Chapter 5
Introduction to Financial
Management
Chapter Overview
I. Introduction
II. Economic principles
a. Demand, scarcity, surplus and price
III. Business types
a. Government-operated organizations
b. Community-owned entities
c. Non-profits
d. Sole proprietorships
e. Partnerships
i. General partnership
ii. Minority partner
IV. Stock markets
a. Professional sport franchises
b. Athletes selling their “own” stock
V. Government influence on the business environment
a. Monetary policy and the Federal Reserve
i. Setting interest rates
b. Fiscal policy
i. Taxes
ii. Depreciation
1. Straight-line
VI. Conclusion
Key Concepts
When reading this chapter, students should focus on the following key concepts:
2. Demand, scarcity, surplus, and price impact sport in a variety of ways, including the
location of franchises and ticket pricing.
4. Federal and state governments have a significant impact on the financial operation of
sport organizations.
Responses to Concept Check Questions
1. Define microeconomics and macroeconomics. What are the main differences between
the two?
Microeconomics refers to the study of issues that occur at the firm level, whereas
2. How do professional sports leagues use the concept of scarcity when locating franchises?
Most professional sport leagues do not create enough teams to meet the market
3. Define and discuss monetary policy. What specific actions can the Federal Reserve take
to achieve its goals?
Monetary policy is policy that government sets to control the supply, demand,
4. List some actions that a government can take for establishing its fiscal policy. What are
some fiscal policies specifically targeted to the sport industry?
Fiscal policy involves government entities collecting and spending money. The U.S.
5. What is a basis point? How does a change in a few basis points affect a loan?
A basis point is a hundredth of a percent. Loans are based on a percentage of interest
6. Define inflation and explain how it may affect sport business operations.
Inflation is the gradual increase in prices for goods and services. Any investment must
account for inflation when determining its “real” potential rate of return. For instance, if
7. What is a market index? What is an index designed to accomplish?
A market index is a basket of stocks that are chosen to represent the overall stock
8. What considerations must teams and athletes evaluate in regards to insurance?
The sport business industry utilizes a variety of insurance products to cover all aspects
of various activities. Contact sports have seen increases in costs while many insurers
9. Explain the important differences between general and limited partners.
General partners retain personal liability for the actions of the partnership, whereas
limited partners are liable only for their direct financial contribution.
10. What are the differences between a C corp and an S corp?
An S corp provides investors limited personal liability but permits flow-through taxation.
11. What is an LLC and an LLP? Why have they become more popular business entities over
the past ten years? What concerns should an investor investigate before forming an LLC
or LLP?
An LLC is a limited liability corporation, and an LLP is a limited liability partnership.
Before investing in an LLC or LLP, investors should understand the specific laws
12. How has globalization affected sport finance in the past 10 years? How might it affect
sport finance in the future?
There are certainly various points of discussion here; these might include league
13. What is your reaction to Phil Mickelson’s 2013 comments regarding taxes? What is the
potential impact of Mickelson and others’ leaving California because of high taxes?
Students’ answers will vary, but they should support what they believe. There is
14. What are jock taxes? How is Tennessee’s jock tax unique?
Jock taxes are charged to athletes, coaches, and administrators who work in a
municipality that is not their “home.” For example, an NBA player who plays a road
Responses to Practice Problems
1. If an interest rate is currently 6% and a lending institution announces a 25 basis point
increase, what percentage of increase does this represent?
2. Calculate the straight-line and sum-of-years-digits depreciation schedules for a $450
video camera that will have a salvage value of $50 after five years of use.
SL – $450 – $50 = $400, divide by number of years = $400/5 = $80 per year of
depreciation
SOYD – Determine denominators – 5 years = 5 + 4 + 3 + 2 + 1 = 15
Accelerating – allocate 1/15, 2/15, 3/15, 4/15, 5/15
3. Calculate the double-declining balance depreciation schedule for a $1,000 item that will
last four years. What is the estimated salvage value?
Year Straight-Line % Double Declining % Amount Remaining $
1 25% 50% $500 $500
4. For a fitness center purchasing a $3,000 photocopier expected to produce 30,000
copies, calculate the units of production depreciation schedule if the following number
of copies are expected to be made each year:
Year 1―12,000
Year 2―8,000
Responses to Case Analysis Questions
Darlington Raceway is one of the most important tracks in the history of NASCAR. Opened
in 1950, Darlington Raceway became a model for many tracks that would be built later in
the 1950s and 1960s. For many years, NASCAR held two Sprint Cup Series races at the
track—one in the spring and one on Labor Day weekend. In 2003, because of decreased
demand for the spring Darlington race and NASCAR’s desire to expand its presence to
other areas of the United States, Darlington’s schedule was reduced to one Sprint Cup
race.
1. How might NASCAR’s decision to reduce Darlington’s races from two to one be
received by regular attendees at both events?
4. Did NASCAR make the correct decision in this situation? Explain and justify your
answer.
Students should discuss the potential impact of scarcity and how attendees who were used
to attending both events may now elect to not attend any events; alternatively, they may
Additional Classroom/Exam Problems
1. Calculate the double-declining balance depreciation schedule for a $2,000 item that will
last five years. What is the estimated salvage value?
Year Straight-Line % Double Declining % Amount Remaining $
1 20% 40% $800 $1200
2. If the state charges a jock tax on players who compete in that state, what arguments will
the player (or the player’s representative) potentially make regarding how much money
is owed?
If the tax is based on a percentage of days worked, the state will argue for a shorter
3. Calculate the differences in total taxes paid if a $10,000 profit (that is disbursed to the
shareholders) is realized for an S corp versus a C corp. Assume a 20% personal tax rate
and a 20% corporate tax rate.
S corp (flow through taxation to the shareholder) – $10,000 .20 = $2,000 personal