CH6 Flashcards
GLOBALIZATION IS FREQUENTLY ASSOCIATED WITH COMPARATIVE ADVANTAGE AND
-INCREASE SPECIALIZATION
A GLOBAL ECONOMY WILL LIKELY PROMOTE INCREASED ECONMY OF SCALE AND INCREASED SPECIALIZATION IN INDIVIDUAL ECONOMIES.
MOTIVATION FOR INTERNATIONAL BUSINESS OPERATIONS
- COMPETITIVE ADVANTAGE
- IMPERFECT MARKETS
- PRODUCT CYCLE.
THE CONCEPT OF A GLOBAL ECONOMIC BALANCE OF POWER ANTICIPATES
-THE CONCEPT OF BALANCE POWER ANTICIPATES THAT NO ONE NATION WILL DOMINATE OR INTERFERE WITH THE ACTIVITIES OF OTHERS.
SOURCING REQUIREMENT
GENERALLY REFER TO CONTENT OR VALUE ADDED LIMITS ON THE % OF LABOR OR MATERIALS USED IN IMPORTED PRODUCTS. COMPLIANCE WITH LIMITS MYA RESULT IN TARIFF REDUCTIONS.
UNIPOLAR
IS THE CONCENTRATION OF POWER BY ONE COUNTRY. FOR EXAMPLE THE US
MULTIPOLAR
POWER DISTRIBUTED AMONGS MULTIPLE NATIONS
UNILATERAL
ACTION TAKEN BY A SINGLE NATION ACTION ON ITS OWN IS REFERRED TO AS UNILATERAL.
MULTILATERAL
REFERS TO POWER THAT IS NOT ONLY DISTRIBUTED BUT SHARED COOPERATIVELY AMONG NATIONS.
SYSTEMATIC INTERDEPENDANCE
REFERS TO THE GLOBAL WARMING AND NUCLEAR PROLIFERATION ISSUES THAT FACE ALL NATIONS.
-IT ACKNOWLEDGES THAT ALL MEMBERS OF THE GLOBAL COMMUNITY SHARE THE PLANET EARTH. ACTIONS OF GOVERNMENT THAT ADVERSELY IMPACT THE CLIMATE OR REDUCE OUR SAFETY (SUCH AS NUCLEAR PROLIFERATION) IMPACT ALL NATIONS.
FUNCTIONALITY INTERDEPENDANCE
IS THE PARTICIPATION OF NATIONS IN WORLDWIDE INSTITUTIONS, SUCH AS THE UNITED NATIONS, THE WORLD TRADE ORGANIZATIONS, AND THE INTERNATIONAL MONETARY FUND.
RISK
IT MAY BE DEFINED AS THE CHANCE OF FINANCIAL LOSS. MORE FORMALLY THE TERM RISK MAY BE USED TO INTERCHANGEABLY WITH THE TERM UNCERTAINTY TO REFER TO THE VARIABILITY OF RETURNS ASSOCIATED WITH A GIVEN ASSET.
RISK AND RETURN
ARE A FUNCTION OF BOTH MARKET CONDITIONS AND THE RISK OF PREFERENCES OF THE PARTIES INVOLVED.
RISK PREFERENCES
- DIFFERENT MANAGERS HAVE DIFFERENT ATTITUDES TOWARD RISK. THERE ARE 3 BASIC RISK PREFERENCES.
1. RISK INDIFFERENT
2. RISK ADVERSE
3. RISK SEEKING BEHAVIOR
RISK INDIFFERENT
-REFLECTS AN ATTITUDE TOWARD RISK IN WHICH AN INCREASE IN THE LEVEL OF RISK DOES NOT RESULT IN AN INCREASE IN MANAGEMENTS REQUIRED RATE OF RETURN.
DIVERSIFICATION
RISK IS OFTEN REDUCED BY DIVERSIFICAITON, WHICH IS THE PROCESS OF SELECTING INVESTMENTS OF DIFFERENT OR OFSSETING RIKS. NOT ALL RISK CAN BE MANAGED THORUGHT DIVERSIFICATION. TOTAL RISK IS THE COMBINATION OF THE DIVERSIFIABLE AND NON-DIVERSIFIABLE RISK OF A SINGLE ASSET.
DIVERSIFIABLE RISK
ALSO KNOWN AS NON MARKET UNSYSTEMATIC RISK OR FIRM SPECIFIC. REPRESENTS THE PORTION OF A SINGLE ASSET'S RIKS THAT IS ASSOCIATED WITH RANDOM CAUSES AND CAN BE ELIMINATED THROUGH DIVERSIFICATION. EXAMPLES OF DIVERSIFIABLE RIKS: -STRIKES -LAWSUITS -REGULATORY ACTIONS -LOSS OF A KEY ACCOUNT.
NON-DIVERSIFIABLE RISK
DUNS
NS
-ALSO KNOWN AS MARKET RISK OR SYSTEMATIC RISK IS ATTRIBUTABLE TO MARKET FACTORS THAT AFFECT ALL FIRMS AND CANNOT BE ELIMINATED THROUGH DIVERSIFICATION. EXAMPLES OF NON-DIVERSIFIABLE RISK -WAR -INFLATION -INTERNATIONAL INCIDENTS -POLITICAL EVENTS.
RISK CLASSIFICATION:
“DUNS”
-DIVERSIFIABLE=UNSYSTEMATIC NON-MARKET RELATED, FIRM SPECIFIC.
NON-DIVERSIFIABLE=SYSTEMATIC OR MARKET RISK
AS INFLATION ASSOCIATED WITH A FOREING ECONOMY INCREASES IN RELATION TO A DOMESTIC ECONOMY
–DEMAND FOR THE FOREIGN CURRENCY FALLS.
INFLATION WEAKENS THE FOREIGN CURRENCY IN RELATION TO THE DOMESTIC CURRENCY AND MAKES FOREIGN PRODUCTS MORE EXPENSIVE AND REDUCES DEMAND.
REDUCED DEMAND FOR A FOREIGN IMPORT WILL REDUCE THE DEMAND FOR ITS CURRENCY.
FINANCIAL RIKS IS A GENERAL CATEGORY THAT INCLUDES
- INTEREST RATE RIKS
- MARKET RISK
- PURCHASING POWER RISK
- LIQUIDITY RIKS
- DEFAULT RIKS
BUSINESS RISK
-REPRESENTS THE RISK ASSOCIATED WITH THE UNIQUE CIRCUMSTANCES OF A PARTICULAR COMPANY, AS THEY MIGHT AFFECT THE SHAREHOLDER VALUE OF A COMPANY. IF A COMPANY PURELY USES ITS OWN CUMULATIVE EARNINGS IN CAPITALIZING ITS OPERATIONS, IT IS EXPOSED TO THE RIS OF ITS OWN CIRCUMSTANCES
FORWARD CONTRACT
FORWARD CONTRACT IS ALSO KNOWN AS FORWARD HEDGE.
SHORT TERM FINANCING
CHARACTERISTICS
- RATES ASSOCIATED WITH SHORT TERM FINANCING TEND TO BE LOWER AND PRESUME GREATER LIQUIDITY
- STRATEGIES, SHORTER TERM FINANCING STRATEGIES ANTICIPATE HIGHER LEVELS OF TEMPORARY WORKING CAPITAL THAT REQUIRE GREATER AGILITY AND FLEXIBILITY.
ADVANTAGES OF SHORT TERM DEBT FINANCING
- INCREASED LIQUIDITY
- INCREASE PROFITABILITY
- DECREASE FINANCING COST.
DISADVANTAGES OF SHORT TERM DEBT
-INCREASED INTEREST RATE RISK
INTEREST RATES MAY ABRUPTLY CHANGE AND REQUIRE GREATER FINANCING CHARGES THAN ANTICIPATED
-INCREASED CREDIT RISK
LENDER EVALUATION OF CREDITHWORTHINESS MAY CHANGE AND THEREBY MAKE FINANCING IMPSSIBLE OR LESS FAVORABLE VIRTUE OF INCREASED RATES AND LESS FAVORABLE TERMS.
LONG TERM FINANCING
- RATES ARE USUALLY HIGH
- STRATEGY IS TO USE WITH HIGHER LEVELS OF PERMANENT WORKING CAPITAL.
LONG TERM FINANCING ADVANTAGES
-DECREASED INTEREST RATE RISK
FOR THE BORROWER, LONG TERM FINANCING LOCKS IN AN INTEREST RATE OVER A LONG PERIOD. THEREFORE REDUCING THE EXPOSURE TO FLUCTUATION IN RATES.
-DECREASED CREDIT RIKS
SECURING LONG TERM DEBT GUARANTEES FINANCING OVER A LONG PERIOD AND REDUCES THE COMPANY’S EXPOSURE TO ANY RISK THAT REFINANCING MIGHT BE DENIED.
LONG TERM FINANCING DISADVANTAGES
- DECRESED PROFITABILITY
- DECREASED LIQUIDITY
- INCREASED FINANCING COSTS
EXPECTED VALUE
- PROBABILITY AND EXPECTED VALUE QUANTITATIVE MODELS TO ADDRESS THE ISSUE OF APPROPRIATE COURSE OF ACTION IN AN ENVIRONMENT OF UNCERTAINTY.
- THE EXPECTED VALUE IS A WEIGHTED AVERAGE OF ALL VALUES AND VARIABLES. THE COURSE OF ACTION WITHE THE HIGHES EXPECTED MONETARY VALUE SHOULD BE SELECTED.
COST VOLUME PROFIT ANALYSIS
-IS A METHOD USED TO EVALUATE OPERATING DECISIONS
PROGRAM EVALUATION AND REVIEW TECHNIQUE
PERT IS A TECHNIQUE USED IN PROJECT MANAGENT THAT FOCUSES ON THE TIME REQUIRED TO COMPLETE EACH STEP IN A PROJECT.
IT ALLOWS A PROJECT MANAGER TO MONITOR A PROJECT PROGRESS AND IDENTIFY POTENTIAL BOTTLENECKS OR DELAYS THAT WILL POSTPONE COMPETION DATE.
PRIMARY REASON FOR A COMPANY TO AGREE TO A DEBT COVENANT LIMITING THE PERCENTAGE OF ITS LONG TERM DEBT
-TO REDUCE THE COUPON RATE ON THE BONDS BEING SOLD.
THE PRIMARY REASON FO A COMPANY TO AGREE TO A DEBT COVENANT LIMITING THE PERCENTAGE OT ITS LONG TERM DEBT IS TO REDUCE THE COUPON RATE ON NEW BONDS BEING SOLD.
-A DEBT COVENANT IS A PROVISION IN A BOND INDENTURE. CONTRACT BETWEEN BOND ISSUER AND HOLDER THAT THE BOND ISSUER WILL EITHER DO AFFIRMATIVE COVENANTS.
BOND COVENANTS AFFECT BONDS NOT EQUITY
COMMON STOCK
IS AN EQUITY SECURITY THAT CONVEYS OWNERSHIP. COMMON STOCK DOES NOT REQUIRE ANY PAYMENT, IT DOES NOT MATURE AND BECAUSE IT INCREASES EQUITY WHILE HAVING NO EFFECT ON DEBT, IT DECREASES THE DEBT TO EQUITY RATIO AND INCREASES THE CREDIT-WORTHINESS OF THE FIRM.
FORMULA TO CALCULATE THE ECONOMIC RATE OF RETURN ON COMMON STOCK
(DIVIDENDS+CHANE IN PRICE)/ BEGINNING PRICE
WHICH OF THE FOLLOWING TYPES OF BONDS IS MOST LIKELY TO MAINTAIN A CONSTANT MARKET VALUE
-FLOATING RATE
FLOATING RATE BONDS AUTOMATICALLY ADJUST THE RETURN ON A FINANCIAL INSTRUMENT TO PRODUCE CONSTANT MARKET VALUE FOR THAT INSTRUMENT. NO PREMIUM OR DISCOUNT WOULD BE REQUIRED SINCE MARKET CHANGES WOULD BE ACCOUNTED FOR THROUGH THE INTEREST RATE.
ZERO COUPON BODS
HAVE IN EFFECT A FIXED STATED RATE OF RETRUN THAT WOULD REQUIRE ASSIGNMENT OF A PREMIUM OR DISCOUNT TO THE UNDERLYING SECURITY TO PRODUCE A MARKET RATE OF INTEREST IF THAT MAKER YIELD IS DIFFERENT FROM STATED RATE.
CALLABLE BONDS
THEY WOULD FLUCTUATE IN VALUE. ONE OF THE ADVANTAGES TO THE ISSUER OF CALLABLE BONDS IS THE ABILITY TO CALL OR EFFECTIVELY REFINANCE THE BONDS IF INTEREST RATES BECOME FAVORABLE
PRICE SALES RATIO
THIS APPROACH CAN PROVIDE MEANING INFO IN THE EVENT TAHT NET EARNINGS DATA IS NOT AVAILABLE.
PRICE EARNINGS RATIO
PE RATIO
=PRICE OR VALUE TODAY/EXPECTED EARNINGS IN ONE YEAR..
THIS RATIO IS NOT MEANINGFUL IF EARNINGS ARE EITHER EXTREMELY SMALL OR A LOSS.
WHEN USING A CONSTANT GROWTH DISCOUNT MODEL TO FORECAST THE VALUE OF A SHARE OF CS THE ASSUMPTIONS
AN UNDERLYING ASSUMPTION OF THE CONSTANT GROWHT MODEL IS THE IDEA THAT STOCK PRICE WILL GROW AT THE SAME RATE AS THE DIVIDEND THEREBY PRODUCING A CONSTANT GROWTH RATE.
ZERO GROWHT MODEL
DIVIDEND DIVIDED BY DESIRED RATE OF RETURN.
INVESTORS ARE LIKELY TO VIEW A HIGH EARNINGS PRICE RATIO AS AN INDICATION
EARNINGS HAVE GROWTH POTENTIAL
-PE RATION MEASURES THE AMOUNT THAT INVESTORS ARE WILLING TO PAY FOR EACH DOLLAR OF EARNINGS PER SHARE. HIGHER PE RATIONS GENERALLY INDICATE THAT INVESTORS ARE ANTICIPATING MORE GROTWH AND ARE BIDDING UP THE PRICE OF THE SHARES IN ADVANCE OF PERFORMANCE.
OVERCONFIDENCE
-IS THE MANAGERS BELIEF THAT THEY ARE GENERALLY CORRECT
EXCESS OPTIMISM
-THE MANAGERS BELIEF THAT RESULTS WILL GENERALLY BE POSITIVE IS EXCESSIVE OPTIMISM.
CONFIRMATION BIAS
-IS WHEN MANAGERS USE DATA THAT CONFIRMS THEIR CONCLUSIONS AND IGNORES DATA THAT CHALLENGES THEIR IDEAS.
ILLUSION OF CONTROL
-THE ERRONEOUS BELIEF THAT THE FINANCIAL MANAGER HAS CONTROL OVER VALUATION OUTCOMES THAT ARE REALLY RESULT OF MARKET FORCES.
PRICE SALES RATIO
A VALUATION ESTIMATION THAT CAN BE ADAPTED TO START UP COMPANIES AND OTHER SITUATIONS WHERE EARNINGS ARE VERY LOW.
-THE PRICE SALES RATIO USES SALES PER SHARE AS BASIS FOR VALUATION AND BE USED IN START UP SITUATIONS OR UNDER CONDITIONS WHERE EARNINGS DATA IS NOT MEANINGFUL.
PE PROJECTION
RELY ON MEANINGFUL FIGURES
PEG PROJECTIONS
RELY ON MEANINGFUL EARNING FIGUES
CONSTANT GROWTH MODELS
ARE LESS ADAPTABLE TO LOW EARNINGS SITUATIONS THAN THE PRICE SALES RATIO. CONSTANT GROWTH WOULD REQUIRE ADJUSTMENTS TO RETURN AND GROWTH AMOUNTS TO PRODUCE REALISTIC RESULTS.
RISK APPETITE
ITS BEEN EXCEEDED WHEN THE COMBINED LIKELIHOOD AND IMPACT OF NEGATIVE EVENTS SIGNIFICANTLY EXCEEDED RESIDUAL RISKS.
EVENT ID OCCURS
AFTER THE DEVELOPMENT OF OBJECTIVES
