ACC-345 Module 4 Ashley Ohlsen

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Southern New Hampshire University *

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345

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Economics

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Jan 9, 2024

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Economic Indicators 1. Explain what economic indicators are and why they are important to a company. A. Economic indicators are used to evaluate the financial health of an economy. These indicators provide more in-depth information relating to the company and will allow for educated decisions. They also analyze risk and are often used to determine lending options. Observing these trends over time will allow the company the opportunity to recognize potential risks and ensure their security during difficult times. 2. Identify three types of economic indicators that a company might use to inform its business decisions. A. GDP, CPI, and unemployment rates can be used to inform business decisions. These factors play a significant role in decisions and, depending on trends, can quickly alter plans. Gross Domestic Product growth rate represents the value of all products/services produced within a country. This reveals the current state of the economy and will assist in financial decisions. If the GDP is higher, it is assumed that demand is high and has a high potential for growth. If the GDP is lower, options must be considered to understand the best route moving forward, whether pulling the product, moving the location to a more favorable market, to sustain (Indeed Editorial Team, 2021) . B. The Consumer Price Index measures the changes in average amounts paid for specific products/services. This is used to recognize inflation or deflation. It is beneficial to businesses because it offers a better understanding of price changes

for specific materials, as well as the opportunity to adjust pricing to prevent losing money. C. Unemployment rates are also important indicators in making decisions. If the unemployment rate is low, it is more likely that wages will be more competitive to retain workers. If the rate is high, that means that there are a lot of people unemployed and seeking work, so it may be easier to find help. Lower employment rates lead to paying employees more than anticipated and create an environment with potentially unskilled and untrained workers. 3. Explain how a company might make business decisions based on its knowledge of economic indicators. A. Companies will make business decisions based on the knowledge gained from economic indicators. These decisions include investing opportunities, the possibility of expanding, pricing strategies, inventory management, and financial planning. The use of economic indicators ensures decision-makers that they have the knowledge and understanding to make the best decisions possible for the sustainability and growth of the business. 4. Explain any significant changes that have affected economic indicators over the past three to five years. Include the following detail in your response: A. Explain what you think caused the changes to occur. B. One change that has occurred was in 2020 when there was a significant decline in GDP, CPI fluctuated due to high demand and low supply, and unemployment rates skyrocketed due to the COVID-19 pandemic. The effects of businesses closing, and the lockdown were unprecedented. They slowed

down, and in some cases completely halted, production of necessary materials, leading to a significant rise in price. The policies implemented post-pandemic also affected economic indicators. The programs established to ease the financial impacts dropped interest rates assisted in the reestablishing of the sustainable factor of businesses. C. The recent invasion of Ukraine by Russia has also affected economic indicators as trade with those countries came to a halt. This affected both imports and exports. The financial impacts of the war, though not directly involved, are substantial and hard to prepare for. This could also create a hike in supply with low demand, creating inventory concerns. 5. Explain the impact the changes to the economic indicators have had on both domestic and global economies. A. COVID-19 led to an economic recession in the U.S. due to the lockdown and business closures resulting in less spending and less revenue. The jump in unemployment rates meant there were not sufficient workers in place to continue to produce and sell products. The stimulus checks issued assisted both businesses and consumers recover from the effects of the pandemic. The preferences of customers have shifted toward shopping online rather than in-store, due to both the convenience and to avoid encountering potentially sick people. B. Globally, trade was significantly impacted due to illness and lack of supplies. This impacted every country involved in trade, due to fluctuating supply and demand. The currency exchange rates between countries were impacted by this pandemic.

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This affected profits and costs. Increased concern for sustainability and use of renewable energy is leading to a new standard being set for future operations. 6. Explain how a company should respond to changes related to domestic and global economies to remain in business and competitive. A. Diversification is one of the best ways to respond to changes that occur. This increases sustainability and resilience when faced with unplanned circumstances. Understanding market changes and making the adjustments to accommodate those changes will result in remaining competitive. With the changes that COVID-19 brought, it is becoming more common for workers to want to work from home. When possible, offering the option to work from home may create more of the work-life balance that employees often seek. Another way to respond to the effects of the COVID-19 pandemic would be to put into place an emergency fund. Valuation Discounts 1. Explain the discount for lack of control (DLOC) and when it is used in the valuation process. A. The discount for lack of control is used when there is an owner that owns a small portion of the company and does not have much control over decisions made. This is used when legal action has taken place, in situations where a company is being purchased or sold, and when considering investments (Webber, et al, 2020). 2. Explain the discount for lack of marketability (DLOM) and when it is used in the valuation process.

A. The discount for lack of marketability is used when the ownership is not easily transferable. This can make selling or transferring ownership very difficult, so it is often not of high interest to potential buyers and investors. This is also used when considering investments and when legal action has occurred (Webber, et al, 2020). 3. Explain the discount rate that is used in the discounted cash flow (DCF) valuation method. Include the following detail in your response: A. Describe how the discount rate is derived in this DCF method. B. The discount rate is used to account for the future value of money. It helps to offset the risks associated with the investment and to offer incentives to invest. It is calculated by determining the time value of money and using the weighted average cost of capital. This is the weighted average cost of debt and cost of equity. Valuation Methods 1. Explain the market-based approach valuation method. Include the following detail in your response: A. When might the market-based approach valuation method be used? B. The market-based approach is used to compare the business to other similar businesses that have recently sold. This approach is used in publicly traded companies, private companies, and in business purchases. This approach is used in resolving disputes and in legal action. Financial reporting also accounts for this approach (Caruso, 2020). 2. Explain the asset-based approach valuation method. Include the following detail in your response:

A. When might the asset-based approach valuation method be used? B. The asset-based approach is used when the company is facing financial hardship. Bankruptcy or liquidation would use the asset-based approach to determine what stakeholders are entitled to. This method is also used in the beginning stage of new businesses(Caruso, 2020).. 3. Explain the earnings-based approach valuation method (discounted cash flow valuation method). Include the following detail in your response: A. When might the earnings-based approach valuation method be used? B. The earnings-based approach uses expected future earnings to determine the value of an investment. It is used in evaluating projects, when reporting financial statements, and during dispute resolution. This is used to determine the ability of an investment to generate profit in the future (Caruso, 2020). Sources Used

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Caruso, Gregory R.. The Art of Business Valuation : Accurately Valuing a Small Business , John Wiley & Sons, Incorporated, 2020. ProQuest Ebook Central , https://ebookcentral-proquest- com.ezproxy.snhu.edu/lib/snhu-ebooks/detail.action?docID=6317228 . Indeed Editorial Team. (2021, March 1). Macroeconomic Factors: What Are They and How Do They Impact the Economy? Indeed Career Guide. https://www.indeed.com/career-advice/career- development/macroeconomics-factors Webber, S., Scott, C., & Karlsen, C. (2020). Discounts for Lack of Control and Marketability in Business Valuations. Estate Planning, 47 (10), 4-12. https://ezproxy.snhu.edu/login?qurl=https %3A%2F%2Fwww.proquest.com%2Ftrade-journals%2Fdiscounts-lack-control-marketability- business%2Fdocview%2F2469847167%2Fse-2%3Faccountid%3D3783

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