Bus 100 Final Review Napoli CSM

1. Bus 100 Review

3. 1. What factors contribute to the rapid pace of change in business? Is the pace likely to accelerate or decrease over the next
decade? Why?
A number of factors contribute to the rapid pace of change in business, including cutthroat global competition, rapidly changing
technology with plunging prices, better and cheaper global communication, and depleted resources. As these trends intensify,
the pace of change will likely pick up even more speed in the decade to come.

4. What role does entrepreneurship play in the economy? Who stands to gain from the success of individual entrepreneurs? How do other
parties benefit?
Entrepreneurship fuels innovation and increases competition, which leads to more choices for consumers, higher quality
products, and better prices. The success of individual entrepreneurs impacts those individuals, of course, but also affects other
players in the community. A successful new business provides jobs, offers business to suppliers, pays taxes, and adds vitality to
the community. As the entrepreneur accumulates wealth, he or she will spend, save, or invest that money, further boosting the
economy.

5. When did American business begin to concentrate on customer needs? Why?
A critical mass of American businesses began to concentrate on customer needs during the marketing era, which emerged after
World War II. The key reason was more intense competition, which gave customers more choices. In this environment, meeting
customer needs became an imperative for business success. The customer-first approach continues to influence business
decisions today as global competition heats up to unprecedented levels.

6. How do nonprofit organizations compare to businesses? What role do nonprofits play in the economy? How do they interact with
businesses?
Nonprofit organizations differ from businesses in that their primary goals do not include financial gain. However, nonprofits are
clearly business-like establishments that contribute to the economy in a number of significant ways—most employ people, many
produce goods and services and take in revenue, and many act as economic magnets for additional investment. Many nonprofits
interact with businesses by developing partnerships that benefit both parties. Kraft Foods, for instance, contributes to America’s
Second Harvest, a nonprofit organization that aims to eliminate hunger in America. Kraft benefits by raising their public profile
in alignment with their corporate vision: “Helping People Around the World Eat and Live Better.” America’s Second Harvest
benefits, of course, from the financial support.

7. What are the factors of production? How can economies grow when one or more of the factors is weak?
Factors of Production:
● Natural resources: All inputs that offer value in their natural state, such as land, fresh water, and wind
● Capital: The synthetic resources that a business needs to produce goods or services such as machines, information, and
technology
● Human resources: The physical, intellectual, and creative contributions of everyone who works within an economy
● Entrepreneurship: People taking the risk of launching and operating their own businesses, largely in response to the
profit incentive
Economies can compensate for weak factors of production by buying or investing in other economies (e.g., purchasing
technology from another country), or by developing their own weak factors (e.g., investing in the education of their workforce).

8. What are some key strategies for developing a competitive edge in today’s competitive global market? How important is customer
satisfaction?
Customer satisfaction is more important than ever before in today’s competitive global market. The goal is to develop long-term,
mutually beneficial relationships with customers. Higher customer satisfaction can translate into higher profits even when the
competition is most challenging. Some broad strategies to develop a competitive edge:
● Use imagination and innovation to deliver unsurpassed value
● Increase speed-to-market for new products
● Recruit and retain the most talented workforce

9. How has the rise of the World Wide Web changed business practices? What are the benefits and drawbacks for business? For
consumers?
The rise of the Web has created unprecedented opportunities for businesses to reach markets far beyond their local areas,
creating a huge potential source of new revenue. The Web has also facilitated alternative selling strategies that give rise to an
individualized buying experience. Producers can offer customized products at a cost and price that are roughly comparable to
standardized products. And by creating links among producers, suppliers, and distributors, the Web offers businesses the
potential for new efficiencies in their day-to-day practices. Businesses that capitalize on the opportunities offered by the Web
can sharpen their edge dramatically. But the Web has also intensified competition, since it brings new competitors into virtually
every business arena. Consumers benefit from the plethora of options, enjoying a new power to choose and to offer feedback to
producers. Leading edge businesses respond to consumer feedback and tap into consumer creativity, using both to further
sharpen their competitive edge. But to make this work, they must be willing to relinquish power and control to the marketplace.

10. How has the definition of diversity changed over time? Can a diverse workforce help a company compete more effectively? How?
Until recently the definition of diversity was fairly narrow, including only ethnic diversity. But leading edge companies view
diversity more broadly, including differences in gender, age, religion, and nationality, among others. A diverse workforce can
help a company compete more effectively by raising the level of innovation, and gathering new insights about how to reach an
increasingly diverse marketplace.

11. How has the global free trade movement impacted business? Who benefits? Why? Who loses? Why?
The global free trade movement has affected business in many ways. The re-negotiation of GATT in 1995 and the subsequent
establishment of WTO have lowered tariffs, boosting the movement of goods and services across the globe. Regional trade blocs
have gone even further, creating blocs of nations with virtually unrestricted trade. In close relationship to free trade, jobs have
migrated to the lowest bidder with the highest quality—regardless of where that bidder is based. The result has been lower
production costs, lower prices, stronger global competition, more innovation, and a higher standard of living for millions. The
“losers” in the free trade movement have been less educated workers in developed countries who can no longer find jobs to
support a middle class life style. Another “loser” has been local culture, since more global free trade has led to a more
homogenized world culture.

12. Chapter 2
Economics: The Framework for Business

13. 1. What is the difference between fiscal and monetary policy? What role does politics play in shaping these policies?
Fiscal policy refers to government efforts to influence the economy through taxation and spending decisions that are designed to
encourage growth, boost employment, and curb inflation. Monetary policy, managed by the Federal Reserve System (the Fed),
refers to efforts to shape the economy by influencing interest rates and the supply of money. Politics plays a much stronger role
in fiscal policy, since the president proposes a taxation and spending plan that Congress must approve, implement, and oversee.
Both the president and Congress are elected, of course, and must answer directly to their constituents. The governors of the Fed,
on the other hand, are appointed by the president and approved by Congress, but they serve single 14-year terms. Since their
terms are staggered, no single president can appoint all of the members. This structure helps ensure that the governors act in
the best long- term interests of the economy, and do not simply respond to the political pressures of the moment.

14. What are the fundamental elements of the free market economic system? How can businesses thrive within this system?
The fundamental elements of the free market system are private ownership, economic freedom, and fair competition. Key principles
include the paramount importance of individuals, innovation, and hard work. The profit motive provides the incentive to achieve. To
thrive in a free market system, companies must offer value to their customers—otherwise their customers will choose to go elsewhere.
Businesses must also offer value to their employees and suppliers in order to attract top-quality talent and supplies

15. Describe the difference between a monopolistic competition and a monopoly.
A monopolistic competition is a market structure with many competitors selling differentiated products. Producers have some
control over prices, and new producers can enter and leave the market fairly easily. A monopoly is a market structure with just
a single producer completely dominating the industry. With a few exceptions, monopolies are illegal in the United States
because they stifle competition.

16. Why does quantity supplied tend to increase when prices go up and decrease when prices
go down? Why does quantity demanded move in the opposite direction?
Since businesses seek to make as much profit as possible, they are likely to produce more of a product that commands a higher
market price, and less of a product that commands a lower price. This tendency leads to an increase in the quantity supplied
when prices are higher and a decrease in the quantity supplied when prices are lower. Consumers, on the other hand, generally
seek to get the products they need (or want) at the lowest possible prices, so they buy more of products with lower prices and
less of products with higher prices. This causes an increase in the quantity demanded when prices are lower and a decrease in
the quantity demanded when prices are higher.

17. Describe the key principles of socialist and communist economic systems. Does more
government control mean less economic opportunity? Why or why not?
Socialism is an economic system based on the principle that the government should own and operate key enterprises that directly
affect public welfare, such as healthcare. The goal is to run these enterprises in the best interest of the overall public, although
in practice, inefficiencies and corruption often interfere with effectiveness.
Communism is an economic and political system that calls for public ownership of virtually all enterprises, under the planning
and direction of a strong central government. The goal is to dramatically improve the lot of the worker at the expense of the
super rich. But in practice, communist economies have produced crippling shortages and excessive corruption, leading to a
lower standard of living for everyone.
Too much government control tends to reduce economic opportunity by creating inefficiency, corruption, and a disincentive to
innovate.

18. Why do most countries have neither “pure” market nor “pure” planned economies? Is the
trend toward the market end of the spectrum likely to continue? Why?
All countries have mixed economies in order to meet the needs of their citizens. A pure market economy would make insufficient
provision for the old, the young, the sick, and the environment. A pure planned economy would not create enough value to
support its people over the long term. The trend toward the market end of the spectrum seems likely to continue since in most
cases it has boosted economic growth rates, raising the standard of living for millions of people.

19. How do gross domestic product, the employment rate, and the inflation rate relate to the
business cycle? Why is it difficult to predict changes in the business cycle?
During a contraction in the business cycle, gross domestic product falls, unemployment rises, and the inflation rate typically
holds steady or even drops. During an expansion in the business cycle, gross domestic product rises, unemployment falls, and
the inflation rate typically rises. Predicting changes in the business cycle is difficult (if not impossible)—even for experts—
because an astonishingly complex web of factors affects the economy and many of those factors are constantly changing.

20. Chapter 3
The World Marketplace: Business without Borders

21. What countries represent the largest global business opportunities for the next decade? What factors determine the size of the
opportunity?
China and India represent the largest global business opportunities for the next decade, due to the potent combination of above
average GDP growth and large population. Indonesia, Brazil, and Vietnam, among other countries, also share these factors
(although to a lesser degree), offering significant global business opportunities.

22. Why do companies tend to thrive in global markets when their country of origin enjoys a comparative advantage in their industry?
A comparative advantage means that the firms in a given country can turn out goods in a specific industry for a lower
opportunity cost relative to other countries. The opportunity cost of producing a good is the amount of other goods that must be
given up to produce that good. Thus, a producer has a comparative advantage if it gives up a smaller value of other goods to
produce a given product than other producers. This lower cost results in an efficient use of resources, allowing firms with a
comparative advantage to compete successfully in the global marketplace. In fact, countries tend to specialize in the production
of goods in which they have comparative advantages, developing powerful, world-class industries. Examples include the film
industry in India and the electronics industry in South Korea.

23. Explain how to calculate the balance of trade. How does the growing United States trade deficit impact the economy? Why?
The balance of trade is the difference between the value of a nation’s exports and the value of its imports over a set period of
time. The growing United States trade deficit reflects the wealth of an economy that can afford to buy huge amounts of foreign
products. But it may eventually destabilize the U.S. economy, since money flows out of the country as products flow in.

24. Explain the meaning of “strong” currency and “weak” currency. What are the advantages and disadvantages of each?
“Strong” currency is when the currency of one country is worth significantly more than the currency of another country, and
“weak” currency is when the currency of one country is worth significantly less than the currency of another country. Strong
currency versus the currency of another country offers several advantages and disadvantages.
Key advantages:
● Imported goods from the other country are less expensive
● Business operations in the other country are less expensive
● Travel to the other country is less expensive
Key disadvantages:
● Selling products in the other country becomes more difficult
● Attracting businesses from the other country becomes more difficult
● Attracting tourists from the other country becomes more difficult

25. Weak currency versus the currency of another country offers the opposite advantages and disadvantages.
Key advantages:
● Selling products in the other country becomes easier
● Attracting businesses from the other country becomes easier
● Attracting tourists from the other country becomes easier
Key disadvantages:
● Imported goods from the other country are more expensive
● Business operations in the other country are more expensive
● Travel to the other country is more expensive

26. Why is outsourcing such an attractive way for firms to tap into foreign markets? What are the risks of foreign outsourcing?
Foreign outsourcing is an attractive way for firms to tap into foreign markets because production costs are typically a fraction of what
they are in the U.S. But foreign outsourcing also involves significant risk in terms of quality control, delivery dates, and social
responsibility.

27. Explain how countertrading works. What are the benefits and drawbacks for both parties that engage in countertrading?
Countertrading is essentially barter—it involves trading products for products rather than products for money. Experts estimate
that countertrade accounts for as much as 20% of international commerce. The key benefit is that countertrade meets the needs
of customers who don’t have access to hard currency or credit, usually in developing countries. As such, countertrade can be a
powerful tool for gaining customers and products that would not otherwise be available. But the downside is that countertrade
often involves an expensive, complex web of exchanges that can be difficult to manage effectively.

28. What are the key elements of sociocultural barriers to trade? How can companies overcome these barriers?
Key sociocultural barriers to trade include differences in language, attitudes, and values. On a day-to-day basis, these can play out in
different types of nonverbal communication, forms of address, attitudes toward punctuality, religious celebrations and customs,
business practices, and expectations regarding meals and gifts. Companies can overcome these barriers by conducting thorough
research, cultivating firsthand knowledge, and practicing extreme sensitivity.

29. How has NAFTA impacted the U.S.? Overall, do you believe that it was a positive move for the U.S.? Why or why not?
NAFTA has impacted the U.S. by gradually eliminating trade barriers and investment restrictions over a 15-year period
beginning in 1994. Benefits for the U.S. economy have included the availability of cheaper labor in Mexico, less expensive
imports, and easier access to the Mexican and Canadian markets. While the U.S economy has continued to grow since the
implementation of NAFTA, the U.S. trade deficit with both Mexico and Canada has skyrocketed, accounting for more than 30%
of the total U.S. trade deficit. Critics of NAFTA also contend that NAFTA has contributed to increased pollution in the U.S. and
Mexico, and social upheaval and worker abuse in Mexico. Student opinions will differ regarding whether or not NAFTA was a
positive move overall for the U.S.

30. What is the overarching goal of the European Union? What role has been played by the introduction of the euro?
The overarching goal of the European Union is to bolster Europe’s trade position and to increase its international political and
economic power. To help make this happen, the EU has removed all trade restrictions among member nations and unified internal
trade rules. The introduction in 2002 of a single currency, the euro, had far-reaching economic significance. It has simplified and
streamlined trade among the countries that adopted it. And in world markets, the euro has consistently gained strength, creating a bold
presence around the globe.

31. Chapter 4
Business Ethics and Social Responsibility: Doing Well by
Doing Good

32. What is an ethical dilemma? Give 3 examples of ethical dilemmas that workers or managers might face in a business setting.
An ethical dilemma is a decision that involves a conflict of values—a decision in which every potential course of action has
significant negative consequences. Here are 3 hypothetical examples:
● In order to meet financial goals of your firm, you need to layoff one of three workers in your group, but all three workers
have been key contributors to the organization. What should you do?
● The rules of your firm require that you report any co-workers who are rude to customers. You have just overheard a co-
worker yelling at a customer, but you’re convinced that the customer completely deserved it. What should you do?
● The supplier you know and trust has just submitted a bid for your business that is 2% higher than a different supplier
who is new to your industry. You want to suggest that the supplier you know lowers his bid, but you don’t want to
undermine the confidentiality of the process. What should you do?

33. Compare the role of the individual and the role of the organization in ethical decision making. How can business promote an ethical
climate?
Ethical choices begin with ethical individuals, but a high profile, ethical organizational culture and a formal ethics program can work
in tandem to support ethical decision making. Organizations can promote an ethical climate by establishing a strong, clear, written
code of ethics, and bringing it to life through training, communication, and action. The active leadership of senior management plays
an especially strong role in creating and supporting an ethical climate.

34. When might the need for social responsibility conflict with the need to maximize profits? When the needs conflict, how should a firm
decide which path to pursue?
The need for social responsibility might conflict with the need to maximize profits in a number of situations. For example, investing in
pollution control equipment, paying foreign contractors a living wage, investing in the local community, providing workers with top-
notch health insurance can all be costly, which impacts profitability. When social responsibility conflicts with profitability, firms should
decide which path to pursue based on both their values and objectives. They should also consider the potential long-term payoff from
investments in social responsibility. Socially responsible firms often benefit financially in terms of stronger sales and branding,
stronger customer loyalty, and higher employee retention rates.

35. Do you believe that employers should respond to employee needs for work-life balance? Why or why not? What are the trade-offs?
Student opinions on this will differ, but they will probably all acknowledge that companies that help workers establish a healthy work-
life balance are likely to have more loyal, motivated employees and to have an easier time recruiting the most talented workers. The
trade-off, of course, is cost. Providing more work-life balance typically requires an investment in expensive programs such as
childcare, and it requires more tolerance of flexible work hours.

36. Define the concept of planned obsolescence. Is this strategy ethically unsound? Why or why not?
Planned obsolescence involves deliberately designing products to fail at a certain time in order to shorten the time between consumer
re-purchases. This represents a clear violation of social responsibility because it abuses consumer trust and wastes consumer money.
Long term, the market will typically weed out offenders, but that doesn’t do much to help short-term victims.

37. What is the difference between corporate philanthropy and corporate responsibility to the community? Which do you think is better?
Why?
Corporate philanthropy includes all business donations—including money, time, and products—to nonprofit groups. Corporate
responsibility, on the other hand, focuses on the actions of the business itself, rather than direct donations. Student answers will vary
regarding which is better, but they should all provide a rationale for their responses.

38. How can domestic companies that outsource manufacturing to foreign factories ensure that their vendors adhere to ethical standards?
No system is perfect, but the most responsible firms establish codes of conduct for their vendors, setting clear policies for human
rights, wages, safety, and environment impact. They also monitor and enforce compliance, proactively pulling contracts from
serious violators and rejecting bids from suppliers who don’t meet their standards.

39. Chapter 5
Business Communication: Creating and Delivering Messages
that Matter

40. What are the 6 main barriers to effective communication? Which barriers are easiest to surmount? Why?
Main barriers to communication:
● Physical barriers
● Language barriers
● Body language barriers
● Perceptual barriers
● Organizational barriers
● Cultural barriers

41. Why is nonverbal communication so important? How can you tell when nonverbal communication is effective?
Nonverbal communication is important because it contributes so much to the meaning of the messages that we communicate;
38% of meaning comes from tone of voice and 55% of meaning comes from body language such as facial expressions, gestures,
and posture. Nonverbal communication is effective when it supports the verbal component of the message.

42. Why is active, effective listening difficult for many people? What are 5 strategies for improving listening skills within the American
culture?
Active, effective listening is difficult for many people because it requires the temporary suspension of self-involvement and prior
perception; active listening means focusing with complete attention on the person who is talking. Since most people listen at
about 125 to 250 words per minute, but think at about 1,000 to 3,000 words per minute, they tend to fill the gap with thoughts
that don’t relate to the speaker’s message. Strategies to improve active listening:
● Use extra mental capacity to summarize the speaker’s key points
● Take a few notes
● Look for consistency between the speaker’s words and body language
● Use nonverbal communication to illustrate interest in the speaker
● Use verbal feedback and questions to indicate understanding and empathy

43. What factors should you consider when you choose a communication channel for your messages? Should you always use the richest
channel? Why or why not?
Key considerations when choosing a communication channel:
● Message content: controversial, complex, personal, or sensitive information typically requires a richer channel
● Need for interaction: a higher need for interaction or spontaneous feedback usually merits a richer channel
● Size and location of audience: Clearly these factors will limit your channel choices
● Audience expectations: You should stick to channels that your audience understands and uses (especially important
given the range of technological options)
The richest channel isn’t always best—the right channel fits best with the content of the message, the needs of the sender, and the
needs and expectations of the recipient. For instance, a rich channel wouldn’t be effective for routine communication about
policy details or a routine bulletin about next month’s work schedule.

44. When you develop messages, what factors should you consider as you choose your words? Which considerations do you think are most
important? Why?
Key factors to consider when choosing your words:
● Account for audience needs: What are the expectations, education, and profession of your recipient(s)?
● Be concise: Use as few words as possible to communicate your message, but don’t be concise at the expense of
completeness.
● Avoid slang: Unless you’re absolutely certain your audience will understand and appreciate it, do not use slang.
● Avoid bias: The three most common kinds of bias are gender bias, age bias, and race, ethnicity, and nationality bias.
● Use active voice: Active voice facilitates direct, powerful, concise communication.

45. How should the needs and expectations of your reader affect the structure of your writing? Why does it matter?
The anticipated response of your audience should determine the structure of your writing. If your recipient will feel positive or
neutral about your message, you should begin with your bottom line. If your recipient will feel negative about your message, you
should present the rationale before the bottom line. This matters, because accounting for the needs of your audience will help
ensure that the recipient of your message actually absorbs it, rather than hitting the delete button or tuning you out.

46. What steps can you take to create a smooth, conversational tone for your writing?
Good business writing flows smoothly and sounds natural. To strike the right tone for your audience and your message, you
should consider the following guidelines:
● Use common words in most situations
● Use active voice
● Use personal pronouns
● Use contractions
● Avoid grammar goofs
● Don’t blindly adhere to “mythical” grammar rules
– It is OK to end a sentence with a preposition
– It is OK to begin sentences with “and” or “but”
– It is OK to split infinitives

47. Why do so many people ignore or delete email messages? How can you boost the chances that your target audience will read your
message?
So many people ignore or delete email messages because they receive far too many to absorb and respond to—especially in most
business settings. You can boost the chances that your email will be read by considering the following tips:
● Consider both your primary and secondary readers
● Keep it short
● Don’t forget to proofread
● Use standard writing
● Avoid attachments whenever possible
● Don’t assume privacy
● Respond promptly to email from others (who might then return the favor!)
● Assume the best—keep your tone positive
● Create a compelling subject line
● Think before you hit “send”

48. What are your options for creating an effective opening “hook” for a verbal presentation? Why is humor not always the best approach?
Options for creating an effective “hook”:
● An interesting or startling statistic
● Audience involvement
● A compelling story or anecdote
● A relevant simile or metaphor
● Engaging questions
Although humor can work well to open a presentation, it involves considerable risk. When humor falls flat it can derail the entire
presentation and undermine your credibility as a presenter.

49. How can you mitigate speech anxiety?
Key steps to mitigate anxiety:
● Send yourself positive messages
● Take ten slow, deep breaths
● Take a sip of water at nervous moments
● Pick a few friendly faces in the audience and speak to them
● Remind yourself that the audience wants you to succeed
● Practice, practice, practice!

50. Chapter 6
Business Formation: Choosing the Form that Fits

51. Describe the basic features that distinguish the four basic forms of business ownership: sole proprietorships, general partnerships, C
corporations, and limited liability companies.
A sole proprietorship is a business that is owned and usually managed by a single individual. It is the simplest and least
expensive form of ownership to establish. The sole proprietorship is considered to be an extension of the owner. The owner has
unlimited liability for the debts of the proprietorship.
A general partnership is an agreement between two or more individuals to co-own and operate a business. Each general partner
has the right to participate in the management of the partnership, and to share in the company’s profits (or losses). Each
partner also has unlimited liability for the debts of the company.
A C corporation is a legal entity that is considered separate and distinct from its owners. A corporation is like an artificial
person; it can own property, enter into contracts, and initiate legal actions (such as lawsuits) in its own name. It is created by
filing a form, usually called the articles of incorporation, and paying an incorporation fee to the appropriate agency in the state
of incorporation. Ownership of a corporation is represented by shares of stock, so its owners are called stockholders (or
shareholders). Unlike sole proprietors and general partners, stockholders are not liable for the debts of their company.
A limited liability company (LLC) is a hybrid form of business ownership that is similar in some respects to a partnership while
having other characteristics that are similar to a corporation. Like a corporation, a limited liability company is considered a
legal entity separate from its owners. Also like a corporation—and as its name implies—an LLC offers its owners limited
liability for the debts of their business. But it is subject to fewer regulations and has more flexible tax treatment than a
corporation; in fact, one of the most interesting characteristics of an LLC is that its owners can elect to have their business
taxed either as a corporation or a partnership.

52. Why do many entrepreneurs initially set up their businesses as sole proprietorships? Why do many successful entrepreneurs eventually
decide to convert their sole proprietorship to some other form of ownership such as a corporation or LLC?
The sole proprietorship is the easiest and least expensive form of business to set up. For entrepreneurs who are eager to get their
business up and running this can be a major advantage. Many entrepreneurs also want to be in control, and sole proprietorships allow
them to be their own boss. Entrepreneurs also tend to be very self-confident and expect to earn a profit. Thus, the fact that a sole
proprietorship allows the single owner to reap all of the profits is also likely to be an attractive feature.
But sole proprietorships have some major limitations, many of which become increasingly serious as the company grows. By definition,
a sole proprietorship can have only one owner, so the only sources of equity financing are the entrepreneur’s personal wealth and
retained earnings. Many traditional lenders are reluctant to extend loans to sole proprietorships. Because of these limitations sole
proprietorships often struggle to raise financial capital to finance growth. (Even if angel investors and venture capital firms are willing
to invest, they typically do so by seeking an equity (ownership) stake in the company, which means the company can no longer be a sole
proprietorship.) Another drawback of the sole proprietorship is the risk associated with unlimited liability. Finally, as a company
becomes bigger and more complex the entrepreneur may find it increasingly difficult to manage all aspects of the business alone. Thus,
it may be necessary to bring in professional managers or additional owners to share the workload (or both). All of these problems can
be remedied by forming a corporation or LLC. These forms of ownership provide access to greater financial resources, provide the
owners with the protection of limited liability and allow for professional management or additional owners to share some of the
workload.

53. How do limited partnerships and limited liability partnerships differ from general partnerships and from each other?
In a general partnership all of the partners are general partners, meaning that they each have the ability to participate in
managing their company and share in its profits. Each partner in a general partnership also has unlimited liability for any
claims against the partnership.
A limited partnership must have at least one general partner and at least one limited partner. General partners in a limited
partnership are much like general partners in a general partnership; they actively manage the company, share in its profits and
have unlimited liability for claims against the partnership. Limited partners contribute money, other assets (or both) in return
for a share of the partnership’s earnings. However, they do take an active role in managing the company and have limited
liability for claims against their company.
In a limited liability partnership all of the partners can actively participate in managing their company and share in its profits.
However, all partners in this type of partnership also have some degree of limited liability protection. (The degree of liability
protection varies among states; some offer “full shield” protection that protects the partners against liability for anything other
than their own malpractice or negligence while others offer less extensive “partial shield” protection.) In some states limited
liability partnerships can only be formed by certain professionals such as lawyers, architects or accountants.

54. What advantages help explain why virtually all large companies are organized as C corporations?
Compared to sole proprietorships and general partnerships, corporations generally have greater access to financial capital
because they tap a large pool of investors by issuing stocks and bonds. Corporations also have the permanence needed to
sustain growth over the long haul. And, because they usually are able to offer better salaries and benefits and the greater
opportunities for growth and advancement, corporations often are able to attract highly talented employees.

55. What steps are involved in forming a C corporation?
General (or C) corporations are formed by filing articles of incorporation with the appropriate state agency. The incorporators
must pay fees at the time of filing. Another major step in forming a corporation involves the establishment of corporate bylaws,
which are the basic rules and procedures governing the way the corporation will operate. The exact forms, fees and other
requirements for forming a corporation vary from state to state. Some states, such as Delaware, are known for their simple
forms, low fees, and corporation-friendly laws.

56. Describe the relationship between a corporation’s common stockholders, its board of directors, and its chief executive officer (CEO).
The common stockholders are the basic owners of a corporation, but few stockholders of large corporations take an active role in
their company’s management. Instead, they elect the corporation’s board of directors to represent their interests. Board
members seldom get involved in the day-to-day management of the company. Instead, they establish the basic mission and goals
of the corporation and appoint the chief executive officer (CEO) and other top corporate officers who actually manage the
company. The board evaluates the performance of these top officers, offers them advice, approves major policy proposals and
ensures that the company’s policies adhere to regulatory requirements.

57. 1. How does a merger differ from an acquisition? What is the difference between a horizontal merger or acquisition and a vertical
merger or acquisition? Give a real world example of recent merger to illustrate each type of combination.
In both mergers and acquisitions two formerly independent firms come under common ownership, but the way the combination
occurs is quite different. In an acquisition occurs one corporation buys controlling interest in another company. The acquiring
firm remains intact and the firm that is acquired (called the target firm) becomes its subsidiary. In a merger the two formerly
independent companies agree to combine to form a new corporate entity.
A horizontal merger (or acquisition) occurs when the two firms in the combination are both in the same market. A vertical
merger occurs when the firms in the combination are at different points in a supply chain, so that one is a supplier (or potential
supplier) to the other.
At the time this text went to print, one of the biggest recent examples of a vertical combination was Comcast’s acquisition of
controlling interest in NBC Universal. (Another proposed vertical acquisition that had just been announced when the text was in
final preparation was Google’s acquisition of Motorola Mobility.) The biggest example of a horizontal combination was
AT&T’s acquisition of T-Mobile. (This acquisition had not yet received final approval from the FCC when the text went to print,
but approval seemed very likely.) There have also been several mergers among major airlines in recent years. Key examples
include the Delta and Northwest merger and the merger of Continental and United.

58. Compare an S corporation with a limited liability company. Why do you think limited liability companies are currently more popular
than S corporations?
Both limited liability companies (LLCs) and S corporations provide all owners with limited liability and eliminate the problem of
double taxation associated with C corporations. In recent years LLCs have become more popular than S corporations because
they offer more flexibility and fewer restrictions on ownership and operation. For example, while S corporations are limited to
no more than one hundred owners (stockholders) there is no limit to the number of members who may own a limited liability
company. And while all owners of an S corporation must be U.S. citizens or permanent U.S. residents, no such restrictions are
placed on who may own an LLC.

59. What are the main advantages and disadvantages of a business format franchise arrangement for the franchisee? For the franchisor?
The main advantages of business format franchising for the franchisor it that the arrangement allows the franchisor to expand
the business and bring in additional revenue (in the form of franchising fees and royalties) without investing more of its own
capital.
The main disadvantage of franchising from the franchisor’s perspective is that overseeing the actions of hundreds (or even
thousands) of semi-independent franchisees can be challenging and complex. Moreover, if some of the franchisees fail to live up
to their responsibilities, they can damage the reputation (and undermine the value) of the entire franchise organization. This is
known as the negative halo effect.
For franchisees, the main advantages are the right to use a well-known brand name and obtain the right to sell proven products
and use proven business methods. Franchisees can also benefit from the support and training most franchisors offer. Because of
the proven product and methods and well-known brand name, franchisees also may find creditors are more willing to loan them
funds than other types of small businesses. In fact, many franchisors offer either direct or indirect financial assistance to their
franchisees.
From the franchisee’s perspective the relatively high costs of initial franchise fee and ongoing royalty payments to the franchisor
can be a major disadvantage. Another drawback is the fact that franchisees lose a significant degree of freedom and flexibility
to run the business the way they want. In general, franchisees are not allowed to open new units or sell existing units with the
approval of the franchisor. Also, some franchisors promise more than they deliver in terms of support. Finally, the irresponsible
behavior of other franchisees can create a negative halo effect that can harm the franchisee’s business.

60. What is a Franchise Disclosure Document (FDD) and why is it important?
The Franchise Disclosure Document is a document the FTC requires franchisors to provide to potential franchisees. The FDD contains
detailed information about virtually every aspect of the franchisor and the franchise agreement. It is designed to help potential
franchisees make an informed decision about whether or not to enter into a franchise agreement. The FTC requires the franchisor to
give the franchisee at least 14 calendar days to review the FDD before the franchise agreement can be signed.
The FTC requires the FDD be written in “plain English,” meaning that it should be free from legal and technical jargon, so that a
typical franchisee can understand it. Even so, it is advisable to have a lawyer familiar with franchising review the document.

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Small Businesses and Entrepreneurship: Economic Rocket Fuel

62. Review the benefits an entrepreneur might seek in starting a new business. Which benefits are most appealing to you? Why?
The key benefits that entrepreneurs might seek in launching a new business are greater financial success, independence,
flexibility, and challenge (although a smaller segment of entrepreneurs—at least in the U.S.—simply seek survival in the face of
few other alternatives). Student answers will vary in terms of which benefits are most appealing, but most younger students seem
to cite greater financial success, while older students often gravitate more towards flexibility.

63. What role does failure sometimes play in entrepreneurial success? What can an entrepreneur gain from failure?
Failure can play a key role in entrepreneurial success by providing valuable lessons about what not to do and by spurring
creativity in the effort to recover. Experience with failure can also strengthen other key entrepreneurial characteristics such as
self reliance. Increasingly, the stigma of failure has diminished with recognition that people who have experienced failure may
be more likely to eventually succeed because they are willing to take risks.

64. Beyond personal resources, what are other funding options for small businesses? Why don’t more entrepreneurs tap into these
resources?
Other funding options for entrepreneurs include loans, angel investors, and venture capital firms. But many entrepreneurs—
especially at the initial launch of their business—find trouble tapping into these resources since they lack the track record that
many lenders or investors require. In some cases the Small Business Administration can help firms jump this hurdle by partially
guaranteeing loans from commercial lenders. The SBA also has a microloan program that can help start-up businesses through
community nonprofit organizations.

65. Compare the opportunities and threats that small businesses face. Which opportunities are most compelling? Which threats are most
intimidating? Why?
Opportunities:
● Market niches: Because of their size, many small firms are uniquely positioned to exploit small but profitable corners of
the market
● Personal customer service: With a small customer base, small firms can develop much more personal relationships with
individual customers.
● Lower overhead costs: With entrepreneurs wearing so many hats, many small firms have lower overhead costs.
● Technology: The Internet has played a powerful role in opening new opportunities for small businesses.
Threats:
● High risk of failure: Starting a new business involves a lot of risk, especially in the first five years.
● Lack of knowledge and experience: Entrepreneurs often have in-depth knowledge in a specific areas, but lack expertise
in running a business.
● Too little money: Lack of sufficient start-up money is a major issue for most new firms.
● Bigger regulatory burden: Complying with federal regulations can be an overwhelming challenge for small firms.
● Higher health insurance costs: The costs for small health plans are much higher, making it tough to offer the coverage
that top employees expect.

66. Review the definition of niche marketer, and cite three examples of niche marketers. How has technology affected niche marketing?
A niche marketer is a firm that targets a sparsely occupied space in the market. Examples include Anything Left Handed (products for
left-handed people), Kool Dog Kafe (gourmet dog treats), and Scrappin’ Twins (scrapbooking products for mothers of twins and
triplets).

67. What are the key contributions of small business to the U.S. economy? Rank the benefits in terms of importance, and provide the
reasons for your ranking.
Key contributions:
● Creating new jobs: Small businesses with employees generate about 70% of the new jobs in today’s economy.
● Fueling innovation: Small businesses develop innovations at about twice the rate of their large business counterparts.
● Vitalizing inner cities: Small businesses comprise more than 99% of inner city establishments, providing a springboard
for development.

68. What factors account for the dramatic differences in entrepreneurship rates around the world? Do you think entrepreneurship will
continue to grow worldwide? Why or why not?
Factors that account for much of the differences in entrepreneurship rates:
● Per capita income: In very low income countries the entrepreneurship rate is high because many people have no other
option.
● Opportunity costs: Entrepreneurship rates tend to be lower in countries where employment protection and
unemployment insurance is strong.
● Cultural/political environment: Extensive regulation can be a barrier to entrepreneurship, while government and
cultural support can be a boon.
Many experts believe that entrepreneurship rates will continue to grow worldwide given the growth of market economies and free
trade, the dramatic, high-profile successes of entrepreneurs in the last couple of decades, and the growing worldwide Internet
penetration rate.

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Small Businesses and Entrepreneurship: Economic Rocket Fuel

70. What are the major types of depository institutions, and what roles do they play in financial markets? How do institutional investors
differ from depository institutions?
Depository institutions are financial intermediaries that obtain funds by accepting checking or savings deposits (or both) from
individuals, businesses, and other institutions and then lend these funds to borrowers. The most common types of depository
institutions are commercial banks, credit unions and savings and loan associations.
Institutional Investors such as mutual funds, insurance companies, and pension funds, don’t accept deposits; instead they amass
huge pools of financial capital from other sources and use these funds to acquire a portfolio of many different assets. Mutual
funds obtain money by selling shares to investors; insurance companies obtain money by collecting premiums from
policyholders; and pension funds obtain money by collecting funds employers and their employees contribute for the employees’
retirement. These institutions invest heavily in corporate stock; the majority of shares in most major U.S. corporations are held
by institutional investors. They are also major holders of corporate bonds and government securities.

71. How have recent financial disruptions changed the ways that financial markets are regulated?
A series of accounting scandals at the beginning of the twenty-first century, followed by a near collapse of the financial system in
2008, created pressure for new laws and regulations.
Congress reacted to the accounting scandals in the first years of the new century by passing the Sarbanes-Oxley Act in 2002. This
law included provisions to ensure that external auditors offered fair, unbiased opinions when they examined a company’s
financial statements. It also increased the SEC’s authority to regulate financial markets and investigate charges of fraud and
unethical behavior.
In the wake of the financial crisis of 2008–09 Congress passed the Dodd-Frank Act of 2010. This far-reaching law expanded the
Fed’s regulatory authority over nondepository financial institutions, such as hedge funds and mortgage brokers, that had
previously operated with little regulatory oversight or accountability. It also created the Financial Stability Oversight Council
to identify emerging risks in the financial sector so that action could be taken to rein in risky practices before they led to a
crisis. The council was given the authority to recommend new rules to the Federal Reserve that would limit risky practices of the
nation's largest, most complex financial institutions.

72. Describe the basic rights of common stockholders. What are the key differences between common and preferred stock?
The basic rights of common stockholders include:
● Voting rights: Common stockholders have the right to vote in stockholders meetings. They elect the corporation’s board
of directors and vote on other important issues such as the approval (or disapproval) of a proposed merger or
acquisition.
● Right to a dividend: A dividend is a distribution of profits. Common stockholders are entitled to receive a dividend if the
board declares one. However, the board has no legal obligation to pay dividends. The board may decide to reinvest
some or all of the firm’s profits rather than pay a dividend. In addition to dividends, stockholders may also earn another
form of return on their shares, called a capital gain. This is a rise in the market value of the stock so that it is worth more
than the stockholder paid to acquire it. Since stock prices can fall as well as rise, there is no guarantee of a capital gain.
● Preemptive right: If their corporation issues additional new shares of stock, the existing shareholders may have the
right to purchase new shares in proportion to their existing shares of ownership. This may be important to stockholders
who want to maintain control over a significant block of votes.
● Right to a residual claim on assets: Should the corporation cease operations, stockholders have a residual claim on the
assets of their corporation. This means that they are entitled to whatever is left after court and legal fees, employees,
suppliers, creditors (such as banks and bondholders), and preferred stockholders are paid what they are owed.

73. Preferred stock has two preferences when compared to common stock:
● Preference with respect to dividend payment: Owners of preferred stock are more likely to receive a dividend, and the
amount of the dividend is usually a specific amount.
● Preference in claim on assets: If their firm goes out of business, preferred stockholders have a claim on assets that takes
precedence over the claims of common stockholders.
Preferred stockholders normally do not have voting rights in stockholders meetings. Also, though a dividend is more likely to be
paid to preferred stockholders than to common stockholders, there is no guarantee that the total return (dividend plus capital
gain) to preferred stockholders will be greater than the total return to common stockholders.

74. Describe the basic features and characteristics of bonds. What is a convertible bond and why do investors find such bonds attractive?
What advantages do convertible bonds have for the issuing firms? What stakeholder group might be harmed when a firm issues
convertible bonds?
Bonds are formal IOUs issued by corporations or government entities. Bonds vary considerably in their characteristics and
features. Most corporate bonds reach maturity (come due) 10 to 30 years after they are issued. When they mature, the issuer
must pay the bondholder an amount indicated by the par (or face) value of the bond. Bonds normally pay interest every year
until they come due. The amount of interest is expressed as a percentage of the par value, called the coupon rate. Thus the
company issuing a bond with a $1,000 par value and an 8% coupon rate that matures in 20 years will pay the bondholder $80
(8% of $1,000) in interest each year until the bond matures and will pay the holder the $1,000 when the bond matures. The
payments of interest and repayment of principal are legally required payments.
Convertible bonds allow bondholders to convert the bond into a specified number of shares of common stock. This is attractive to
the bondholders since it allows them to limit risk while taking advantage of favorable changes in the price of the company’s
stock.
The firm also can benefit from issuing convertible bonds because the popularity of this feature with investors allows it to offer a
lower coupon rate on convertible bonds (or a lower dividend on preferred stock), thus reducing its fixed payments. And if
investors convert to common stock, the firm no longer has to make these fixed payments at all. But there is one important group
that may be unhappy with this arrangement; the corporation’s existing stockholders may be displeased if the new stock issued to
holders of convertible securities dilutes their share of ownership—and their share of any profits!

75. What is a mutual fund? How does a closed-end mutual fund differ from an open-end fund? Why do such funds appeal to investors?
What is the difference between mutual funds and exchange traded funds.
Mutual funds pool money from a large number of investors and use the funds to buy a large number of different securities. A
closed-end fund issues a fixed number of shares and invests the money received from selling these shares in a portfolio of assets.
Shares of closed-end funds can be traded among investors much like stocks. An open-end mutual fund doesn’t have a fixed
number of shares, nor are its shares traded like stocks. Instead, the fund issues additional shares when demand increases, and
redeems (buys back) shares when investors want to cash in. Open-end funds are much more common than closed-end funds.
Mutual funds allow investors to own a much broader portfolio of securities than they could afford to buy as an individual. This
offers the benefits of risk reduction through diversification. Also, most mutual funds offer professional management, which
appeals to many people who lack the time and expertise to do careful market research and make complex investment decisions.
Mutual funds come in many varieties; some are very broad based, while others focus on a specific sector of the economy or type
of security. Thus, it is easy for investors to find a fund that matches their investing philosophy. Finally, shares of many funds
can be bought directly from mutual fund companies, thus avoiding commissions and brokerage fees.
Like mutual funds, exchange traded funds (ETFs) offer individual investors a way to invest in many different securities at a
relatively low cost. When investors buy shares of an exchange traded fund, they are really buying a “market basket” of many
different securities. Unlike open-end mutual funds, exchange traded funds are bought and sold just like stocks. This has both
advantages and disadvantages. The major advantage is that it allows for more flexibility in the timing of purchase, while mutual
funds can only be purchased and redeemed at the end of a trading day. Also unlike mutual funds, ETFs don’t require a minimum
initial investment. The major disadvantage of ETFs is that buying and selling them requires the use of a broker and hence
involves commissions and brokerage fees.

76. What is the key difference between the primary and secondary securities markets? Why are the trades that occur on the secondary
market important to a firm’s management?
Primary security markets are where newly issued securities are first sold to investors. The firms that issue securities receive the
funds generated from sales in the primary market.
Secondary security markets are where previously issued securities are traded. Firms who issue the securities do not receive the
proceeds from these sales. Nevertheless, the liquidity provided by secondary markets, and the chance for capital gains offered
by sales on these market are key reasons why firms can sell securities in the primary market. Moreover, changes in the price of
a company’s stock on the secondary market are a key indicator of how investors view the effectiveness of the firm’s
management.

77. What is an initial public offering (IPO)? Describe the role investment banks play in an IPO.
An IPO is the first time the company’s stock is issued for sale to the general investing public.
An investment bank specializes in helping firms issue securities in primary markets. IPOs and other public offerings are
complicated procedures and the investment bank helps in a variety of ways. Investment banks help the firm plan their issue. For
example the bank will advise the issuing firm about the types of securities to issue, the number of shares to issue, and whether to
offer them as a private placement or public offering. If the firm decides to use a public offering, the investment bank also helps
complete the registration statement that must be filed with the SEC. It also helps publicize the offering and line up potential
investors. In fact, in many cases the bank actually underwrites the offering. This means the bank actually buys all of the
securities itself, thus guaranteeing the firm a given amount of financial capital. (The investment bank makes a profit by re-
selling the securities to other investors at a higher price.) Finally, the investment bank handles all of the detail work when the
stock is actually sold, ensuring that investors receive their shares and all of the necessary procedures are followed.

78. What service does a stockbroker offer? Briefly describe the difference between a full service broker and a discount broker. How does a
broker handle a market order? How does a broker handle a limit order?
A stockbroker facilitates the purchase and sale of securities by providing access to the stock exchanges and OTC market.
Discount brokers simply carry out trades, while full- service brokers offer additional services such as tax and estate planning
and investment research. As their name implies, discount brokers charge lower commissions and fees than full-service brokers.
In recent years the distinction between full service and discount brokers has become less clear-cut. Full-service brokers have
reduced their commissions, while discount brokers have begun to offer more services. Many brokerage firms now offer both
types of services.
A market order is an order to buy a stock at the best available price. A broker who receives a market order from a client will buy
or sell the stock at the best price the broker can obtain. In contrast, a limit order is an order to buy shares of a stock only if its
price is below some specified amount (or to sell shares of a stock only if the price is above a specified value). Thus, a broker
who receives a limit order from a client will only buy or sell the security if the price meets the conditions specified by the client.

79. Describe five different investment strategies. Which of these investment strategies do you personally favor? Why? What types of
investments fit best with your strategy?
Investors who focus on income buy securities that offer a steady and predictable stream of income. Income investors tend to have
portfolios that are heavily weighted in bonds (which pay a stated rate of interest) and preferred stocks (which offer a stronger
possibility of paying a dividend than common stock). This approach is popular with retirees and others who are very risk averse.
Its main drawback is that such safe investments generally offer a fairly low rate of return and seldom generate large capital
gains.
Market timers try to time their purchases and sales of securities so that they “buy low and sell high.” They tend to have a fairly
short investment horizon and focus on making profits quickly. There are a couple of problems with this approach. First, so many
factors affect the price of stocks—some of them based on random events—that it is hard to consistently identify the timing and
direction of changes in stock prices. This approach tends to require frequent trades, which results in frequent payments of
commissions and brokerage fees.
Value investors try to identify companies which are undervalued by investors. They do a lot of research in an attempt to find
discrepancies between the true (intrinsic) value of a firm’s stock and its current market price. The challenge of this approach is
that there are thousands of other investors doing the same thing. Unless an investor is among the very first to discover an
undervalued stock, the investors who discover it first will buy it up, driving up the price and eliminating the opportunity.

80. Growth investors try to find companies that are likely to grow much faster than average. Such investors tend to look for small
companies with unique products in fast growing sectors of the economy. But such sectors tend to attract a lot of competition,
and are beset by rapid technological change. This makes predicting winners and losers in growth sectors very difficult.
Buy and hold investors tend to buy a diversified portfolio of stocks with the intention of holding them for a long period of time.
This approach puts its faith in the ability of a diversified portfolio to minimize risk and in the long-term trend for stock prices to
rise over time. Investors who adopt a buy and hold approach seldom see dramatic short-term gains, but usually experience a
good long-term return on their portfolios. This approach requires patience and the courage to stick with stocks during
inevitable periods of market declines.
There is no single correct answer to the question about the student’s preferred strategy. The key is simply for the student to
provide a rationale for his or her choice. One element of the rationale might have to do with how much risk the student can
comfortably assume and how confident they are in their ability to “pick winners.” Other factors that could influence the
student’s choice might be the student’s financial goals and the timeframe—students who are young and investing for the long
term may choose a more aggressive strategy than students who are older or who have a shorter timeframe.
The specific types of securities listed will depend on the strategy the student chooses. For example, students choosing the income
strategy would probably select mostly bonds, CDs, and preferred stocks. Those who opt for a buy and hold approach would
probably opt for a broad portfolio including many different stocks. (One way they could achieve this would be to invest in
broad-based mutual funds or ETFs.) Students who choose other strategies would tend to select specific types of securities
consistent with their approach.

81. In addition to reporting a stock’s closing price, most financial websites provide additional information about the stock, including its
market capitalization, price-earnings ratio, earnings per share and dividend and yield. Define each of these measures and provide a brief
explanation of its significance.
Market Cap: the total market value of all shares common stock outstanding, found by multiplying the price per share times the
number of shares of common stock outstanding.
EPS (earnings per share): measures the net income available to common stockholders divided by the number of shares of
common stock outstanding. It indicates what the company earned per share of common stock.
P/E: The price earnings ratio shows the price of a common stock as a ratio of earnings per share. It is found by dividing the
price per share by the stock’s earnings per share. In general, a higher P/E ratio means investors expect a greater growth in
earnings over time.
Div & Yield: The dividend figure represents the sum of all dividends paid by the company over the past 12 months. Yield is found
by dividing the price per share by the previous day’s price per share. It tells us what the rate of return the dividend represents to
the investor at the stock’s current price. (But keep in mind that the dividend isn’t the only return investors might earn. In fact,
when stocks are rising in value the capital gain may offer a much greater return than the dividend.)