B1

Question 1

Enterprise Risk Managment components

Answer 1

Question 2

Question 3

ERM - GO

Answer 3

Question 4

ERM - PRO

Answer 4

Question 5

Inherent Risk - COSO’s ERM

Answer 5

The risk that exists to an entity when management takes no action to alter the severity of the risk

Question 6

Residual Risk - COSO’s ERM

Answer 6

Leftover risk after taking steps to mitigate risk

Question 7

Which type of risk is represented by obtaining more insurance in anticipation of the increased likelihood of a nature disaster?

Answer 7

Risk Sharing

Question 8

Answer 8

Question 9

Question 10

Question 11

Question 12

Question 13

Question 14

Question 15

Question 16

Question 17

Question 18

Question 19

Question 20

Answer 20

Question 21

Question 22

Cost of Retained Earnings

Also the Cost of Common Stock.

Answer 22

(D+(1+g)/P) + g

(Dividend Plus Growth / Initial Price) + Growth

To calculate the number of shares from the CS BS FS line, remember to divide this by Par Value to find the # of shares of CS.

Question 23

Cost of Preferred Stock

Answer 23

(Pref Dividend X Par Value Pref Stock) / MV of Pref Stock

Question 24

After-Tax Cost of Debt

Answer 24

Pretax cost of Bonds X (1-Tax Rate)

The interest is tax deductible, so only 70% of the pretax cost of the interest rate is the after-tax cost, for example.

Question 25

Weighted Avg Cost of Capital (WACC)

Often used at the hurdle rate for investments.

Answer 25

Question 26

Value of Equity Using Sector PE

Answer 26

= NI x P/E Multiple

Question 27

Question 28

Default Risk Premium (DRP)

Answer 28

Risk that the borrower won’t pay

Question 29

Credit Risk Premium

Answer 29

Risk that a firm will not be able to borrow more money

Question 30

Maturity Risk Premium (MRP)

Answer 30

Risk associated with the length of time allowed to a borrow, the longer the time before they have to pay, the increased chance they might not pay you back.

Question 31

Purchasing Power Risk Premium

Answer 31

Inflation risk (IP) - loss of purchasing power

Question 32

Answer 32

Question 33

Nominal Dollars vs Real Dollars

Answer 33

Nominal Dollars are not adjusted for inflation

Real Dollars are adjusted for inflation

Question 34

Question 35

Answer 35

Question 36

Question 37

What effect does paying a current liability have of Working Capital?

Answer 37

None,

Paying a current liability with cash reduces both equally.

Question 38

Question 39

Change in Demand/Supply vs. Change in Quantity Demanded/Supplied

Answer 39

Change in Demand represents a shift left/right of the whole demand curve and shows a change at all price levels.

Change in Quantity Demanded is a slide up/down the demand curve as price levels change.

Question 40

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Question 45

Answer 45

Price Discrimination - Customers only buying at certain prices.

Question 46

Answer 46

To lower due to inflation:
$1,030 is adjusted for a 2% inflation by

1,030 / 1.02

To raise due to inflation
$1,030 X 1.02

Question 47

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Question 58