Name: ______Period ______Date ____/____/____

Corporate CategorizationMinds on the Markets

Module 03 – Lesson 2

  1. What is market capitalization?
  2. Total market value of all of a company’s outstanding shares ______
  3. Market Cap:Shares Outstanding______× Share Price______
  4. Large Cap:Companies that have a market cap of more than $10 billion. For example: Google, Apple
  5. Mid Cap:Companies that have a market cap between $2 and $10 billion______
  6. Small Cap: Companies that have a market cap between $300 million and $2 billion_
  7. Company ABC has a share price of $15 per share and has 20,000 shares outstanding. The market capitalization is 20,000 x $15 = $300,000,000.
  8. Therefore, Company ABC is considered a small cap_________company.
  9. What is a business cycle?
  10. The business cycle describes different stages of growth and decline in an economy ______
  11. Peak: Economic activity is growing rapidly and production facilities are operating at full capacity
  12. Contraction: Economy begins to slow down, unemployment rate rises, consumer spending declines, and sales decline
  13. Trough: Economy is at the lowest point on the business cycle______
  14. Recovery: Employment levels and sales start to increase again______
  15. Expansion: A period when business activity surges and the GDP expands until it reaches a peak (also known as an economic recovery)
  16. What determines a Company’s Sensitivity to the Business Cycle?
  17. The types of products and services the company offers
  18. How it has set up its:
  19. Operations (known as operating leverage)
  20. Finances (known as financial leverage)
  21. Defensive vs. Cyclical Stocks
  22. Defensive Stock:______not greatly___affected by the business cycle. This is because defensive stocks are in industries such as food, utilities, and other consumer goods that are considered “necessities”______. Defensive stocks ______do not increase in price significantly when the market surges or suffer big declines when it falters.
  23. Example: ConAgra Foods______
  24. Cyclical Stocks:largely______affected by the business cycle. Cyclical stocks will decrease ______when the market is weak and increase______when the market is favorable.
  25. Examples: Auto Makers (Ford), Airlines (Jet Blue)______
  26. Operating Leverage
  27. Measures the amount of ______operating risk associated with a company’s level of fixed costs compared to its variable costs.
  28. The greater the percentage of fixed costs to total expenses,______the higher a company’s degree of operating leverage.
  29. Higher operating leverage means ______there are more costs that not easy to cut in bad times. Therefore, the higher the operating leverage, the higher the sensitivity to the business cycle.

2.4.4.Fixed Costs: Costs that do not change______with the level of production. Examples include______salaries, insurance expenses, and rent because regardless of how much you produce, these costs will not change______.

2.4.5.Variable Costs:Costs that______change with the level of production. Examples include the costs of goods sold or sales commission______. Generally the larger the production ______, the less each individual product costs to make because of “economies of scale”.

2.4.5.1.Scenario: You walk into Factory A and see rows of people sitting at tables assembling SuperToys. It sells them to Toys R’ Us for $10 each. The cost to make them is $7.

2.4.5.2.You go into Factory B that makes the same SuperToy. It’s a less crowded space with robots here and there turning every which way. This highly automated factory can make a SuperToy for just $5 each.

2.4.5.3.Factory A has chosen to employ more people. The lack of automation______raises the cost to make each unit.

2.4.5.4.Factory B has chosen to invest heavily in robotics so that there is______a low cost to make each unit. But the robots cost $50,000 per month to lease on a 5 year contract!

2.4.5.5.Factory B has traded______variable costs (ie: workers) for______fixed costs (ie: robots that it has leased for a substantial monthly expense).

2.4.5.6.If business booms, Factory A will certainly make money, but Factory B’s profits will soar. Its robots ensure the cost of making each unit is ______as low as possible, resulting big profit per unit and overall.

2.4.5.7.If business falters, Factory A can lay off the employees it has, lowering this______variable cost. But Factory B, which has committed to a long-term lease on the robots, will be in big trouble. It will be stuck with high______fixed costs!

2.4.5.8.We see that with regard to their operations, companies are able to automate more (thereby raising their______fixed costs) in order to cut______variable costs.

2.4.5.9.The more highly automated, the higher______the fixed costs, the______higher the operating leverage!

2.4.5.10.Companieswith______high operating leverage are more sensitive to the business cycle. They soar in good times and can suffer mightily in bad times.

2.4.5.11.It is a way for a company to gain large returns without requiring a lot of shareholder investment. You may have figured out that companies do this by______borrowing any additional money they need.

2.4.5.12.As we’ve mentioned earlier, there are two ways to raise money, sell ______.sell stock (ie: equity) or ______or sell bonds (ie: debt). Leverage compares them. It is calculated:

2.4.5.13.Leverage = Debt/Equity______

2.4.5.14.Firms with a highdegree of financial leverage are______more sensitive to the business cycle

  1. Web Challenge #1:Find and list five companies with a market cap over $100 billion. What name would you suggest giving to this group of behemoths? “______cap”
  2. Web Challenge #2:Research three consumer staples companies and for each identify three to five of their brands that are household names.
  3. Web Challenge #3:Research the Great Recession. Document the month and year of its peak, contraction, trough, recovery and expansion.