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Ag Econ > Final Exam new material > Flashcards

Final Exam new material Flashcards

1
Q

Steps in capital investment?

A
  • Identify Profit Opportunities
  • Determine Capital Req/Cost
  • Estimate Income/Cost Changes
  • Determine Time Value of Benefits
  • Choose Among Alternatives
  • Analyze Decision
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2
Q

Information needed to invest?

A
  • Net cash flows
  • Cost of investment
  • Salvage value
  • Cost of capital (interest)
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3
Q

Total advantages minus total disadvantages=

A

Net gain

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4
Q

What is the net present value theory?

A

Land values should equal capitalized revenues

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5
Q

Expected revenues/capitalization rate=

A

Land Values

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6
Q

Stronger revenues lead to ____ land values

A

Higher

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7
Q

Lower____or______ rate lead to higher land values

A

Discount, capitalization

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8
Q

Interest rates determine what?

A

Current value of future incomes

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9
Q

What is payback period?

A

Time for net cash flow to cover the cost of capital investment

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10
Q

Advantages of payback period?

A
  • simple
  • compare to alternatives
  • good measure of liquidity and risk
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11
Q

Disadvantages of payback period?

A
  • ignores time value of money
  • ignores timing of cash flow
  • favors quick payback
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12
Q

Average net return/cost of investment=

A

Simple rate of return

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13
Q

Advantages of simple rate of return?

A
  • Considered entire life of investment

- Can compare rates of return

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14
Q

Disadvantages to Simple rate of return?

A

-ignores time value of money and timing of cash flow

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15
Q

Characteristics of land?

A
  • permanent resource
  • immobile
  • fixed supply
  • different characteristics
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16
Q

Land ownership advantages?

A
  • security of tenure
  • loan collateral
  • management independence
  • hedge against inflation
  • pride of ownership
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17
Q

Land ownership disadvantages?

A
  • cash flow
  • lower return on capital
  • less working capital
  • size limits
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18
Q

Land leasing advantages?

A
  • more working capital
  • additional management
  • more flexible size
  • more flexible financial obligations
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19
Q

Land leasing disadvantages?

A
  • uncertainty
  • poor facilities
  • slow equity accumulation
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20
Q

Aspects to consider when buying land?

A
  • soil, topography, climate
  • buildings and improvements
  • size
  • markets
  • community
  • location
  • competing uses
  • ag characteristics
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21
Q

How do you estimate the present value of the future income stream from the land?

A

income capitalization-investment analysis AKA perpetual average annual net return/discount rate

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22
Q

What you need to lease land?

A
  • legal description of land
  • term of lease
  • rent paid amount at what time and place
  • name of lessee
  • signatures of all parties
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23
Q

Legal aspects of purchasing land?

A
  • easements
  • zoning
  • property taxes
  • mineral rights
  • water rights
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24
Q

Advantages of cash rent?

A
  • simple to implement and supervise
  • managerial freedom
  • risk all on tenants
  • capital requirements are lower for landlords
  • investment income
25
Q

Disadvantages of cash rent?

A
  • risk on tenants
  • higher capital requirements for tenants
  • poor land use for short run profit
  • poor improvement
  • rigid rents
26
Q

Advantages to crop share?

A
  • Management is shared
  • expenses are shared
  • material participation
27
Q

Disadvantages to crop share?

A
  • risk due to variability of yield and price
  • capital requirements increase for landlord
  • marketing?
28
Q

Livestock share-all disadvantages?

A

-rent higher than crop rent
-records must be kept carefully for division
-complex and time consuming
ONE advantage-management shared

29
Q

Other lease types?

A
  • labor share
  • variable cash
  • bushel
  • custom farming
30
Q

Farm businesses have a life cycle with what four stages?

A
  • entry
  • growth
  • consolidation
  • exit
31
Q

Sole proprietorship means?

A

owner owns, manages, assumes all risk, receives all profit

32
Q

Advantage of sole proprietorship?

A

simplicity and freedom

33
Q

Disadvantage of sole proprietorship?

A
  • personal liability
  • size may be limited
  • lack of continuity
34
Q

Joint ventures consist of what?

A
  • operating agreements
  • partnerships
  • corporations
  • limited liability companies
  • cooperatives
35
Q

What is an operating agreement?

A

when two or more proprietors carry on some activities jointly while maintaining individual ownership of resources
-operating expenses and income is shared

36
Q

What is a partnership?

A

association of two or more persons who share ownership of a business

37
Q

What is a general partner?

A

one that contributes to the management of the business and exposed to unlimited liability

38
Q

What is a limited partner?

A

one that doesn’t participate in management and are liable for only what they have contributed

39
Q

Characteristics of a general partnership?

A
  • sharing of business profits and losses
  • shared control and partial ownership of property
  • shared management of business
40
Q

What is a written partnership agreement?

A

Outlining

  • management
  • property
  • share of profits and losses
  • record keeping
  • taxation
  • termination
  • dissolution
41
Q

What is termination?

A

Plan for when death, bankruptcy, or mutual agreement ends the venture

42
Q

Advantages of a partnership?

A
  • easier and cheaper
  • maintain freedom
  • flexible form
43
Q

Disadvantages of partnership?

A
  • unlimited liability
  • if one partner makes a decision all other partners held responsible
  • poor business continuity
44
Q

How do partnership taxes work?

A
  • file an info income tax return reporting income and expenses
  • each partner’s share is on their own tax returns
45
Q

How are corporations different?

A
  • formed and operated due to laws of the state where it is organized
  • shareholders are liable only to the extent of their investment
46
Q

What are the two types of corporations?

A
  • C regular

- S tax option

47
Q

Advantages of corporations?

A
  • limited liability for shareholders
  • allows for pooling of resources
  • business continuity
48
Q

Disadvantages of corporations?

A
  • costly to form and maintain
  • legal advice needed
  • shareholder and director meetings have to be held
49
Q

How do taxes and C corporations work?

A
  • pays taxes on earnings before dividends are distributed

- shareholders pay taxes at individual rates

50
Q

How do taxes and S corporations work?

A

-taxed like a partnership

51
Q

What is a limited liability company?

A
  • Resembles a partnership but offers members advantages of a corporation
  • limited to assets of the LLC not individual assets of members
  • ownership distributed according to fair market value
52
Q

What are cooperatives?

A
  • special type of corporation
  • require bylaws, articles, and detailed records
  • limited liability for members
53
Q

What are all the plans we need to succeed?

A
  • estate plan
  • transition plan
  • business plan
  • land use plan
  • retirement plan
54
Q

What is an estate plan?

A

how assets are distributed

55
Q

What is a transition plan?

A

strategy to transfer ownership

56
Q

What is a business plan?

A

defining business goals and strategy to reach them

57
Q

What is a land use plan?

A

determine the desired current and future uses

58
Q

Stages of transfer?

A
  • spin off
  • takeover
  • joint operation

Ag Econ (3 decks)

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