[Music]
When people from around the world think of
businesses in the USA, thoughts are often
centered on our financial markets, innovation
from the private sector, and how businesses
and the government are linked through our
web of commercial interactions.
In this lecture, we will look closely at how
companies are organized, how we all interact
to facilitate new investments and enforce
the rule of law.
You will find leaders of companies often come
from different backgrounds,
bringing unique experiences,
and serving to grow the investments
of their owners in exciting ways.
One of the most unique CEOs of the American business world is Steve Ballmer,
former CEO of Microsoft corporation,
who currently finds
excitement as the owner of the Clippers basketball team.
For this introduction we turn to Neil Cavuto
at Fox Business News.
President Elect don't prompt on it Thank
You Tour he is calling it is showing a lot
of
passion onstage something that is not
lost on my next guest, take a look
[Music]
Steve Ballmer! Get up! Get up!!!
I always wonder and Steve Ballmer the field
when you play that video I I I love it
and I also think it's even it's a great
to have you
it shows unique passion you can't you
haven't covered you for many many years
I I think it's a rare quality and in a
lot of industries probably all industry
to see passion you don't see that much
how are you? I'm great how are you good
to see you again very good
um Donald Trump is certainly an
outside-the-box kind of a candidate an
outside-the-box president-elect I mean II
got to speak that you know at the top of
his head barely use the prompter um you
were that kind of CEO before crowds and
annual meetings I guess their
differences in of your approach of the
things that's probably an understatement
but a lot of people are saying you know
Mr.
President-elect it's time to dial it
back it's time to start being more
presidential
what do you think? Well its not for me to
give
advices to the President of the United
States a whole different thing I do think
it
is fun for people who are leaders to
both have a chance to be thoughtful and
serious also kind of you know feel
feeling a little bit and show people
that you're in and you're excited and in
general I think that's a good thing for
leaders were supposed to don't being all
stiff and formal but you don't want to
look like a madman who has no no real
thoughtfulness and sort of contempt of
nature
yeah but you know and I'm not blowing
you smoke but you could keep people
really glued to their seats are in an
audience and that is because you did
physically glue them into their seats
but no I'm kidding but that's the idea
was you know you're trying to jazz a
crowd you're trying to get them into
what you're
talking about whether you're talking
about developers or Clippers fans I mean
there's not much difference here keeping
them engaged right no yeah and I think
it is really important when you have a
group of people in front of you they come
yes to hear your message and but they
also kinda wanna they want to be there
they want to be excited they want to be
inspired and then you are right you know
you bring people to a computer
conference and you want to not only to
understand what you're saying you want
them to follow you you want them to be
enthusiastic we get guys to clipper
games the number one thing I care about
actually on the business side of the
clips is how loud we can get our fans
bumpin and thumpin during the game
because I think it's exciting for the
fan and by the way it's great for the
team and it's sold out every game since
you've had them so that you're doing
something right on let's talk a little
bit about now in this post election of
our I have no idea who supported or or
voted for I know your wife Connie Ballmer
had donated to Hillary Clinton earlier
in the campaign year how she faring now
well I mean she and I both actually
we're focused in on our issues and you
know for me it it's like when you're on
Microsoft you're not is a SEO company
you're not a Democrat you're not a
Republican not at least in your business
you're all about Microsoft they're all
about whatever company you lead the issue
we are very focused in on is how do kids
who are born in tough circumstances get
a shot at the American Dream and they're
literally our communities in this
country were fifty percent of the kids
are the probability rather 50-percent
the kids are not going to do any better
than their parents and I just think I
think people ought to deserve a better shot
whether we have republicans in office or
democrats in office were working with
everybody on that particular goal that's
not too shabby
um you know I I wonder what you then
make of this
the move of the president-elect made to
save these 1100 so jobs at carrier
there are a lot of pure free-market
capitalist even said be careful what you
wish for Mr.
President-elect because
you're going to do that for everybody
and you're choosing winners and losers
the same thing you criticize Barack
Obama for doing when he was trying to
build and support the solar and wind
energy and all those guys to lender at
all what do you make of that that a
president let alone the president-elect
shouldn't be doing this kind of stuff
well I think there are kinda two aspects and
you know again I don't fit the
presidency and I wouldn't dare to say if
I take a look have another project I'm
working on called USA Facts by early next
year we hope to be able to actually at
after two years of study be able to
simply tell people other people and me
we're trying to learn where does
government money come in and where does it
go out and what impact really does
government have and I've built develop
the point of view that says there's very
little the government can actually do to
stimulate the economy in the long run
yes interest rates in the short-run yes
sending in the short run but those
things they bleep up to a blip down
there are a few things and trade is one
of them and and you know the country has
to decide and how it feels about open
border for trade or whatever had border
this president will decide but at the
end of the day I think the inexorable
kind of advance of innovation in the
private sectors what's going to
stimulate jobs jobs in America maybe
jobs abroad to but jobs here in America
Thank you, Neil Cavuto and Steve Ballmer for
this energetic insight into the business world
of positive thinking and energetic searches
for solutions to business and social challenges.
We will now take this energy to explore how
businesses are organized and financed, and
to whom they provide benefits to share information with.
[Music]
In the United States, there are four main
categories firms are organized under.
A sole proprietorship is a firm owned by a
single individual and not organized as a corporation.
This is the business you might have started
as you mowed lawns, sat as baby sitter, or
sold firewood through.
It is the name you put to your services and
it was a sole proprietorship.
A partnership is a firm owned jointly by two
or more persons and still not organized as
a corporation.
Most law and accounting firms are partnerships.
Most large firms are organized as corporations.
A corporation is a legal form of business
that provides owners with protection from
losing more than their investment should the
business fail.
There are several flavors of Corporations
such as the recognized business structures
of most companies like Microsoft, Inc., Walmart,
Inc., and Exxon Mobile, Inc.
These corporations have thousands of shareholders
and are managed by a team of executives.
There are closely held corporations, termed
"S corporation" means a "small business corporation"
generally with fewer than 100 domestic shareholders
and only one class of stock.
A fairly new business organization format
is the Limited Liability Company, an LLC,
which carries the protections against liability
of owners when they act on behalf of the company,
but forfeits the ability to raise funds by
issuing stocks or selling bonds.
In 1977, when the state of Wyoming first passed
legislation allowing a new type of company
called a Limited Liability Company, hardly
anyone noticed.
Today, over two-thirds of all new companies
formed are LLCs.
It is a business structure that combines the
pass-through taxation of a partnership or
sole proprietorship with the limited liability
of a corporation.
An LLC is not a corporation; it is a legal
form of a company that provides limited liability
to its owners in many jurisdictions.
Now we will take a look at each of these business forms.
The owners of sole proprietorships and partnerships
have unlimited liability, which means that
there is no legal distinction between the
personal assets of the owners and the assets
of the firm.
An asset is anything of value owned by a person
or a firm, this includes the owner's investments,
savings accounts, and their home.
Beginning in the early nineteenth century,
state legislatures began to pass laws that
allowed firms to be organized as corporations,
and more recently as LLCs.
Under the corporate and LLC forms of business,
the owners have limited liability.
Limited liability is the legal provision that
shields owners of a corporation or LLC from
losing more than they have invested in the firm.
The personal assets of the owners of the firm
are not affected if the firm fails.
Limited liability makes it possible for corporations
to raise funds by issuing shares of stock
to many investors.
Corporate profits are taxed twice -once at
the corporate level and again when investors
receive their share of corporate profits.
Corporations are generally larger than sole
proprietorships and partnerships and more
difficult to organize and run.
LLCs cannot issue stocks or bonds to raise
funds.
LLCs are generally about the size of sole
proprietorships and partnerships although
none of the business structures limit the
size of the organization.
Some businesses make their structure using
obvious reasons.
For instance, a company making a commodity
that puts them at potential risk of liability
to food poising - like a meat canner, or device
malfunction that could harm someone - like
automobiles, may want to adopt a business
form that delivers liability protection.
Other businesses that perform services like
house cleaning or painting, art galleries
or book stores will operate nicely as sole
proprietors or partnerships.
Although the cost of forming the LLC are similar
to the cost of forming a sole proprietorship
or partnership, the cost of forming the Corporation
requires licensing and paperwork at initiation
and quarterly to report to the state of incorporation
tax offices and corporate records offices.
Taxes for the corporation are handled different
from the other forms.
Revenue to Corporations are taxed first to
the company and second to the shareholders.
They are taxed twice.
The Corporate tax rates have been higher historically
than private individuals are taxed.
But, corporations are the only business form
that can issue shares of ownership through
the stock market, and the only form that can
issue bonds on the open market to raise funds.
We will circle back to this topic in a few minutes.
Recognizing these three types of firms in
the United States as sole proprietorships,
partnerships, and corporations.
Panel (a) shows that only 18 percent of all
firms are corporations.
Yet, as panels (b) and (c) show, corporations account
for the majority of the revenue and profits earned by all firms.
Even though big corporations generate most
of the financial activity in the USA, small
businesses bring the majority of new jobs
and represent creative innovation throughout
the economy.
All businesses struggle to keep employees
engaged during economic downturns, and smaller
businesses are often more resilient during
slowdowns, but they are not immune to effects
of business cycles.
I give most attention to these performance
graphs recognizing how the larger businesses
have been able to grow more during expansionary
periods than did the medium and smaller size
businesses in the same economic environments.
[Music]
When you picture a business you think of the
founder of the company as someone who owns
the business and is involved in the day-to-day
operations, someone who makes decisions from
the ground up.
Then the company grows, incorporates, hires
more people, expands operations and an evolving
business structure is adopted and deployed.
Right there, you have introduced the separation
of ownership from control.
This is a situation in a corporation in which
the top management, rather than the shareholders,
controls day-to-day operations.
The top management of a large corporation
does not generally own a large share of the
firm's stock, so there is a separation of
ownership from control: A problem sometimes
caused by an agent pursuing personal interests
rather than the interests of the principal who hired the new talent.
Corporations are legally owned by their shareholders,
the owners of the corporation's stock.
Shareholders do not manage the firm directly,
instead they elect a board of directors to
represent their interests.
The board of directors appoints a chief executive
officer, a CEO, to run day-to-day operations
and may appoint other top management.
Managers may serve on the board of directors;
they are referred to as inside directors.
Outside directors are directors who do not
have a management role in the firm.
Corporate governance is the way in which a
corporation is structured and the effect that
structure has on the corporation's behavior.
Separation of management from ownership benefits
the corporation, but can lead to a potential
problem from the Principal-Agent complex.
To lessen these conflicts of interest, many
firms structure the agent's benefit package
to include transfer of corporate stock shares.
This serves to anchor the CEO in the same
boat as all other shareholders.
[Music]
To earn a profit, a firm must raise funds
to pay for its operations.
If a small business is successful and the
owner decides to expand, it can obtain funds
in three ways.
First, the firm can reinvest its profits,
called retained earnings.
Second, the firm can take on one or more partners
who invest in the firm.
Third, the owner can borrow funds from relatives,
friends, or a bank.
Unless firms rely on retained earnings, they
must obtain the external funds they need from
others.
The financial system transfers funds from
savers to borrowers - directly through financial
markets or indirectly through financial intermediaries
such as banks.
Firms raise external funds in two ways.
Indirect finance refers to a flow of funds
from savers to borrowers through financial
intermediaries such as banks.
Intermediaries raise funds from savers and
lend to firms, and other borrowers.
The second way to acquire external funds is
through financial markets.
Direct finance refers to a flow of funds from
savers to firms through financial markets,
such as the New York Stock Exchange.
This option is only available for corporations
as other business forms cannot create stock
to sell to investors.
Bonds are also only an option for corporations.
Together, stocks and bonds are known as financial
securities.
A financial security is a document that states
the terms under which funds have passed from
the buyer to the borrower.
A bond is a financial security that represents
a promise to repay a fixed amount of funds.
The interest rate is the cost of borrowing
funds, usually expressed as a percentage of
the amount borrowed.
The interest rate on a bond is equal to the
coupon payment, which is an interest payment
on a bond, divided by the amount borrowed.
The corporation will set the term of the Bond
and the coupon rate, which is the rate of
return the investor will receive if they purchase
the Bond.
The Corporation wants to attract investors
so they make the term long and the rate high.
But, they do not want to commit to so much
that is becomes impossible to honor the Bond.
These are stated as an annual payment.
For example, if the annual payment on a $1,000
bond is $40, then the interest rate is:
$40 / $1,000 = 0.04 or 4%.
Many bonds that corporations issue have maturities
of 30 years.
The interest rate that a borrower selling
a bond has to pay depends on how likely bond
buyers think that the bond seller is to default.
The higher the default risk on a bond, the
higher the interest rate.
You will discover that in the world of corporate
finance, the corporation is legally bound
to honor Bond payments before Dividend payments
can be made.
A stock is a financial security that represents
partial ownership of a firm.
When a corporation sells stock, it is increasing
its financial capital by bringing additional
owners into the firm.
A shareholder is entitled to a share of the
corporation's profits.
Corporations generally keep some profits - known
as retained earnings - to finance expansion.
The remaining profits are paid to shareholders.
Dividends are payments by a corporation to
its shareholders.
A corporation must make promised payments
to bond holders before it can make dividend
payments to shareholders.
Most buying and selling of stocks and bonds
involves investors reselling existing stocks
and bonds.
There is no single place where stocks and
bonds are bought and sold.
Some trading takes place in buildings called
exchanges, but computer technology has spread
the trading of stocks and bonds to dealers
outside of exchanges.
Changes in the prices of stocks, bonds, and
other securities reflect investors future
expectations.
A bond that was issued in the past may have
its price increase or decrease, depending
on whether the coupon payments being offered
on newly issued bonds are higher or lower
than on existing bonds.
The price of a bond will also be affected
by changes in default risk, or investors'
perceptions of the issuing firm's ability,
or inability to make coupon payments.
Think about investors who want to participate
in business ownership and purchase shares
of stock in growing or new businesses.
These people will have a super difficult time
investigating each and every company to discover
details making their risk versus benefit profile
look clear.
In steps credit-rating agencies.
These agencies have ability to discover and
report facts about corporations that those
companies are obligated to report.
Obligations in this case are legally binding
on corporations.
The reports by these agencies are used to
qualify the value of bonds issued by those
companies and governments.
The conflict of interest was mostly always
present, but not realized until the mid-2000s.
It came with the mortgage-backed securities
scandal that happened when mortgage-backed
bonds were rated at low risk and high value
even as the assets they were based on tanked.
This was the case of the credit-rating agencies
receiving payment from firms having a stake
in the results reported.
A financial stake was anchored to making the
mortgage-backed securities a valuable asset.
When it collapsed, everyone lost their chair
in the musical go around leading to the Great
Recession.
Think back to September 2016 as Samsung Electronics
was splashed in the headlines with cell phone
problems of batteries catching fire as they
charged.
Even airlines forbid these phones on flights
for caution against fire during a flight.
Samsung announced a replacement battery to
fix the problem.
Then in October 2016, the replacement batteries
caught fire and Samsung instead of accepting
responsibility, blamed a battery supplier.
For some investors, Samsung was a write-off.
By November 2016, the company structured new
product releases, reset pricing levels, targeted
new markets, and in early January 2017 they
discontinued the Galaxy Note 7 line of products
and investors watched as stock prices climbed.
Oftentimes, stock performance is driven not
only by the book price reported through the
reporting agencies, but by the happenstance
events of technologies and investor preferences.
The performance of the U.S.
stock market is often measured by market indexes,
which are averages of stock prices.
The three most important indexes are the Dow
Jones Industrial Average, the S&P 500, and
the NASDAQ.
During the period from 1996 to 2013, the three
indexes followed similar patterns, rising
when the U.S.
economy was expanding and falling when the
economy was in recession.
Note that in all three panels the vertical
axis does not start at zero.
As 2017 turned the calendar page, the Dow
Jones Industrial average peaked for the first
time ever above 20,000, giving many of us
the indication that the US economy is headed
into a fresh expansionary period.
[Music]
Before a corporation can sell new issues of
stocks or bonds, it must provide investors
with information about its finances.
In the United States, the Securities and Exchange
Commission, the SEC, requires publicly owned
firms to report their performance according
to generally accepted accounting principles.
Some private companies, for example, Moody's
Investor Services and Standard and Poor's,
collect information from businesses and sell
it to subscribers.
Investors and the managers of firms need information
regarding the firm's revenues and costs, as
well as information regarding the value of
the property and other assets the firm owns
and the firm's debts or other liabilities
it owes to others.
A liability is anything owed by a person or
a firm.
The information investors need to know to
decide whether to buy a firm's stocks or bonds
is contained in the firm's financial statements.
A firm's income statement is a financial statement
that shows a firm's revenues, costs, and profit
over a period of time.
A balance sheet is a financial statement that
sums up a firm's financial position on a particular
day, usually the end of a quarter or year.
A balance sheet summarizes a firm's assets
and liabilities.
Subtracting the value of a firm's liabilities
from the value of its assets leaves its net
worth.
Net worth is what the firm's owners would
be left with if the firm were closed, its
assets sold, and its liabilities paid off.
Accounting profit is a firm's income, measured
as revenue minus operating expenses and taxes
paid.
This is the metric used for taxation purposes.
Economic profit is the firm's revenues minus
all of its implicit and explicit costs.
Because economic profit takes into account
all costs, it provides a better indication
than accounting profit of how successful a
firm is.
Do not allow the inconsistency of these two
statements of profit to confuse you.
Accounting profits are aimed to explain and
articulate the status of investments and tax
liabilities.
Economic profits describe how the business
is performing in the economy giving opportunities
taken and those avoided.
It uses opportunity cost options, implicit
and explicit to evaluate performance.
Economists always measure cost as opportunity
cost.
Opportunity cost is the highest-valued alternative
that must be given up to engage in an activity.
An explicit cost is a cost that involves spending
money.
An implicit cost is the nonmonetary opportunity
cost.
The firm's most important implicit cost is
the opportunity cost to investors of the funds
they have invested in the firm.
The minimum amount that investors must earn
on the funds they invest, expressed as a percentage
of the funds invested, is called a normal
rate of return.
If a firm fails to provide at least a normal
rate of return, it will not remain in business
over the long run.
[Music]
The Crisis of Credit
what is the credit crisis it's a
worldwide financial Fiasco involving
terms you've probably heard like
subprime mortgages collateralized debt
obligations frozen credit markets and
credit default swaps who's affected
everyone how did it happen
here's how the credit crisis brings two
groups of people together home owners
and investors homeowners represent their
mortgages and investors represent their
money these mortgages represent houses
and this money represents large
institutions like pension funds
insurance companies sovereign funds
mutual funds etc these groups are
brought together through the financial
system a bunch of banks and brokers
commonly known as Wall Street well it
may not seem like it
these banks on Wall Street are closely
connected to these houses on Main Street
to understand how let's start at the
beginning years ago the investors are
sitting on their pile of money looking
for a good investment to turn into more money
traditionally they go to the US Federal
Reserve where they buy Treasury bills
believed to be the safest investment but
in the wake of the dot-com bust in
September 11 federal reserve chairman
Alan Greenspan lowers interest rates to
only 1% to keep the economy strong one
percent is a very low return on
investment so the investors say no thanks
on the flipside this means banks on Wall
Street can borrow from the Fed for only
one percent
add to that general surpluses from Japan
China and the Middle East and there's an
abundance of chief credit this makes
borrowing money easy for banks and
causes them to go crazy with leverage
leverage is borrowing money to amplify
the outcome of a deal
here's how it works and our normal deal
someone with $10,000 by the box for ten
thousand dollars
he then sells it to someone else for 11
thousand dollars for one thousand dollar
profit a good deal but using leverage
someone with ten thousand dollars would
go borrow nine hundred ninety thousand
more dollars giving him 1 million
dollars in hand then he goes and buys
100 boxes with is 1 million dollars and
sells them to someone else for 1,000,000
$100,000 many pays back is nine hundred
ninety thousand plus 10,000 interest and
after his initial 10,000 he's left with
the ninety thousand dollar profit versus
the other guys 1000 leverage turns good
deals into great deals
this is a major way banks make their
money so wall-street takes out a ton of
credits makes great deals and grows
tremendously rich
and then paste it back investors see
this and want a piece of the action and
this gives Wall Street an idea they can
connect the investors to the homeowners
through mortgages here's how it works
a family once a house so they say for a
down payment and contact a mortgage
broker the mortgage brokers connects the
family to a lender who gives them a
mortgage broker makes a nice Commission
the family by the house becomes
homeowners this is great for them
because housing prices have been rising
practically forever
everything works out nicely one day the
lender gets a call from an investment
banker who wants to buy the mortgage the
lender sells it to him for a very nice p
the investment banker then borrows
millions of dollars and by thousands
more mortgages and puts them into a nice
little box
this means that every month he gets the
payments from the homeowners of all the
mortgages in the box then he sliced his
banker wizards on it to work their
financial magic which is basically
cutting it into three slices safe ok and
risky they packed the slices back up in
the box and tell us a collateralized
debt obligation or CDL
a CDL works like three cascading trays
as money comes in the top tray filled
first then stills over into the middle
and whatever is left in the bottom the
money comes from homeowners paying off
their mortgages if some owners don't pay
and default on their mortgage less money
comes in the bottom tray may not get
filled this makes the bottom tray
riskier and the task tray safer to
compensate for the higher-risk the
bottom tray receives a higher rate of
return while the top receives the lower
but still nice return to make the top
even safer thanks will insure it for
small fee called a credit default swap
the banks do all of this work so that
credit rating agencies will stamp the
top slice as a safe triple-a rated
investment the highest safest rating
there is the ok slices triple-b still
pretty good and they don't bother to
rate the risky slice because of the
triple-a rating the investment banker
can sell the safe slice to the investors
who only want safe investments he sells
the ok slice to other bankers and the
risky slices to hedge funds and other
risk takers the investment banker makes
millions he then repays his lungs
finally the investors have found a good
investment for their money much better
than the one percent Treasury bills
they're so pleased they want more CDL
slices so the investment banker cause of
the lender wanting more mortgages the
lender calls up the broker for more
homeowners but the fucker can't find
anyone everyone that qualifies for more
each already has one but they have an idea
[Music]
when homeowners default on their
mortgage the lender gets the house and
houses are always increasing in value
since they're covered if the homeowners
default lenders can start adding risk to
new mortgages not requiring down
payments no proof of income no documents
at all and that's exactly what they did
so instead of lending to responsible
homeowners called prime mortgages they
started to get some that were well less responsible
these are subprime mortgages this is the
turning point
so just like always the
mortgage broker connects the family with
a lender and a mortgage making his
commission the family buys up big house
the lender sells the mortgage to the
investment banker whose turns it into a
CDL and sell slices to the investors and
others this actually works out nicely
for everyone that makes them all rich
no one was worried because as soon as
they sold the mortgage to the next guy
it was his problem if the homeowners
were to default they didn't care they
were selling off their risk of the next
guy in making millions like playing
hospital with a time bomb
not surprisingly the homeowners default
on their mortgage which at this moment
is owned by the banker this means he
forecloses and one of his monthly
payments turns into a house no big deal
he put it up for sale but more and more
of his monthly payments turn into houses
now there are so many houses for sale on
the market creating more supply than
there is demand and housing prices
aren't rising anymore
in fact they plumb this creates an
interesting problem for homeowners still
paying their mortgages as all the houses
in their neighborhood go up for sale the
value of their house goes down
and they start to wonder why they're
paying back their $300,000 mortgage when
the house is now worth only ninety
thousand dollars they decide that it
doesn't make sense to continue paying
even though they can afford to and they
walk away from their house default rates
sweep the country and prices plummet now
the investment banker is basically
holding a box full of worthless houses
he calls up his buddy the investor to
sell his CDL but the investor isn't
stupid and says no thanks
he knows that the stream of money isn't
even a dribble anymore
the banker tries to sell to everyone but
nobody wants to buy his bomb
he's freaking out because he borrows
million sometimes billions of dollars to
buy this bomb and he can't say it back
whatever he tries he can't get rid of it
but he's not the only one
the investors have already bought
thousands of these bombs the lender
calls up trying to sell his mortgage but
the banker won't buy it and the brokers
out of course the whole financial system
is frozen and things get dark
Eeverybody starts going bankrupt.
But, that's not all the investors calls up
the homeowner and tells him that his
investments are worthless and you can
begin to see how the crisis flows in a cycle
welcome to the crisis of credit.
Firms disclose financial statements in periodic
filings to the SEC and in matching annual
reports to stockholders.
The management of a firm has two reasons to
attract investors and keep the firm's stock
price high.
First, a higher stock price increases the
funds the firm can raise when it sells a given
amount of stock.
Second, to reduce the principal-agent problem,
boards of directors often tie the salaries
of top managers to the firm's stock price.
However, problems that surfaced during the
early 2000s revealed that some managers inflated
profits and hid liabilities.
At other firms, managers took on more risk
than they disclosed to investors.
They complied with Generally Accepted Accounting
Practices, but did not recognize implicit
or explicit costs of choices they made.
In the early 2000s, top managers at some firms,
such as Enron and WorldCom, falsified their
firms' financial statements to mislead investors
about how profitable they were.
The federal government regulates how financial
statements are prepared but cannot guarantee
the accuracy of their statements.
To guard against future scandals, the Sarbanes-Oxley
Act of 2002 was enacted, which requires CEOs
to personally certify the accuracy of financial
statements.
Most observers acknowledge that the Sarbanes-Oxley
Act increased confidence in the U.S.
corporate governance system, though problems
during 2007-09 at financial firms again raised
questions of whether corporations were adequately
disclosing information to investors.
It seems transparency has several shades of
clarity.
The U.S. economy suffered the stiffest financial
crisis since the Great Depression from 2007
through 2009.
Looking back to the 1970s, financial institutions
began securitizing mortgage loans.
Mortgage-backed securities are similar to
bonds - buyers receive regular interest payments,
which in this case come from the payments
made on the original mortgage loans.
At first, the securitization process was carried
out by the Federal National Mortgage Association,
"Fannie Mae" and the Federal Home Loan Mortgage
Corporation, "Freddie Mac".
Fannie Mae and Freddie Mac would buy mortgages
granted to borrowers and bundle them into
securities that were sold to investors.
In the 1990s, private financial firms began
securitizing mortgages.
By the early 2000s, many mortgages were granted
to "subprime" borrowers, borrowers with flawed
credit histories, and "Alt-A" borrowers, who
failed to document that their incomes were
high enough to afford their mortgages.
Housing prices soared during the late stages
of the expansionary period, but began falling
in 2006.
By 2007, many borrowers began to default on
their mortgages, and many financial institutions
started to suffer heavy losses.
Many investors complained that they weren't
aware of how risky some of the assets on the
balance sheets of financial firms were.
In fall of 2008, Fannie Mae and Freddie Mac
were brought under direct control of the government.
The Wall Street Reform and Consumer Protection
Act, the infamous Dodd-Frank Act, is legislation
passed during 2010 that was intended to reform
regulation of the financial system.
The act created the Consumer Financial Protection
Bureau to write rules protect consumers in
their borrowing and investing activities.
The act also established the Financial Stability
Oversight Council, which is intended to identify
and act on risks to the financial system.
Again, looking backwards to the 1990s, private
investment banks began to securitize mortgages.
Investment banks had traditionally concentrated
on providing advice to corporations selling
stocks and bonds and on underwriting the issuance
of stocks and bonds.
To address the risks of investment banking,
Congress passed the Glass-Steagall Act in
1933 to prevent firms from being both commercial
banks and investment banks.
This was intended to prevent a conflict of
interest.
Congress repealed the Glass-Steagall Act in
1999.
Many of the best-known financial firms remained
investment banks.
Mortgage-backed securities originated by investment
banks were sold mostly to investors, but investment
banks retained some of the securities as investments.
When the prices of the securities declined
in 2007 and 08, the investment banks suffered
heavy losses.
Lehman Brothers declared bankruptcy, Merrill
Lynch and Bear Stearns were sold to commercial
banks, and Goldman Sachs and Morgan Stanley
became bank holding companies.
The era of the large Wall Street investment
banks appeared to have ended.
Traditionally, Wall Street investment banks
had been originated as partnerships, but by
2000 all had become publicly traded corporations.
With a publicly traded corporation, the principal-agent
problem can be severe.
Some economists believe that the financial
crisis may not have occurred if investment
banks had remained partnerships.
Let's look closer at the situation of one
of these entities, Enron.
Enron used to be the seventh largest
corporation in the united states at one
point valued at over 70 billion dollars
as in 1997 however they started losing
money and accumulating debt instead of
admitting their mistakes and making
changes and run executives decided to
hide the losses through accounting
tricks because they didn't want the
Enron stock price to go down risky
decisions kept being made and the truth
with hidden under the rug
as of 2001 however the media started wondering
whether or not
Enron was overvalued this obviously put
a lot of pressure on Enron stock prices
which used to be as high as 90 dollars
and seventy-five cents per share
insiders decided to cash out and started
selling lots of shares and prices kept
falling until they ended up at below a
dollar in late two thousand one in
December 2001 Enron ultimately filed
for bankruptcy approximately 20,000 jobs
and two billion dollars an employee
retirement funds for lost many
executives were brought to justice and
some of them ultimately ended up
receiving prison sentences and run was
an early example of just how recklessly
some corporations are managed we've had
countless other examples mainly in the
financial industry especially after the
Great Recession of 2007-2008
Do you see a pattern?
It's been two and a half months since
Bernard L Madoff was picked up in charge
with what's believed to be the largest
financial fraud in history yet we still
don't know much more about the alleged
50 billion dollar scam than what made
off initially told the FBI agents who
arrested him
there's still no indictments federal
prosecutors continue to unravel the case
and try and figure out exactly what
happened and who always involved but the
proof that it happened can be found in
the ruins lives of thousands of victims
the one person who knows the most and is
willing to talk is harry markopolos the
man who figured out Madoff scheme before
anyone else he said down with us for his
only television interview until a few
months ago he remarked a polis was an
obscure financial analyst and mildly
eccentric fraud investigator from Boston
who most people would never notice on
the street I modern Greek hero
how you doing but today he enjoys an
almost heroic status pursued by
journalists and movie producers and
honored by colleagues as the man who
went to the Securities and Exchange
Commission and blew the whistle on
Bernie Madoff in his 50 billion dollar
fraud TV thank you thank you thank you
think but he seems uncomfortable with
all the attention and knows that he is
no hero I stand before you a
fifty-million-dollar failure second how
many times did you send material to the
FCC may 2005 Tober 2001 of Tober
November december two thousand five then
again
jun 2011 and finally april two thousand
eight five separate sec submission and
in spite of all of the things that you
did that still ended up in disaster
there's nothing to be proud about in
this case I feel horrible about the
results in a total disaster for the
victim
it began a decade ago when market polish
was working for Boston investment firm
his boss told him that Bernard Madoff
former chairman of the Nasdaq Stock
Exchange was running a huge unregistered
hedge fund that was producing incredible
returns he wanted Harry to
reverse-engineer its trading strategy
and revenue streams so that the firm
could duplicate made office results he
had the patina are being respected
citizen one of the most successful
businessman in New York and certainly
one of the most powerful that on Wall
Street you would never suspect in the
fraud unless you knew the math I mean
you're like a math guy right
I've taken all the calculus courses from
integral calculus differential calculus
as well as linear algebra and statistics
both normal and non-normal how long did
it take you to figure out that there was
something ruled it took me five minutes
to know that it was a fraud
it took me another almost four hours of
mathematical modeling to prove that it
was a fraud
what were the things that caught your
attention it was the performance line as
we know that markets go up and down and
has only went up he had very few down
months only four percent of the month
were down months and that would be
equivalent to a baseball player and in
the major leagues getting 964 a year
clearly impossible you would suspect
eating immediately
maybe it was just good no one's that
good
harry said there were only two plausible
explanations either made off with using
insider information to rack up huge
profits or he was running a giant Ponzi
scheme so either way he was doing
something illegal either way I knew he
was going to prison in may have 2,000
market polish took his suspicions about
Bernie Madoff to the Boston office of
the Securities and Exchange Commission
did you have any financial motive
yes he was a competitor of mine and 2000
2004 life was still in the industry and
when someone's competing on your playing
field is a dirty player you want him
tossed off the field he also thought he
might be eligible for a sizable reward
if the fraud involved insider trading
but that turned out not to be the case
in your first letter to the sec back in
two thousand
you're a little tentative you say look
I've been smoking gun in 2000 with more
theoretical 2001 it was a little bit
more real by 2005 had 29 red flags that
you just couldn't miss on but I 2005 the
degree of certainty with approaching a
hundred percent over time and with some
simple math calculations marca polish
concluded that for Madoff to execute the
creating strategy he said he was using
he would have had to buy more options on
the Chicago options exchange then
actually existed yet he says no one he
spoke to their remembered making a
single trade with Bernie Madoff spot i
would talk to people I trading
relationships with an F did you have a
trading relationship with mr.
bernard
madoff and they all said no we don't
think it's for real did you find anybody
I found no one that ever created with Mr
Man off and I said with the largest
equity derivatives sort of the world and
that's because Madoff investment fund
never actually made any trades at least
going back to 1993 and probably further
a fact confirmed last week at a meeting
of Madoff investors by the trustee
charged with liquidated his assets no
one knew the depth of the fraud but a
lot of people had questions
who else figured this out the side shoot
I would say that hundreds of people
suspected something was amiss with an
operation if you look at who the victims
were not you'll notice that the major
firms on Wall Street had no money with
Mr Man on me right into this is the
letter I'm quoting from a letter to the
Securities and Exchange Commission red
flag number 28 officer suspected of
being a fraud by some of the world's
largest most sophisticated financial
services firms and then you with some of
the firm's yesenia biggest firms on Wall
Street in conversations with people high
up into this room's been a threat and
the SEC ignore that they call any of
these people all the SEC had to do is
pick up the phone
they never did if you had executives
it's at the biggest investment houses in
wall street that knew something was
wrong when Ethan they didn't go to the
SEC because people are last houses downtown
stone and self-regulation and Wall Street
doesn't work in January 2006 to
New York office of the Securities and
Exchange Commission finally opened the
case file to look into Harry's
allegations about Bernie Madoff despite
uncovering evidence that madoff it
misled them about his investment
activities the FCC closed the case 11
months later without ever opening a
formal investigation the staff said
there was no evidence of fraud
what I thought after my dealings with
the SEC of rate and a half years is that
their people are totally untrained
finance their unschooled most of them
are just merely lawyers without any
financial industry experience with the
people there aren't trained in
securities work where did they try to
how to look at pieces of paper that the
securities laws require they can check
every piece of paper perfectly and find
misdemeanors and miss all the financial
felonies that are occurring because they
never look there even when pointed fraud
they're incapable of finding fraud no
one at the FCC would talk to us on the
record about he remarked opposes
allegations but one person who seemed to
have had a high opinion of the agency
was Bernie Madoff I'm very close with
the regulator's let's try to say that
they can't you know that what it was bad
about my niece just married one besides
nieces husband who no longer works at
the SEC made office have long-standing
ties to the agency and has been called
upon to give advice at this 2007 meeting
of a non-profit group called the
Philoctetes center Madoff seem to think
the FCC was doing a great job you know
in today's of regulatory environment
it's virtually impossible to to violate
rules when this is something that the
public really doesn't understand but you
is impossible for you to go on this for
a violation go undetected certainly not
for a considerable 32 thought but don't
try and tell that to the Philoctetes
center today
its main benefactor the betty and Norman
leading foundation was fully invested in
Madoff one of dozens of charitable
organizations that have been devastated
or wiped out
Madoff customer list single space with
small pipe is a hundred and 62 pages long
victims running the gamut from Hollywood
royalty to carpenters pension fund in
Syracuse New York Shelly Ludlow has been
forced to put her mother in a Medicaid
assisted living facility while she
packed up their apartment to move in
with the friend all because of Bernie
Madoff a whole is why Canada upside down
by this man that sits in his penthouse
and smirks the same day last week 70
miles away land and Marge forests were
leaving their house that they just sold
it to talk at Long Island and we're
preparing to drive the South Florida to
sell their home there
they had their money with Bernie Madoff
for 30 years and lost an eight-figure
family fortune two days before his 80th
birthday you have any money to live on
enough I would say for 60 days you know
other people who are in the same situation
oh yes we have a lot of unfortunately
and I think probably the thing that
tears me up more than anything is the
fact that I recommended made us to a
number of people and they lost their
money and yet never stopped feeling
responsible for that it will close
family and friends when Forrest and his
friends thought they were part of a
small exclusive group of investors lucky
enough to have a connection with Bernie
Madoff and because they thought they
were making twelve percent a year they
weren't inclined ask a lot of questions
Carrie Marco Polo's called it the
classic affinity scan independence
cameras when you pray on group that a
similar nature to yourself so I'm Greek
if I was going to run an affinity scans
I would put it on the Greek American
community here Bernie was Jewish so
Randall in the Jewish community in the
United States but that didn't that
wouldn't give him enough customers
because he always needed new money to
keep this game going overtime Madoff
extended its reach from New York to Palm
Beach where he enlisted hundreds of
wealthy clients many of them recruited
from his own country clubs and he also
made connections that gave him on pretty
Europe and
hedge fund capital of America Greenwich
Connecticut it was here that Bernie
Madoff made some of his biggest deals
with large investment firms that were
willing to feed in billions of dollars
of their clients money to manage and in
return Bernie Madoff agreed to pay these
so-called feeder funds of fortune and
annual fees the largest of the feeder
funds was the fairfield Greenwich group
how much money did fairfield make
operating Madoff every year hundreds of
millions of dollars if your feet are fun
what are you supposed to do for those
hundreds of millions of dollars you
supposed to identify the world's best
hedge fund managers and the best only in
them and it's supposed to make sure
they're not putting plans games they're
real steroids here with the feeder funds
that's what made it an international on
his game attorney David Boies is one of
the most prominent lawyers in the
country and is representing fairfield
Greenwich investors who lost nearly
seven billion dollars when Madoff went
under they're suing the firm for gross
negligence claiming it failed to
investigate Madoff thoroughly or monitor
his activities as it promised to do in
its marketing materials analysis and
portfolio composition portfolio
stress-testing risk management asset
verification you think that really
happened
no we know it didn't happen because we
know all they did was turn the money
over to bernie madoff and they did that
for 20 years
there's nothing they essentially did
nothing except lose their investors
money and enjoy very luxurious
lifestyles from the money that account
Walter no one of the founding partners
of Fairfield Granite's declined to talk
to us and has reportedly been lying low
with his wife that their compound on the
private island of mustique but in a
statement to 60 minutes his firm said
that it too was a victim of Bernie
Madoff that it had placed too much trust
in His then impassable reputation and in
the fact that there have been multiple
reviews of Madoff by the sec
in the end Harry Markham polish have
been right about Bernie Madoff he will
be going to prison but not because of
anything that area or the SEC did in a
bad economy may dogs lives simply
collapse under their own weight
no only investigating Mr.
Mehta at the
end so he turned himself in before
anybody in a position of authority began
a serious investigation that's typically
how the SEC does it
they come in after the climate been
committed they toe tag the victim count
the body and trying to figure out who
the crooks were after the fact which
does not want any good.
for more video of Bernie Madoff in his
own words go to 60 minutes dot-com
Forwarding now to more recent events, we can
look into familiar names, like Facebook.
The performance of the U.S.
stock market is often measured by market indexes,
which are averages of stock prices.
The three most important indexes are the Dow
Jones Industrial Average, the S&P 500, and
the NASDAQ.
During the period from 1996 to 2013, the three
indexes followed similar patterns, rising
when the U.S.
economy was expanding and falling when the
economy was in recession.
[Music]
We are going to take a short route off our
textbook guidance to use some tools I brought
to you at the beginning of this semester from
FRED.
As economists we are seated in position to
discover what interest rates apply to our
decisions: this is the detective part of our
persona.
We can discover what interest rates have been
present in our economy for the past month,
quarter, year, decade or longer.
We can step into FRED and look at the Producer
Price Index to see what businesses have experienced,
and at the Consumer Price Index to find the
same for consumers.
The Bureau of Labor Statistics collects these
data, and hundreds of others, on a daily basis
to release monthly statistics about the performance
of various sectors in our economy.
It is based on the cost of a standard set
of goods and services in two baskets, one
for producers and the other for consumers.
As the cost of the goods in this non-changing
basket changes, the index values change.
Changes in the index cost represents the purchasing
power of the US Dollar.
We will use that purchasing power to reveal
the time value of money.
These values are reported monthly in each index.
Although these indices are not the sole source
of determining when the economy is in recession,
they clearly demonstrate how factors are interrelated
to explain the performance of things like
inflation, recession, and expansion.
From my standpoint, I have been most impressed
by the people at the BLS as I have called
their Washington DC office to have a specialist
actually answer the phone and engage with
me in discussions.
I have called their regional office in San
Francisco to arrange specialists to address
industry and college groups.
BLS specialists investigate data and provide
me with answers.
In one interaction, I called to search data
on a sector they stopped reporting about in
the current month.
The response was to refresh data collection
to continue reporting.
They were unaware we were using those data,
and adjusted midstream to accommodate the
needs of an industry sector.
[Music]
If you own shares of stock or a bond, you
will receive payments in the form of dividends
or coupons over a number of years.
Most people value funds they already have
more highly than funds they will receive in
the future.
Present value is the value in today's dollars
of funds to be paid or received in the future.
Putting pencil to paper, we discover that
investing $1,000 today at a rate of return
of 10% for one year, put through the Future
Value of a Single Sum is worth $1,100 in one
year.
Now flip that around, to assume you are willing
to receive $1,100 in one year based on your
investment of $1,000 today.
In this case, you are earning 10 percent on
the funds you have loaned.
Economists would say that $1,000 today is
equivalent to the $1,100 to be received one
year in the future.
We can take this exact approach to apply it
to not just one year of investing, but a series
of one initial payment plus 4 additional payments.
We add each payment placed in time to discover
a present value of a terminating annual series.
We continue to use the 10% rate of return
to see that each annual payment through time
is worth less in current terms than the pervious.
We call this an expression of the time value
of money.
We have used a 10% interest rate in these
examples, it is super simple for this math,
but we need to consider different rates based
on your personal impatience factors.
When you are very impatient for a return on
your money, your interest rate for discounting
will be high.
Conversely, a lower rate of return will explain
your patient nature.
Now, I introduce you to a strategy you can
use to discover what the growth rate of the
USA economy has been.
I can look at the Producer Price Index rate
of change within the most recent expansionary
phase between January 2002 and December 2007.
By selecting the index numbers from the starting
and ending points and inserting them into
this formula, we calculate what the rate of
inflation was during this period.
This rate can be calculated between any two
points along this series, for a few months,
several years, or even for decades.
Over this six-year period the rate of business
inflation was 5.64% per year.
The same approach can be made while using
the Consumer Price Index to discover a representation
of the inflation rate of consumers, the average
person.
Here we find the CPI in January 2000 at 168.8
and the July 2008 CPI of 219.9.
filtering it through your rate calculator
this discount rate is 2.93% per year over
this 9.17-year period.
The use of inflation and discount rates is
very important to understanding the time value
of money.
At the fundamental level, we consider money
in our hands today more valuable than the
same amount of money delivered in the future.
The longer money delivery is delayed, the
lower the present value of that money is.
Value is determined both by the time of delay
and the rate of decay.
In this case decay is the inflation rate.
More to the point, when we are in a general
economic growth cycle, an expansionary period,
costs will rise each year.
This is the reality of inflation.
Inflation eats away the value of money.
Fifty years ago, $100 could buy food for a
family of 4 to last a month.
Today, one bag of the same groceries costs
$100 and a month of food for a family of 4
costs closer to $500 and more.
This is the effect of inflation.
I use a combination of inflation and discount
rate, specific to the investor of consideration
to create an overall adjustment rate.
Although this rate is specific to each investor,
I recommend starting with the rate of inflation
expected for the near-term period.
We just looked at the PPI of 5.64% and will
use it.
Then take half this rate to apply it as your
personal discount rate, here at 2.82%.
We use these in combination.
Creating the overall adjustment rate we use
a cross product multiplier of f and r.
We want to consider the present value of a
single sum, V0, as $1,000 received in 10 years.
Our estimate for this rate was 9.17 years
but we can apply this rate to any term, short
or long.
The present value of $1,000 received in ten
years at this 8.62% adjustment rate is $437.
This includes the decay of value caused by
the expected rate of inflation, and the impatience
factor of the investor.
Consider this, what if the rate of inflation
was expected not at 5.64%, but instead at
3%? With the discount rate also reducing to
half of the inflation rate, the new adjustment
factor would be 4.54% and that $1,000 in ten
years would be worth $641 today.
Notice how the lower adjustment factor increases
the discounted value in present day terms?
Try it in reverse.
What if inflation is expected to climb to 8%?
No, really, give it a spin.
You will want to be able to do this for this
class and others.
You will use it in your personal life, and
in business.
This super-fast demonstration of inflation
and discount rates has meaning for you, not
only as an entrepreneur or student of business,
it applies to your decisions made as a consumer.
You might be borrowing money right now to
pay for college, you may want to purchase
a vehicle.
You will be fully engaged in money matters
and you need to be able to discover for yourself
your personal time value of money.
Your personal rate will change through time.
I use the PPI and the CPI to measure what
the economy has done in the long-term past
and short-term past.
I use these rates as a proxy, meaning they
are not perfect predictors of what will be
inflation, but I can make stronger estimates
about the future using these.
As I have worked with clients I have found
some people who have strong opinions about
what the expected rates of return will be
in their markets.
I find those who do not follow indices such
as these, often struggle to release what was
realized in the past.
It includes such perceptions of an expected
discount rate of 7% seen in the 1970s when
inflation was above 15%.
But when we are experiencing 1% inflation
we saw from 2010 through 2016, the 7% discount
rate is not in line with current realities.
The time value of money is not static.
Now you have some no cost tools to assist
you when realizing what you are up against.
We have looked only at the present value of
a single sum, future value of a single sum
and one instance of the present value of a
terminating annual series.
I made this poster in the 1980s when I first
started studying economics and finance in
the forest management sector.
I have updated it since then and added this
dichotomist decision tree framework.
Follow the path through each decision point
to find the formula that will solve your finance
questions.
Here, "i" shows the combination of inflation
and discount, the cross multiplier.
Experiment with these and find uses for your
finance questions, using economic tools to
make meaningful projections.
These are not on quizzes or exams in this
class, they are given to you for your personal
edification and bonus.
Make it count.
Bring these concepts back to the analysis
of Bonds in the corporate business world.
You consider buying a $1,000 bond with $80
coupon payments in 2018 and 2019 with a 2019
maturity date.
Pushing it through with a 10% interest rate,
you find a $965.29 value.
But what if your rate is not 10% but instead
5%? Using the same approach, you determine
the Bond value to be $1,056.
The lower your overall discount rate, the
higher the discounted value will be.
As we convert to stock values, consider there
is no sunset date as there is with a Bond.
You are the owner of the company, or at least
a part of the company and you will receive
the Corporate Dividends as long as the company
delivers.
The Bond payments are agreed when you purchase
the Bond, they are set.
Stock Dividends are based on the performance
of the company, so they go up, they go down,
they are NOT set in advance.
You want to calculate the value of purchasing
corporate stock that is paying Dividends of
$50 per year with an expected growth rate
of 2.5% per year.
Using the 4.545% loaded discount and inflation
rate calculated several minutes ago, you divide
the annual Dividend by the difference of your
personal discount rate minus the anticipated
rate of growth to find the stock value of
$2,450, given these specific assumptions.
Income Statements and Balance Sheets are part
of the bread and butter of accounting operations
because they give a snap-shot in time of a
company's performance.
With these reports, delivered through time,
an investor, business manager, or regulator
can gain valuable insights to how the company
performs and its long term potential.
We can look into Facebook's records to see
what they show to open financial market investors.
Facebook's income statement shows the company's
revenue, costs, and profit for 2012.
Note, negative values are shown in parentheses.
The difference between its revenue ($5,089
million) and its operating expenses ($4,551
million) is its operating income ($538 million).
Most corporations also have interest expenses
and income from investments, such as government
and corporate bonds.
In this case, Facebook paid $44 million more
in interest expenses than it earned on its
investments, so its income before taxes was
$494 million.
After paying taxes of $441 million, Facebook
was left with a net income, or accounting
profit, of $53 million for the year.
Corporations list their assets on the left
of their balance sheets and their liabilities
on the right.
The difference between the value of a firm's
assets and the value of its liabilities equals
the net worth of the firm, or stockholders'
equity.
Stockholders' equity is listed on the right
side of the balance sheet.
Therefore, the value of the left side of the
balance sheet must always equal the value
of the right side.
As we look into forms and structures of businesses,
we started by looking into liability exposure
with Corporations and Limited Liability Companies
providing a firewall for business owners.
We transitioned discussions to detail several
required reporting obligations Corporations
must adhere to.
Some people will consider these requirements
onerous and financially burdensome to operations.
I have been the CEO of corporations where
I was the majority shareholder and founder,
and one multinational corporation where I
was made a super-minority shareholder to avoid
principal-agent problems.
The accounting reports for these Corporations
were more than regulatory requirements, they
were performance verifications, strategy setting
standards, and tools used to improve financial
performance.
Today, I run an LLC with my wife and one of
my daughters as Managing Members.
We are not required to submit the regulatory
accounting documentation that Corporations
are, but we still employ the Accounting Firm
I started using in 1987 to complete the documentation
giving us the ability to grow with targeted intent.
I serve on that Accounting Corporation's Board
of Directors because I know the value of solid
accounting records and stock performance.
Interestingly, that accounting firm also deploys
concepts of determining economic profits discovered
using implicit opportunity costs.
Really, there is plenty of room on business
stages for accountants and economists to work
together.
[Music]
