B6 Flashcards
Business Process Management (BPM)
A management approach that seeks to coordinate the functions of an organization toward an ultimate goal of continuous improvement in customer satisfaction. Customers are both internal and external to the organization. Process management seeks effectiveness and efficiency through promotion of innovation, flexibility, and integration with technology.
5 BPM Activities
- Design
- Modeling
- Execution
- Monitoring
- Optimization
Process management has been commonly referred to as…PDCA
Plan
Do
Check
Act
Benefits of BPM
- Effectiveness
- Efficiency
- Agility
Shared Services
Refers to seeking out redundant services, combining them, and then sharing those services within a group or organization.
Outsourcing
The contracting of services to an external provider.
Offshore operations
Outsourcing of services or business functions to an external party in a different country.
Business Process Reengineering (BPR)
Refers to techniques to help organizations rethink how work is done to dramatically improve customer satisfaction and service, cut costs of operations, and enhance competitiveness.
Just-in-Time (JIT)
- Anticipates achievement of efficiency by scheduling the deployment of resources just in time to meet customer or production requirements
- Pull demand
- Reduce costs
- Improve quality
Quality control principles-costs of quality
The cost of quality includes costs associated with activities related to conformance with quality standards and opportunity costs or activities associated with correcting nonconformance with quality standards
Conformance costs
Prevention and appraisal costs
Prevention costs
Incurred to prevent the production of defective units. Includes: -employee training -inspection -preventative maintenance -redesign of product -redesign of processes -search for higher quality suppliers
Appraisal costs
Incurred to discover and remove defective parts before they are shipped to the customer or the next department Includes: -Statistical quality control -Testing -Inspection -Maintenance of the lab
Nonconformance costs
Internal failure costs and external failure costs
Internal failure costs
Costs to cure a defect discovered before the product is sent to the customer. Includes: -rework costs -scrap -tooling changes -costs to dispose -cost of the lost unit -downtime
External failure costs
Costs to cure a defect discovered after the product is sent to the customer. Includes: -warranty -cost of returning the good -liability claims -lost customers -reengineering an external failure
Cost of quality acronym
APIE
Appraisal
Prevention
Internal
External
Total quality management (TQM)
Represents an organizational commitment to customer-focused performance that emphasizes both quality and continuous improvement. Has 7 critical factors.
7 critical factors of TQM
- customer focus
- continuous improvement
- workforce involvement-quality circles
- top management support-delegation and empowerment
- objective measures
- timely recognition
- ongoing training
Lean manufacturing
Requires the use of only those resources required to meet the requirements of customers
Theory of Constraints (TOC)
States that organizations are impeded from achieving objectives by the existence of one or more contraints
Six Sigma
Anticipates the use of rigorous metrics in the evaluation of goal achivement
Operations management
Pertains to the ongoing production of goods and services and ensuring that all company’s operations function efficiently by using the optimal resources necessary to meet the sales demand of its customers. Focuses on managing the processes that transform inputs into outputs.
Project
A temporary undertaking intended to produce a unique service, product, or result.
Project management
Consists of 5 major processes carried out by a project manager tasked with balancing the needs and expectations of various stakeholders against the organization’s constraints. 5 major processes are:
- initiating
- planning
- executing
- monitoring
- closing
Project manager
Responsible for project administration on a day-to-day basis
Project members
Perform the project tasks
Project sponsor
An individual or group who is internal to the project’s organization; responsible for providing resources and support to the project as well as enabling the success of the project.
Executive steering committee
A group of executive level people or external organizations charged with regular oversight of a project and with responsibility for the business issues associated with a project.
Globalization
The distribution of industrial and service activities across an increasing number of nations. Globalization produces deeper integration of the world’s individual national economies and makes them more interdependent.
Internal Auditing
An independent and objective assurance and consulting activity designed to add value and improve and organization’s operations; bring a systematic and disciplined approach to evaluate the improve the effectiveness of risk management, internal control, and governance processes.
4 principles identified in the IPPF code of ethics
- objectivity
- integrity
- confidentiality
- competency
Attribute standards included in the International Standards for the Practice of Internal Auditing include the following (4 attributes)
- purpose, authority, and responsibility
- independence and objectivity
- proficiency and due professional care
- quality assurance and improvement program
Performance standards included in the International Standards for the Practice of Internal Auditing are composed of 7 areas…
- managing the internal audit activity
- nature of work
- engagement planning
- performing the engagement
- communicating the results
- monitoring progress
- management’s acceptance of risk
Risk-Indifferent Behavior
Reflects an attitude toward risk in which an increase in the level of risk does not result in an increase in management’s required rate of return.
Risk-Averse Behavior
Reflects an attitude toward risk in which an increase in the level of risk results in an increase in management’s required rate of return; risk averse managers require higher expected returns to compensate for greater risk.
Risk-Seeking Behavior
Reflects an attitude toward risk in which an increase in the level of risk results in a decrease in management’s required rate of return.
Diversifiable Risk (unsystematic)
Represents the portion of a single asset’s risk that is associated with random causes and can be eliminated through diversification; attributable to firm specific events such as lawsuits.
Non-diversifiable risk (systematic)
Attributable to market factors that affect all firms and cannot be eliminated through diversification; includes political events and inflation.
Interest rate risk (yield risk)
Represents the exposure of the owner of the instrument to fluctuations in the value of the instrument in response to changes in interest rates.
Market Risk
The exposure of a security to fluctuations in value as a result of operating within an economy
Risk premium components
Interest rate risk
Liquidity risk
Default risk
Trade related risk factors
- relative inflation rates
- relative income levels
- government controls
Trade risk factor-relative inflation rates
When domestic inflation exceeds foreign inflation, holders of domestic currency are motivated to purchase foreign currency to maintain purchasing power of their money; the increase in demand for foreign currency forces the value of the foreign currency to rise in relation to the domestic currency, thereby changing the rate of exchange between the domestic and foreign currency.
Trade risk factor-relative income levels
As income increased in one country relative to another, exchange rates change as a result of increased demand for foreign currencies in the country where income is increasing.
Transaction exposure
The potential that an organization could suffer economic loss or experience economic gain upon settlement of individual transactions as a result of changes in the exchange rates.
Economic exposure
The potential that the present value of an organization’s cash flows could increase or decrease as a result of changes in the exchange rates.
Effect of currency appreciation
- Net exports depreciate
- Net imports increase
Effect of currency depreciation
- Net exports increase
- Net imports depreciate
Translation exposure
The risk that assets, liabilities, equity, or income of a consolidated organization that includes foreign subsidiaries will change as a result of changes in exchange rates.
Futures hedge
Entitles its holder to either purchase or sell a particular number of currency units of an identified currency for a negotiated price on a stated date; futures hedges are denominated in standard amounts and tend to be used for smaller transactions.
Forward hedge
Contracts between businesses and commercial banks that entitle its holders either to purchase or sell currency units of an identified currency for a negotiated price at a future point.
Money Market Hedge
Uses international money markets to plan and meet future currency requirements; uses domestic currency to purchase a foreign currency at current spot rates and invest them in securities times to mature at the same time as related payables.
Currency option hedges
Gives the business the option of executing the option contract or purely settling its originally negotiated transaction without the benefit of the hedge
Annuity assumptions
- recurring amount of the annuity
- appropriate discount rate
- duration of the annuity
- timing of the annuity
Perpetuity assumptions
- specify the dividend and assume it will never change
- specify the required return
Constant growth dividend discount model (DDM)
Assumes that dividend payments are the cash flows of an equity security and that the intrinsic value of the company’s stock is the present value of the expected future dividends.
Constant growth dividend discount model assumptions
- must specify dividends one year beyond the year in which you are determining the price
- must include a required return
- must include a constant growth rate of dividends
- implies that the stock price will grow at the same rate as the dividend in perpetuity
- assumes that the required rate of return is greater than the dividend growth rate
Price multiples
Represent ratios of a stock’s market price to another measure of fundamental value per share. Includes the P/E ratio, the PEG ratio, the price-to-sales ratio, the price to cash-flow ratio, and the price to book ratio.
Price-Earnings (P/E) Ratio
- earnings is a key driver of investment value
- changes in a company’s P/E’s are tied to the long-run stock performance of that company
- calculated as P(0)/E(1)
PEG Ratio
- a measure that shows the effect of earnings growth on a company’s P/E, assuming a linear relationship between P/E and growth
- generally stocks that have lower PEG ratios are more attractive to investors than stocks that have higher PEG rations
- calculated at (P(0))/E(1))/G
- G is calculated at 100*the expected growth rate
Valuing equity with the PEG ratio formula
P(0)=PEGE(1)G
-G=100*expected growth rate
Price-to-Sales Ratio
- sales are less subject to manipulation than earnings or book values
- sales are always positive so this multiple can be used even when EPS is negative
- not as volatile as the P/E ratio
- calculated as P(0)/S(1)
Valuing equity with the P-S ratio
P(0)=((P(0)/S(1))*S(1)
Price-to-Cash Flow Ratio
- cash flow is harder for companies to manipulate than earnings
- P/CF is a more stable measure than P/E
- changes in a companies P/CF ratios over time are positively related to changes in a company’s long-term stock returns
- calculated as P(0)/CF(1)
Valuing equity with the P/CF ratio
P(0)=((P(0)/CF(1))*CF(1)
Price-to-Book Ratio
- used by analysts that focuses on the balance sheet versus the income statement or statement of cash flows
- book value of common equity is more stable than earnings per share, especially when a firm’s EPS is extremely high or low for a given period
- can be used when a firm’s EPS is negative or zero
- calculated as P(0)/B(0)
Valuing equity with the P/B ratio
P(0)=((P(0)/B(0))* B(0)
Excessing optimism bias
The strong belief or overestimation of positive results is a bias that can distort the valuation model
Confirmation bias
Managers experience confirmation bias when they use only data that confirms their conclusions and ignore data that challenges their ideas
Overconfidence bias
The strong belief that decisions and evaluations are correct, which can lead to investors overemphasizing their ability to process and interpret information
Illusion of control bias
The erroneous beleif that the financial manger has control over valuation outcomes that are ultimately the result of market forces
Option
A contract that entitles the owner (holder) to buy (call option) or sell (put option) a stock (or some other asset) at a given price within a stated period of time.
Initiating process phase
The project scope is defined, the project is authorized, and the initial financial resources are committed.
Planning phase
involves all activities necessary to further detail the scope of the project, refine the project objectives, and define the course of action required to attain the project objectives
Executing phase
All activities that are associated with completing the work that has been specified in the project plan and producing the deliverables.
Monitoring and controlling phase
Consists of procedures that are performed to observe project execution so that potential problems can be identified in a timely manner and corrective action can be taken to ensure the completion of the project.
Closing phase
Verifies that all defined project phases are complete, closes the project, and closes all procurement relationships.
Functional interdependence
the participation of nations in worldwide institutions, such as the UN, the WTO, and the IMF
Systemic interdependence
acknowledges that all members of the global community share the planet earth.
Effective interest rate
the actual finance charge associated with a borrowing after reducing loan proceeds for charges and fees related to loan origination
Annual percentage rate calculation
represents a noncompounded version of the effective annual percentage rate
=effective periodic rate*# compounding periods
Effective annual percentage rate
(1 + stated rate)^# of compounding periods - 1
Simple interest
principle
- interest rate
- # of periods
Compounded interest
Principle* (1+interest rate)^# of periods
