BAR Exam Deck 1 Flashcards
No action is taken to change the severity of the risk
risk acceptance
Action is taken to remove the risk
risk avoidance
action is taken that accepts increased risk to achieve improved performance
pursue risk
action is taken to reduce the severity of the risk through risk mitigation techniques
risk reduction
action is taken to reduce the severity of the risk through outsourcing and insurance
risk sharing
how to calculate the real price
nominal price/(1+inflation rate)
the additional compensation demanded by investors for bearing the risk that the security issuer will fail to pay interest and/or principal due on a timely basis
default risk
How to calculate the market rate of interest for a U.S. t-bill?
risk free rate of interest + inflation premium
What does self-insure mean?
It means to cover the costs of damages instead of getting an insurance policy and this means to accept the risk
How to calculate residual risk?
Residual risk = Inherent risk - impact of management’s action
the risk to an entity in the absence of any direct or focused actions by management to alter its severity
inherent risk
what remains after action has been taken by management to reduce inherent risk.
residual risk
the amount of risk an entity prefers to assume in pursuing its goals and objectives.
target residual risk
Who comes up with the objectives for the COSO ERM system?
management/board of directors come up with them
What is the gross profit formula?
Sales - CoGS
What is the gross margin formula?
(Sales - CoGS)/Sales
How to calculate the sales mix percentage?
Find the total units sold during the year
Divide the amount sold of a certain product by the total units sold to find the sales mix percentage for this product
How is the information about plan members’ accounts typically presented in a defined contribution pension plan’s financial statements?
As a combined total of all members’ account balances.
The ____________ component of the COSO ERM framework contributes to the ongoing management of risk/opportunity scenarios in an entity by evaluating the effectiveness of the entity’s risk management activities.
monitoring
Why must there be a formal designation and documentation at the inception of a hedging relationship?
To ensure transparency and alignment with the entity’s risk management strategy.
How to find elasticity in economics?
% change in quantity/%change in price
How to find unit elastic quantity demanded?
1 = % change quantity demanded/supplied/% change in price
occurs when an investor’s certainty equivalent is less than the expected rate of return. The investor seeks higher returns for more risk.
risk averse behavior
occurs when an investor’s certainty equivalent is equal to the expected return on the investment.
risk indifferent behavior
If an investor’s certainty equivalent, the point at which the investor is indifferent to risk, exceeds the expected return on an investment, then the investor is actually seeking lower return for higher risk.
risk seeking behavior
referred to as firm-specific or non-market risk. ________ risk can be reduced by diversification, investing in other companies.
unsystematic risk
refer to risks that can not be mitigated by investment in different securities.
There are three names for this
systematic
market
non-diversifiable
What disclosure related to segment assets is required in a public company’s financial statement notes?
The total assets for each segment must be disclosed
_________ _______encompasses the political risk, economic risk, transfer risk, sovereign risk, and exchange rate risk associated with engaging in business with foreign countries
country risk
___________ ___________generally refer to content or value added limits on the percentage of labor or materials used in imported products
sourcing requirements
_______ ___________ involves setting prices for a product or service when exchanges occur between different units within the same organization. One of the goals of _______ __________ is to minimize the amount of taxes paid by the overall organization
transfer pricing for both blanks
the use of a worldwide supply chain
global sourcing
the general risk that fluctuations in exchange rates could have a negative impact on a company that either consistently sells to foreign customers or consistently buys from foreign vendors
economic risk
the risk that the settlement of a specific transaction in a foreign currency will result in a translation loss.
transaction risk
A significant decline in the exchange rate of the U.S. dollar generally will have which of the following effects
A decline in the exchange rate means the U.S. currency is becoming weaker
Think of foreign companies purchasing more because their currency is worth more now compared to the U.S. dollar and this means U.S. exporters are able to sell more.
What does horizontal merger mean?
When two companies are in the same industry and they merge together think of Titleist and Callaway merging.
What does a vertical merger mean?
When a company merges with its supplier. An example of this would be a rubber supplier for golf balls merging with Titleist.
when two companies that provide support services combine to make them one company. The main objective in a ____________ __________ ________ is to make the support service larger and self sufficient.
diagonal business combination
a business combination of companies that are engaged in different businesses and those producing different products. For example, if a cell phone company bought a car manufacturing company,
circular business combination
An outright sale of a subsidiary. Subsidiary’s core competencies do not align with the overall company’s core competencies.
sell-off
Creates a new, independent company. Stock dividend to existing shareholders or exchange for their stock in the parent company. Unit is less profitable and/or unrelated to the core parent business.
spin-off
Creating a new publicly list company (IPO). The sale of shares in the new company generates cash for the parent. Provides the parent with a controlling interest in the subsidiary.
equity carve-out
two similar asset size companies combining to create a new legal entity.
merger
when one company offers to buy the shares of the other company.
tender offer
one company buying the other company with the acquirer remaining after the transaction and no new company being formed.
acquisition
When a company is interested in buying only a certain segment of another company, what business combination should they pursue?
purchase of assets for a business combination
What are the four principles for the strategy and objective-setting component of the COSO Enterprise Risk Management framework?
Strategies
formulates business Objectives
Analyzes business context
Defines risk appetite
The acronym is SOAR
How to calculate the effective interest rate for a discounted note
Step 1: Find the amount of interst owed on the principle
Step 2: Subtract the interest owed from the principle
Step 3: Divide the interest owed/(Principle - interest owed) to find the effective interest rate
What happens to the supply curve when the wages for labor decreases?
The supply curve shifts to the right
the theoretical balance between an entity’s willingness to accept risk and the return/growth goals that the entity wishes to achieve.
risk appetite
the additional compensation demanded by investors for bearing the risk that the security issuer will fail to pay interest and/or principal due on a timely basis.
default risk premium
The state of not knowing how or if potential events may manifest.
uncertainty in enterprise risk management
undermines competitive pricing and maintains prices to external customers at levels higher than they would be in a competitive market place.
collusive pricing
undertaken by larger organizations that can absorb losses and deliberately do so in an attempt to drive smaller, less capitalized, competitors from the market place.
predatory pricing
involves appropriately assigning different prices to the same product in different market settings.
dual pricing
What is an interest rate swap?
There is going to be a principle amount
The business pays a certain amount
The business when initially receive another percentage and there will also be a ending percentage
The difference between ending and beginning will be the gain/loss
A corporation has a $3,000,000 notional amount interest rate swap as a fair value hedge, paying a fixed rate of 6% annually and receiving a floating rate based on the central bank rate, initially at 5%. At the end of the year, the central bank rate decreases to 4%. What is the impact on the income statement due to the swap?
Pays: 3,000,000 0.06 = 180,000
Receives: (3,000,0000.04)-(3,000,000*0.05) = 30,000 loss
funds that have been set aside for a specific future expense in state and local governments
encumbrance
When should a company start capitalizing costs for software developed for sale? When should a company start capitalizing costs for software developed for sale?
When technological feasibility has been established.
This type of credit facility allows the company to draw funds up to a predetermined limit, providing a buffer against liquidity shortfalls and ensuring that the company has access to funds when required.
revolving credit facility
In a financial statement analysis, which of the following visualization techniques is most appropriate for comparing an entity’s performance across multiple financial metrics, such as revenue, net income, and total assets?
bar chart
Under hedge accounting, what happens if a hedging relationship ceases to be highly effective?
Hedge accounting must be discontinued prospectively
How to calculate economic value added for a project in finance?
Multiply the initial investment by the company’s cost of capital
Compare the after tax operating income to the number from step 1
Economic value added = after tax operating income - (Cost of Capital * Initial investment)
What is the weighted average cost of capital (WACC) formula?
WACC = (cost of equity * weight) + (after tax cost of debt * weight)
What is the formula for the capital asset pricing model (CAPM)?
Cost of retained earnings = Risk-free rate + [Beta * (Market return - Risk-free rate)
How to calculate the market risk premium?
Market return - risk free rate
Rank these four from most to least risk: Banker’s acceptances, Negotiable CDs, Commercial paper, U.S. treasury bills
commercial paper
banker’s acceptances
negotiable CDs
U.S. treasury bills
The greater the return the greater risk
What is 100 basis points equal to?
This is equal to one percent
How to estimate the cost of retained earnings with the discounted cash flow method?
Cost of retained earnings = (Year end dividend per share/current market price of share) + the expected growth rate
How to calculate cost of retained earnings using bond yield plus risk premium?
Pre-tax cost of long term debt + market premium
What is the formula for cost of preferred stock?
Preferred stock dividends(% multiplied by the par value of p/s)/net
proceeds of preferred stock(market value less any transaction cost)
What I paid out/What I paid in
What is the formula for market capitalization?
Market price per share * # of shares outstanding
How to calculate the number of shares outsanding?
Common stock value on balance sheet/par value per share
How to calculate the value of equity using sector price to earnings?
Net income/ P/E multiple
What does beta measure?
How volatile a stock price is
Beta>1 our stock price is more volatile than the market
Beta<1 our stock price is less volatile than the market
How to calculate equity using dividend discount model?
((Current Dividends * (1+growth rate of dividend))/(Cost of Equity)+(Growth Rate of Dividends)
How to calculate the market value of bonds?
(Par value of bonds) *
(Current market value per bond/1,000 or the par value of each bond)
When a derivative is designated in a cash flow hedge, where are the effective portions of gains and losses reported?
Other comprehensive Income
What statement is unique to proprietary funds and not typically found in governmental fund financial statements?
Statement of cash flows
Formula for Annual Cost of Credit
(365/(Pay period - discount period)) * ((discount % /(100-discount %))
The 365 might vary and be 360
What three factors affect the optimal level of inventory?
Time it takes to receive the inventoyr
The cost per unit of the inventory because this affects the carrying costs
The cost of placing an order for the inventory
How to calculate the reorder point for inventory?
Caclulate the weekly sales
Multiply the weekly sales by the lead time
Add this number from step 2 in the process to the safety stock of inventory to get the reorder point
__________ _____is the loan extended by one trader to another when the goods and services are bought on credit. ______ ______ facilitates the purchase of supplies without immediate payment. ________ _____ is commonly used by business organizations as a source of short-term financing.
trade credit for all
What is a characteristic of short-term financing in regards to the interest rate?
The interest rate tends to be higher for the borrower
gives its owner the right to sell a specific security at fixed conditions of price and time.
put option
gives its owner the right to purchase a specific security at fixed conditions of price and time.
call option
What is the formula for the dividend growth model?
D1+g
P0
(D1/P0)+growth rate of dividend
What is the formula for the debt ratio?
Total liabilities/total assets
What are Porter’s five forces?
Bargain power of suppliers
Bargining power of buyers
Existence of substitute products
Barrier of entries into the market
Competition in the market
What is the best hedge investment against a high inflation rate?
Precious metals like gold
How to calculate the direct labor rate variance?
(standard cost - actual cost) * actual hours used
What is the formula for the cash conversion cycle?
Days sales in accounts receivable + Days in inventory - Days of payables outstanding
How to calculate operating cycle?
Days sales in accounts receivable + Days in inventory
In consolidated financial statements, how is the income attributable to noncontrolling interests presented?
As part of the consolidated net income on the income statement.
How to calculate how many units need to be sold if a certain profit number wants to be hit?
Fixed cost + desired profit/(Selling price per unit - Variable cost per unit)
What is the formula for the constant growth dividend discount model?
(Current dividend *( 1+ % of dividend growth)^number of years)/(Required return - growth rate of stock)
How to calculate expected return for a stock?
(Dividend payout + stock growth)/Current price of stock
What do higher P/E ratios indicate for a stock?
The investors think that the stock has potential to grow with earnings. The market price is a lot higher than the earnings per share.
How to calculate free cash flow?
Net income + Noncash expenses - Increase in working capital - capital expenditures
Think of the operating section of the statement of cash flows
How to calculated the expected price of the stock under the zero growth model?
Stock price = Dividend payout/Discount rate
Discount rate is also called desired rate of return
