Chapter 6: The Business-Investment Sector

Holders of _____ get to vote on issues related to the corporation and who runs it.

common stock

It is easiest to get raise funds from the public in a

corporation.

Owners of a business are legally protected from the actions of the business if it is a

corporation.

Despite the economic incentives to invest during recessions, this did not occur during the Great Depression because

the economic downturn was so severe businesses did not know if they would survive it.

Relative to corporations and partnerships, proprietorships are

the most numerous business type but have the least sales.

The number of people who can own a partnership is

two or more.

The greatest obstacle to starting your own business is raising enough capital. If you keep your day job

you may not have the time needed to grow the business.

The purchase or construction of any new plant, equipment, or residential housing, or the accumulation of inventory is known as _______.

Blank 1: investment

Generally, investment in plant and equipment is ________ volatile than inventory investment.

Blank 1: less

Limited ________ is the main advantage of organizing your business as a corporation.

Blank 1: liability

During recessions inventory, investment tends to be ________.

Blank 1: negative

In terms of number of firms, ________ are the most common type of business, however, most sales come from ________.

Blank 1: proprietorships or proprietorship Blank 2: corporations or corporation

We know that in the real world, as income rises investment rises, but we ignore this and say the level of investment stays the same, we do this to trade off some ________ for some _______.

Blank 1: reality Blank 2: simplicity

Goods on store shelves waiting to be sold are defined as ________ , which are considered a form of _______.

Blank 1: inventories or inventory Blank 2: investment

On January 1st your business has $22,000 worth of inventory because of declining sale due to a slumping economy your inventories have increased to $39,000 by December 31st. As a result, your inventory investment is

$17,000.

Between January 1st and December 31st of last, your business saw its inventories change from $35,000 worth of inventory on January 1st to $39,000 by December 31st. As a result, your inventory investment is

$4,000.

Suppose for a particular corporation, 10 million shares of common stock valued at $45 per share have been issued, there are also 500,000 shares of preferred stock selling for $50. In addition, it has issued corporate bonds totaling $30.5 million, based on this we can say its market capitalization is

$450 million.

Suppose for a particular corporation, 1 million shares of common stock valued at $50 per share have been issued, there are also 500,000 shares of preferred stock selling for $100. In addition, it has issued corporate bonds totaling $3 million, based on this we can say its market capitalization is

$50 million.

In addition to borrowing, billions of dollars are invested by American business by using:

- accumulated depreciation allowances. - retained earnings.

Proprietorships are

- almost always small. - owned by an individual.

Strong determinants of the level of investment include

- an increase in inventories when sales are expected to be strong in the coming months. - an increase in plant and equipment when the sales outlook looks good for the next few years.

Investment includes all of the following:

- construction of a new plant. - the accumulation of inventory. - residential housing. - purchase of new equipment.

Businesses tend to invest when:

- expected profit rates are high. - the capacity utilization is high.

In addition to limited liability, corporations also provide the following benefits:

- increased ability for public funding. - perpetual life. - potentially lower personal income taxes.

Inventory investment has been lessened due to:

- inventory computerization. - just-in-time inventory control - faster delivery systems.

Investment in new plant and equipment are generally more stable (and thus more predictable) because:

- it is generally a long-term project that is planned in advance and we generally follow through with them. - even if the economy slows down. even in bad years plant and equipment depreciates.

Examples of human capital include:

- job training. - education.

Business investment is funded by:

- new issues of stock. - initial public offerings (IPOs) of stocks. - savings which are pooled together to make large business loans.

Partnerships are

- owned by two or more people. - almost always small.

Ownership of a corporation is held by owners of:

- preferred stock. - common stock.

Essentially to create investment we must:

- spend less. - work more.

Advantages of doing business in the United States include

- the world's best venture capital network. - ease of incorporating.

The sales outlook for a business can be an important determination in the level of investment when:

- they are expected to be strong for the next few months. - they are expected to be strong for the next few years.

Reasons businesses may choose to invest include:

- to grow the business. - replacing worn out equipment.

The greatest obstacle to starting your own business is raising enough capital. If you quit your day job to run the business:

- your business may not have enough income to grow. - you may not have enough money to live on.

Banks package large numbers of deposits into a much smaller number of substantial business _______.

Banks package large numbers of deposits into a m

_________ consists of the total value of a corporation's stocks and bonds.

Blank 1: Capitalization

The interest rate is the _______ of borrowing money.

Blank 1: cost

The difference between gross investment and net investment it that net investment does not include ________.

Blank 1: depreciation

Despite recent economic problems, American _______ spirit is alive and well.

Blank 1: entrepreneurial

Despite low household savings rates, American businesses have been able to invest by borrowing from _______.

Blank 1: foreigners

True or false: Since investments in new plants and equipment are long-term projects meeting the needs for years ahead, the investment may continue even if the economy enters a recession.

True

When people buy stocks and bonds this is an example of

a financial transaction but not an investment.

Inventory investment is highly volatile

and may become negative.

During really good economic times, we would expect the capacity utilization rate to be

approaching 90%.

The total value of a corporation's stocks and bonds is known as

capitalization.

The capacity utilization rate would be a strong deterrent to investment if

below the normal rate of 80 to 85%.

When American businesses fund investment

billions of dollars a year are invested without borrowing.

Despite low savings rate, American businesses have been able to invest by

borrowing from foreigners.

A business firm can determine the interest rate they pay on borrowing by

dividing interest paid by the amount borrowed.

Businesses may choose not to borrow at low interest rates during a downturn in the economy if

expected future profits are negative.

Purchase of stocks and bonds are a form of

financial transactions.

In our graphs, we keep the level of investment the same for all levels of income

for simplicity.

The accumulation of knowledge and skills that make a worker productive is known as

human capital.

When comparing inventory investment and investing in plant and equipment generally

investment in plant and equipment varies but is more stable than inventory investment.

If you choose to save the money yourself to acquire capital for your business

it takes sacrifice on your part to earn the money.

Gross investment minus the depreciation is known as

net investment.

The number of people who can own a proprietorship is

one.

An unincorporated business firm that is owned by more than one person is a

partnership.

An unincorporated business firm that is owned by just one person is a

proprietorship.