1. Applied Finance
Final Exam Review

2. Price/Earnings Ratio
How do you calculate it?
Answer: Click Here

3. Business Lifecycle Brainstorm steps: Startup Growth Maturity Decline
Cessation

4. Capital
What is it?
Any form of wealth that can be used to create more wealth, such as cash, which can be invested to generate more income.

5. Ways to raise capital Loan from bank Private investors
Venture Capital Firms
Stocks
Bonds
Sell equipment or property
Liquidation

6. Types of Business What are they? Sole Proprietorship Partnership
Corporation
Limited Liability Company

7. Corporation Disadvantages: Legally complex to start and operate
One of the two most regulated business forms
Profits are taxed twice - once as corporation income, and again as investor income
Because the corporation has its own identity, it is responsible for actions taken in its name. The owners are not ordinarily held personally responsible (there are exceptions; you might want to research the Enron scandal to read about one of them).
The same thing is true for the corporation’s business debts—the owners don’t have to pay out of their own pockets; their liability is limited.
Most importantly, the corporation can issue stock to raise money for capital expenditures (buying new land, buildings, and equipment). Members of the public buy this stock and, in turn, receive a small return periodically (a “dividend”). Although most stock in sold in large blocks, through brokers, a few companies sell directly to individuals. Get an idea of their cost by checking the Disney Company site at
The drawbacks to having a corporation are that they are heavily regulated by both the state and federal governments; also, setting them up and doing the ongoing paperwork can be time-consuming, detailed, and costly.
Another disadvantage is that the corporation is taxed on its profits, and then the investors (the stockholders) are also taxed on what they receive from the corporation. In effect, the profits are taxed twice.
Copyright © National Academy Foundation. All rights reserved. 7

8. Sole proprietorship Disadvantages:
The owner is personally responsible for all actions of the business
The owner is personally liable for all business debts
Creating and operating a sole proprietorship is easy and inexpensive. It is the least regulated of all the forms of business ownership we will look at in this presentation.
For income tax purposes, the owner and the business are the same: All profits (and losses) are reported on the owner’s personal income tax return. The business does not exist as a separate organization. That is not the case with more complicated forms, such as the corporation.
The downside to operating as a sole proprietorship is that the owner alone is personally responsible for everything the business does. That includes paying business debts with personal assets—home, car, personal investments, etc.
Copyright © National Academy Foundation. All rights reserved. 8

9. General partnership Disadvantages:
All partners are responsible for any actions taken in the name of the business by all other partners
All business debts are the personal responsibility of the partners
Like a sole proprietorship, a general partnership is easy and inexpensive to set up.
Partners receive income from the business in the same proportion as their investment. For example, if a partner put $100,000 into the business, out of total capital of $500,000, the partner would receive one-fifth of the profits. Similarly, if the business suffered losses, the partner would be liable for one-fifth of the amount of the losses.
As with any group of coworkers, partners sometimes disagree about how to operate the business. This is especially true if one partner’s action increases the financial liability of the other partners and may put their personal assets in jeopardy.
This is one of the main reasons partnerships have written agreements; they set out what to do if a serious disagreement arises about the future of the partnership.
Copyright © National Academy Foundation. All rights reserved. 9

10. Sole proprietorship Advantages:
Simple and inexpensive to create and operate
Least regulated of all business forms
All profits are reported on the owner’s personal income tax return
Creating and operating a sole proprietorship is easy and inexpensive. It is the least regulated of all the forms of business ownership we will look at in this presentation.
For income tax purposes, the owner and the business are the same: All profits (and losses) are reported on the owner’s personal income tax return. The business does not exist as a separate organization. That is not the case with more complicated forms, such as the corporation.
The downside to operating as a sole proprietorship is that the owner alone is personally responsible for everything the business does. That includes paying business debts with personal assets—home, car, personal investments, etc.
Copyright © National Academy Foundation. All rights reserved. 10

11. Limited liability company (LLC)
Characteristics:
Treated as an individual for purposes of ownership and legal standing, but it is not taxed at the higher corporate rates
A limited liability company (LLC) is a form of business ownership that has become increasingly popular (especially with small to medium-sized businesses) within the last 10 years. In fact, all 50 states now recognize LLCs as a legal form of business ownership. LLCs combine aspects of both a partnership and a corporation in that they operate and are taxed as a partnership or sole proprietorship, but have limited liability for the owners. The profits and losses of the LLC pass through the owners’ personal income tax return, which means that LLCs allow their owners to avoid double taxation.
Copyright © National Academy Foundation. All rights reserved. 11

12. Corporation Characteristics:
In the eyes of the law, is treated like an individual:
It can own property
It can be sued
It must file a tax return
Although we usually think of corporations as being very large, with multiple factories and hundreds or thousands of employees, that isn’t always the case. Even small businesses may select this form of ownership for a simple reason: liability. The owners of the business are not personally liable for the corporation’s debts.
Owners may also be employees, and their employee benefits may be taken as a business deduction on the corporation’s tax return, thereby lowering its tax liability.
The corporation exists under the law separate from its owners. (Remember the sole proprietorship? It was the same as its owner.) It can hold title to assets, make profits, and in many other ways operate like a person.
Copyright © National Academy Foundation. All rights reserved. 12

13. Corporation Advantages:
Owners are not responsible for the actions taken by the business
Debts are not the responsibility of the owners (limited liability)
The business can sell shares (stock) in the business to the public in order to raise capital
Because the corporation has its own identity, it is responsible for actions taken in its name. The owners are not ordinarily held personally responsible (there are exceptions; you might want to research the Enron scandal to read about one of them).
The same thing is true for the corporation’s business debts—the owners don’t have to pay out of their own pockets; their liability is limited.
Most importantly, the corporation can issue stock to raise money for capital expenditures (buying new land, buildings, and equipment). Members of the public buy this stock and, in turn, receive a small return periodically (a “dividend”). Although most stock in sold in large blocks, through brokers, a few companies sell directly to individuals. Get an idea of their cost by checking the Disney Company site at
The drawbacks to having a corporation are that they are heavily regulated by both the state and federal governments; also, setting them up and doing the ongoing paperwork can be time-consuming, detailed, and costly.
Another disadvantage is that the corporation is taxed on its profits, and then the investors (the stockholders) are also taxed on what they receive from the corporation. In effect, the profits are taxed twice.
Copyright © National Academy Foundation. All rights reserved. 13

14. LLC
Can choose to be taxed as the property of the owners (like a partnership) or an individual (like a corporation)
The biggest advantage of forming an LLC is that the liability of the owners is limited to their investments. This means that owners cannot be held personally liable for the company’s debts. Another advantage of forming an LLC is that unlike a corporation, the profits are only taxed once. The IRS doesn’t assess taxes on the company itself. Although LLC are more expensive to create than a partnership or a sole proprietorship, they are not as expensive to create as a corporation. By forming an LLC, business owners avoid much of the time-consuming, complex paperwork and hefty fees that are typically associated with corporations.
One of the main disadvantages of forming an LLC is that it may be more difficult to raise capital. In addition, many states impose special taxes on LLCs.
Copyright © National Academy Foundation. All rights reserved. 14

15. General partnership Advantages:
Simple and inexpensive to create and operate
All profits are taxed as personal income to the partners
Like a sole proprietorship, a general partnership is easy and inexpensive to set up.
Partners receive income from the business in the same proportion as their investment. For example, if a partner put $100,000 into the business, out of total capital of $500,000, the partner would receive one-fifth of the profits. Similarly, if the business suffered losses, the partner would be liable for one-fifth of the amount of the losses.
As with any group of coworkers, partners sometimes disagree about how to operate the business. This is especially true if one partner’s action increases the financial liability of the other partners and may put their personal assets in jeopardy.
This is one of the main reasons partnerships have written agreements; they set out what to do if a serious disagreement arises about the future of the partnership.
Copyright © National Academy Foundation. All rights reserved. 15

16. LLC Disadvantages: Governed by complex laws
The owners normally can’t be employees
When a partner dies, the business entity is dissolved
The biggest advantage of forming an LLC is that the liability of the owners is limited to their investments. This means that owners cannot be held personally liable for the company’s debts. Another advantage of forming an LLC is that unlike a corporation, the profits are only taxed once. The IRS doesn’t assess taxes on the company itself. Although LLC are more expensive to create than a partnership or a sole proprietorship, they are not as expensive to create as a corporation. By forming an LLC, business owners avoid much of the time-consuming, complex paperwork and hefty fees that are typically associated with corporations.
One of the main disadvantages of forming an LLC is that it may be more difficult to raise capital. In addition, many states impose special taxes on LLCs.
Copyright © National Academy Foundation. All rights reserved. 16

17. Corporation Characteristics:
Can hire employees, which may include the owners
Although we usually think of corporations as being very large, with multiple factories and hundreds or thousands of employees, that isn’t always the case. Even small businesses may select this form of ownership for a simple reason: liability. The owners of the business are not personally liable for the corporation’s debts.
Owners may also be employees, and their employee benefits may be taken as a business deduction on the corporation’s tax return, thereby lowering its tax liability.
The corporation exists under the law separate from its owners. (Remember the sole proprietorship? It was the same as its owner.) It can hold title to assets, make profits, and in many other ways operate like a person.
Copyright © National Academy Foundation. All rights reserved. 17

18. Lesson 3 – Product or Service Development Cycle
See poster…

19. Lesson 3 – Product or Service Development Cycle
See this game:

20. Which is more expensive?
Shipping inputs and products a long distance or
Obtaining goods and services locally?

21. Which is more expensive?
Shipping inputs and products a long distance or
Obtaining goods and services locally?

22. Profit Margin
How is it calculated?
Profit divided by revenue

23. What is a monetary guarantee that a financial obligation will be fulfilled?
Surety Bond
Worker’s Compensation
Speculative Risk
Product liability insurance

24. What insurance protects a company from lawsuits if someone is injured by the company’s products?
Surety Bond
Speculative Risk
Worker’s Compensation
Product liability insurance

25. What is a situation where there is a chance of either loss or no loss, but no chance of gain?
Surety Bond
Pure risk
Risk Mitigation
Insurance premium

26. Fact
Only pure risks are insurable; otherwise insurance is akin to gambling.

27. What insurance protects a business from lawsuits
Risk mitigation
Theft insurance
General liability insurance
Quality assurance

28. What insurance protects a company in the event that an employee is seriously injured on the job?
Worker’s compensation insurance This insurance is required in most states.

29. Lesson 6: Financial Record-keeping and Analysis
Which document is sent to shareholders at the end of every year? These are required by the SEC for corporations.
Annual Report

30. Lesson 6: Financial Record-keeping and Analysis
What is a measure of a company’s earnings before income and taxes?
EBIT

31. Lesson 6: Financial Record-keeping and Analysis
Which financial statement is a summary of a firm’s assets, liabilities, and owner’s equity on a certain date?
Balance Sheet!

32. Lesson 6: Financial Record-keeping and Analysis
What is a document describing a company’s incoming and outgoing money?
Cash Flow Statement

33. Lesson 6: Financial Record-keeping and Analysis
What is another word for net income?
$Profit$

34. Lesson 6: Financial Record-keeping and Analysis
What is another word for net income?
$Profit$

35. Lesson 7: Financial Strategies
How do you make a personal budget? What are the steps?
Track money coming in
Track money going out (spent)
Find the balance. Are you making more than you’re spending, or vice versa?
Set budget
Review regularly

36. Lesson 7: Financial Strategies
Which analysis involves tracking moving averages and looking for trends & cyclical variations?
Quantitative
Qualitative

37. Lesson 7: Financial Strategies
Which analysis assesses opinions through consumer panels, focus groups and in-house judgements?
Quantitative
Qualitative

38. Lesson 7: Financial Strategies
What is extrapolation?
Using current and/or historical data to estimate or forecast the future.

39. Lesson 8: Business Financing Options
In the term “SBA Guaranteed Loan,” what does SBA stand for?
Small Business
Administration

40. Lesson 8: Business Financing Options
What organization should you go to to obtain a 504 loan?
Small Business
Administration

41. Lesson 8: Business Financing Options
What does a CDFI stand for?
Community Development
Financial Institution

42. Lesson 9: The Stock Market
Which is a rising stock market?
Bear Market
Bull Market