulfillment D) customer service

Business Essentials, Sixth Canadian Edition, by Ebert

. 14-23

CHAPTER 15 Money, Banking, and Securities Markets

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-1

The biggest advantage of today’s Loonie, compared to the $1 bill that used to be in circulation, is that the Loonie is more ___________.

A) durable B) stable C) portable

D) divisible

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-2

The biggest advantage of today’s Loonie, compared to the $1 bill that used to be in circulation, is that the Loonie is more ___________.

A) durable B) stable C) portable

D) divisible

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-3

Danielle is planning a ski trip to Whistler, B.C. The cost of the trip for her family of four is about $7000. To pay for the trip, she plans on taking the money out of a savings account she has been accumulating for years. Which function of money would she be using when she pays the travel agent for the trip?

A) A unit of account B) A store of wealth C) A medium of exchange D) An exchange of value

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-4

Danielle is planning a ski trip to Whistler, B.C. The cost of the trip for her family of four is about $7000. To pay for the trip, she plans on taking the money out of a savings account she has been accumulating for years. Which function of money would she be using when she pays the travel agent for the trip?

A) A unit of account B) A store of wealth C) A medium of exchange D) An exchange of value

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-5

What definition of money represents the most liquid or readily accessible form of the money supply?

A) M1 B) M2 C) M2+ D) Credit cards

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-6

What definition of money represents the most liquid or readily accessible form of the money supply?

A) M1 B) M2 C) M2+ D) Credit cards

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-7

____________ is a privately owned, profit-seeking financial intermediary that serves individuals, businesses, and non-business organizations.

A) The Bank of Canada B) A chartered bank C) The Federal Reserve D) The International Monetary Fund (IMF)

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-8

____________ is a privately owned, profit-seeking financial intermediary that serves individuals, businesses, and non-business organizations.

A) The Bank of Canada B) A chartered bank C) The Federal Reserve D) The International Monetary Fund (IMF)

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-9

The requirement that financial institutions must keep a portion of their chequable deposits in vault cash or as deposits with the Bank of Canada is called the _______________.

A) risky asset allocation B) risk assessment requirement C) Bank Act D) reserve requirement

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-10

The requirement that financial institutions must keep a portion of their chequable deposits in vault cash or as deposits with the Bank of Canada is called the _______________.

A) risky asset allocation B) risk assessment requirement C) Bank Act D) reserve requirement

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-11

When an important, long-standing, and stable business firm with excellent credit records wish to borrow from their bank they know they will likely be charged ____________.

A) the prime rate B) service fees C) the bank rate D) the preferred rate

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-12

When an important, long-standing, and stable business firm with excellent credit records wish to borrow from their bank they know they will likely be charged ____________.

A) the prime rate B) service fees C) the bank rate D) the preferred rate

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-13

The “big six” chartered banks all bank at the Bank of Canada. The rate at which these institutions can borrow money from the Bank of Canada is called: A) the prime rate B) the bank rate C) the reserve rate D) the big six are not charged any interest at all when they borrow money from the Bank of Canada.

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-14

The “big six” chartered banks all bank at the Bank of Canada. The rate at which these institutions can borrow money from the Bank of Canada is called: A) the prime rate B) the bank rate C) the reserve rate D) the big six are not charged any interest at all when they borrow money from the Bank of Canada.

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-15

To stimulate the economy the Bank of Canada can use monetary policy. Which tool of monetary policy would they likely consider ?

A) Lowering taxes B) Increasing taxes C) Increasing the bank rate D) Lowering the bank rate

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-16

To stimulate the economy the Bank of Canada can use monetary policy. Which tool of monetary policy would they likely consider ?

A) Lowering taxes B) Increasing taxes C) Increasing the bank rate D) Lowering the bank rate

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-17

The ______________ is a United Nations agency consisting of about 150 nations that have combined resources to promote stable exchange rates, provide temporary short-term loans, and serve other purposes.

A) World Bank B) International Monetary Fund (IMF) C) Organization for Economic Cooperation and Development (OECD) D) Business Development Bank of Canada (BDC) Business Essentials, Sixth Canadian Edition, by Ebert

. 15-18

The ______________ is a United Nations agency consisting of about 150 nations that have combined resources to promote stable exchange rates, provide temporary short-term loans, and serve other purposes.

A) World Bank B) International Monetary Fund (IMF) C) Organization for Economic Cooperation and Development (OECD) D) Business Development Bank of Canada (BDC) Business Essentials, Sixth Canadian Edition, by Ebert

. 15-19

Kid’s Cafeteria went public last year and issued 100,000 shares for $10 each. You just purchased shares for $15 each. The price of $10 is called the ___________, while the price of $15 reflects the ____________.

A) par value; book value B) book value; market value C) par value; market value D) discount rate; coupon rate

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-20

Kid’s Cafeteria went public last year and issued 100,000 shares for $10 each. You just purchased shares for $15 each. The price of $10 is called the ___________, while the price of $15 reflects the ____________.

A) par value; book value B) book value; market value C) par value; market value D) discount rate; coupon rate

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-21

Jamal is a 45 year old school teacher who has inherited $10 000. He wishes to invest this money but he does not like risk and seeks guaranteed income.

What would you recommend?

A) Blue chip stock B) Government bonds C) Corporate bonds D) Preferred stock

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-22

Jamal is a 45 year old school teacher who has inherited $10 000. He wishes to invest this money but he does not like risk and seeks guaranteed income.

What would you recommend?

A) Blue chip stock B) Government bonds C) Corporate bonds D) Preferred stock

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-23

You call your stock broker with instructions to sell 1000 shares of Google if the price hits $600 within the next month. You just ordered a _________.

A) call option B) put option C) call option D) stop order

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-24

You call your stock broker with instructions to sell 1000 shares of Google if the price hits $600 within the next month. You just ordered a _________.

A) call option B) put option C) call option D) stop order

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-25

Extended periods where most stock prices are increasing is characterized as a ________ market; periods where most prices are falling is characterized as a ________ market.

A) growth; decline B) recovery; recession C) bull; bear D) bear; bull

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-26

Extended periods where most stock prices are increasing is characterized as a ________ market; periods where most prices are falling is characterized as a ________ market.

A) growth; decline B) recovery; recession C) bull; bear D) bear; bull

Business Essentials, Sixth Canadian Edition, by Ebert

. 15-27

CHAPTER 16 Financial Decisions and Risk Management

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-1

Tom Desmond is responsible for presenting the firm’s top management with a variety of options to secure the funds that they will require for the recently approved expansion project. This project requires that Tom source funding for over $3 million. Tom works in the _________ department of his organization.

A) accounting B) human resources C) finance D) operations

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-2

Tom Desmond is responsible for presenting the firm’s top management with a variety of options to secure the funds that they will require for the recently approved expansion project. This project requires that Tom source funding for over $3 million. Tom works in the _________ department of his organization.

A) accounting B) human resources C) finance D) operations

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-3

Meagan is comparing her firms actual quarterly results to the budget projection that was completed six months ago. When analyzing these documents, she discovers that sales were lower than the firm had anticipated.

Meagan is involved in _____________.

A) financial control B) cash flow management C) financial planning D) management accounting Business Essentials, Sixth Canadian Edition, by Ebert

. 16-4

Meagan is comparing her firms actual quarterly results to the budget projection that was completed six months ago. When analyzing these documents, she discovers that sales were lower than the firm had anticipated.

Meagan is involved in _____________.

A) financial control B) cash flow management C) financial planning D) management accounting Business Essentials, Sixth Canadian Edition, by Ebert

. 16-5

Crystal, owner of a travel agency, is beginning to worry that her cash flows are not going to cover her current operating expenses. With the cold weather approaching, Crystal knows that her cash inflows will pick up very quickly as people begin to book vacations to the sunny south. Crystal can resolve her current cash flow concerns by obtaining ________ financing.

A) immediate B) short-term C) contingency D) long-term Business Essentials, Sixth Canadian Edition, by Ebert

. 16-6

Crystal, owner of a travel agency, is beginning to worry that her cash flows are not going to cover her current operating expenses. With the cold weather approaching, Crystal knows that her cash inflows will pick up very quickly as people begin to book vacations to the sunny south. Crystal can resolve her current cash flow concerns by obtaining ________ financing.

A) immediate B) short-term C) contingency D) long-term Business Essentials, Sixth Canadian Edition, by Ebert

. 16-7

Diana has received an invoice from a supplier showing credit terms of 3/10; net 30. Cash is available and is earning 5% per year in the bank. When is the best time to pay the bill?

A) Immediately.

B) In 3 days.

C) In 10 days.

D) In 30 days.

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-8

Diana has received an invoice from a supplier showing credit terms of 3/10; net 30. Cash is available and is earning 5% per year in the bank. When is the best time to pay the bill?

A) Immediately.

B) In 3 days.

C) In 10 days.

D) In 30 days.

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-9

Azim has been approved for a bank loan; however the bank manager requires Azim’s signature allowing the bank to seize his car if payment is not made as agreed.

Azim’s car is being used as __________.

A) security B) a promissory note C) equity D) collateral

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-10

Azim has been approved for a bank loan; however the bank manager requires Azim’s signature allowing the bank to seize his car if payment is not made as agreed.

Azim’s car is being used as __________.

A) security B) a promissory note C) equity D) collateral

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-11

Some suppliers are reluctant to provide trade credit to certain companies, especially if they are unknown to them or have a poor credit history. In these cases it would be appropriate for the supplier to request that the customer agree to sign a _________________.

A) trade draft B) promissory note C) open-book credit D) secured loan agreement Business Essentials, Sixth Canadian Edition, by Ebert

. 16-12

Some suppliers are reluctant to provide trade credit to certain companies, especially if they are unknown to them or have a poor credit history. In these cases it would be appropriate for the supplier to request that the customer agree to sign a _________________.

A) trade draft B) promissory note C) open-book credit D) secured loan agreement Business Essentials, Sixth Canadian Edition, by Ebert

. 16-13

Long-term financing might be used by a large corporation to purchase:

A) high levels of inventory for the holiday season B) employee benefit plans C) buildings D) day to day office supplies

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-14

Long-term financing might be used by a large corporation to purchase:

A) high levels of inventory for the holiday season B) employee benefit plans C) buildings D) day to day office supplies

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-15

Businesses may seek long-term financing from these major sources:

A) debt, equity and insurance financing B) debt, equity and hybrid financing C) government funds and bank loans D) commercial paper and promissory notes

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-16

Businesses may seek long-term financing from these major sources:

A) debt, equity and insurance financing B) debt, equity and hybrid financing C) government funds and bank loans D) commercial paper and promissory notes

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-17

Steven wants to open a new business selling solar powered car heaters and needs to borrow $30 000. The bank has asked to see his _________ in order to determine the credit risk.

A) return on investment B) cash flow projections C) business plan D) market analysis

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-18

Steven wants to open a new business selling solar powered car heaters and needs to borrow $30 000. The bank has asked to see his _________ in order to determine the credit risk.

A) return on investment B) cash flow projections C) business plan D) market analysis

Business Essentials, Sixth Canadian Edition, by Ebert

. 16-19

The Slippery Slope Ski Lodge is very concerned about the potential for law suits from injured customers, so they want to manage the risks. They have trained all lift operators, hired ski patrol, and posted warning signs.

Their next step in managing risk should be to ____________.

A) measure potential losses B) monitor the situation C) identify risks D) buy more insurance Business Essentials, Sixth Canadian Edition, by Ebert

. 16-20

The Slippery Slope Ski Lodge is very concerned about the potential for law suits from injured customers, so they want to manage the risks. They have trained all lift operators, hired ski patrol, and posted warning signs.

Their next step in managing risk should be to ____________.

A) measure potential losses B) monitor the situation C) identify risks D) buy more insurance Business Essentials, Sixth Canadian Edition, by Ebert

. 16-21