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Chapter 12

Chapter 12. Part 2. INDUSTRY. A group of companies producing similar products or services Example: S o d a . INDUSTRY. Coca Cola. Beverages (non-alcoholic). Pepsi. Jones Soda. INDUSTRY. Beverages (alcoholic). Beverages (non-alcoholic). INDUSTRY  S E C T O R.

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Chapter 12

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  1. Chapter 12 Part 2

  2. INDUSTRY A group of companies producing similar products or services Example: Soda 

  3. INDUSTRY Coca Cola Beverages (non-alcoholic) Pepsi Jones Soda

  4. INDUSTRY Beverages (alcoholic)

  5. Beverages (non-alcoholic) • INDUSTRY  S E C T O R Consumer Non-Cyclical Sector not affected much by economy (ups & downs) Beverages (alcoholic)

  6. What Sector?? • General Electric

  7. INDUSTRY • A group of companies producing similar products or services

  8. S E C T O R • A broad group of similar industries

  9. Today’s Topics • What is diversification? • Difference between Revenue & Profits? • Importance of Earnings • Dividends vs. Retained Earnings • Income Stock • Growth Stock • Earnings per Share (EPS) & Price/Earnings

  10. Diversification • Reducing risk by combining different investments whose prices aren’t likely to move in step with one another Energy Sector Financial Services Technology Healthcare Sector Capital Goods Sector

  11. REVENUE (Sales) Receive $10 at the end of the day Is the $10 the person’s profit???

  12. REVENUE (Sales) • The $10 is the lemonade stand’s revenue (sales) • REVENUE– the total money a company receives from selling a product or service

  13. REVENUE (Sales) REVENUE PROFITS =

  14. PROFIT (Earnings) • The amount by which a company’s revenue exceeds its costs R E V E N U E - C O S T S P R O F I T S

  15. PROFIT (Earnings) R E V E N U E -- $10.00 - lemons, sugar, cups (costs) 6.00 = P R O F I T $ 4.00

  16. NET INCOME • A company’s profit after subtracting all costs and income taxes

  17. The Uncommon Hen & the Common Stock MARIA PIO

  18. The Uncommon Hen & the Common Stock

  19. Questions ? • Buyers bid against one another because they were eager to become Pio’s owner. • What benefits did they initially expect to receive by becoming the chicken’s owner?

  20. Response ? • By owning Pio, they expected to earn money by selling all of the hen’s future golden eggs. $ $ $ $ $ $

  21. Questions ? • Why did buyers suddenly lose interest in becoming Pio’s owner?

  22. Response ? • When Pio stopped laying golden eggs • Buyers realized they could NOT earn money by owning the hen and selling its valuable eggs

  23. Questions ? • Investors buy stock because they want to become part owners of a business. • What benefits do investors expect to receive by becoming owners of the business?

  24. Response ? • Expect to receive company’s future earnings (profits) • Dividends • Higher stock price (capital gain)

  25. Questions ? • What would happen to the price of a stock if investors suddenly expected a company’s earnings to be much higher in the future?

  26. Response ? • Investors would bid up the price of the company’s stock 

  27. Questions ? • What if suddenly they expected the company’s earnings to be much lower?

  28. Response ? • They would pay less for the stock • It’s price will then fall 

  29. What does this chart suggest is the driving force behind rising stock prices over the years?

  30. Chart • Driving force behind rising stock prices over time is rising profits or earnings

  31. Lemonade Stand Example • What if the lemonade stand’s costs add up to $12 Revenue  $10.00 Costs  - 12.00 L O S S  - 2.00

  32. L O S S • The amount by which a company’s costs exceed its revenue

  33. No company is guaranteed a profit • It has to earn it • Many companies end up losing money instead

  34. Who bears a company’s loss?? • The company’s owners -- • The stockholders

  35. A Tale of Two Marts Kmart and Wal-Mart Kmart Sold everything for 5 - 10¢ • 1899 - S.S. Kresge Company • 1918 - sold stock to public to raise $ • 1962 - grew larger and opened Kmart • 1977 - changed name to Kmart (earned all profits)

  36. A Tale of Two Marts Wal-Mart 1962 - Start of Wal-Mart • 1970 - Became “Public” • 1980’s - Opened Sam’s Club • 1990 - nation’s largest retailer • 1997 – largest employer in U.S. (DOW) • 2002 - biggest business listed on Fortune 500

  37. As earnings soared, so did it’s stock price

  38. As earnings fell, so did it’s stock price In 2002, Kmart declared bankruptcy.

  39. Kmart • May 2003 – Kmart emerges from bankruptcy • January 2004 – earned first profit • November 2004 - merged with Sears

  40. Stock prices act as financial faucets in our economy Increasing stock price opens flow of $ to company Decreasing stock price slows flow of $ to company

  41. Profits & Eggs

  42. Profits & Eggs

  43. Dividends • Part of profits paid out to shareholders as cash or additional stock

  44. Retained Earnings • Part of profit that companies keep to reinvest in the company • Buy new equipment, machinery, etc • Research and development

  45. Dividends & Retained Earnings A portion of the company’s profit that is paid to shareholders Company sells ---- 10,000. {sales} --pays Expenses 7,500 {bills} --pays Taxes 500 NET INCOME ----------2,000 {left over}

  46. Dividends & Retained Earnings Net Income $2,000. (profit) 3 Options: a) Retain and invest b) Pay dividends to shareholders C) Retain portion + pay out portion

  47. Tax on Profits  $ .04 After tax  $ .06 Before taxes  $ .10

  48. Dividends ~ $70 B Retained Earnings ~ $90 B Total after-tax profits ~ $160 B Dividends 2003 ~ $160B Retained Earnings 2003 ~ $290B Total 2003 ~ $450 B

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