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Corporate Governance Flashcards

1
Q

Corporate Governance

What is the primary duty of the board of directors?

A

To monitor management behavior.

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2
Q

Corporate Governance

What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?

A

Oversees the board

Responsible for hiring new CEO

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3
Q

Corporate Governance

What is the responsibility of the audit committee of the board of directors?

A

The audit committee appoints and oversees the external auditor.

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4
Q

Corporate Governance

What is the duty of the compensation committee of the board of directors?

A

The compensation committee handles the CEO’s compensation package.

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5
Q

Corporate Governance

What does the NYSE and NASDAQ require of the board of directors?

A

They require the board to be independent.

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6
Q

Corporate Governance

What is the main goal in an executive compensation package?

A

The package should ensure that the goals of management should match those of the shareholders.

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7
Q

Corporate Governance

How can an executive compensation package ensure that goals of management align with those of shareholders?

A

Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn’t sacrifice the long-term success of the enterprise for short-term gain.

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8
Q

Corporate Governance

Which influences help mold the direction that management takes?

A

They range from internal (Board of Directors- Audit Committee- Internal Control) to external (Creditors- SEC- IRS)

These influences should not be tainted by undue influence from management or have financial ties to management such as compensation-related duties

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9
Q

Corporate Governance

What is shirking?

A

When management doesn’t act in the best interest of shareholders.

It can be alleviated by tying compensation to stock performance or company profit.

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10
Q

Corporate Governance

What requirements are imposed on a public company under Sarbanes-Oxley?

A

Management must submit a report on the effectiveness of Internal Control in the 10K.

Management must disclose significant Internal Control deficiencies.

CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.

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11
Q

Corporate Governance

What characteristics are promoted by the COSO framework on internal control?

A

Reliable financial reporting

Effective and efficient operations

Compliance

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12
Q

Corporate Governance

What are the elements of the control environment?

A 
Integrity & Ethics
Competence
The Board of Directors & Audit Committee
Management's Operating Style
Organizational Structure
Authority & Roles of Responsibilities
HR Policies
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13
Q

Corporate Governance

What are control activities?

A

A component of internal control that includes actions being taken to promote the control environment.

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14
Q

Corporate Governance

What are the basic elements of internal control?

A 
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring
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15
Q

Corporate Governance

What is the significance of the Information and Communication aspect of internal control?

A

Management must have access to relevant and timely information to make good decisions.

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16
Q

Corporate Governance

How does Monitoring affect internal control?

A

Internal Control activities must be constantly monitored and evaluated for effectiveness.

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17
Q

Corporate Governance

What activities does the COSO framework for enterprise risk management include?

A 
Identifies Risk Factors
Promotes Risk Response Decisions
Compares Management Risk vs. Shareholder Goals
Aids in evaluating opportunities
Promotes Quicker Capital movement

Does NOT eliminate all risk

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18
Q

Corporate Governance

What are possible responses to risk under the COSO framework for enterprise risk management?

A

Avoid or Reduce

Share or Accept

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19
Q

Cost Accounting

What is Cost Accounting?

A 
Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet for
o Direct Materials
o Direct Labor
o Work in Process
o Finished Goods

Cost Accounting also records for the Income Statement

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20
Q

Cost Accounting

What is the difference between Cost Accounting and Managerial Accounting?

A

Cost Accounting - External Focus- GAAP

Managerial Accounting - Internal Focus- Not GAAP

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21
Q

Cost Accounting

What are Product Costs (aka Inventory Costs)?

A

Prime Costs

Conversion Costs

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22
Q

Cost Accounting

What are included in Prime Costs?

A

Direct Material USED - Have become part of the product or had a direct impact on the product

Direct Labor Used - Employees who worked on product and had direct impact

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23
Q

Cost Accounting

What is Factory Overhead?

A

All factory costs except for DM and DL used in production- including Spoilage (except for abnormal spoilage- which is a period cost and not included in OH).

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24
Q

Cost Accounting

What is included in Fixed Factory Overhead?

A

FFO = Estimated Costs / Normal Capacity

Uses Normal Activity

Examples of Fixed Factory OH: Depreciation (SL)- Utilities- Taxes

Under/Over-applied Fixed OH always goes to COGS

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25
# Cost Accounting What is included in Variable Overhead?
VO = Estimated Activity / Actual Activity Uses Actual Activity Examples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)
26
# Cost Accounting Where is Under/Over-applied Variable OH recorded?
If Immaterial – Goes to COGS If Material – Goes to WIP- Finished Goods- or COGS- based on their Ending Balance
27
# Cost Accounting Where is Under/Over-applied Fixed OH recorded?
It always goes to COGS
28
# Cost Accounting What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?
Under-applied overhead. If it's Fixed OH- under-applied goes to COGS. If it's Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.
29
# Cost Accounting What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?
A credit balance indicates over-applied overhead. If Fixed overhead- it is corrected from COGS. If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.
30
# Cost Accounting Which variables are used to calculate Direct Material balances?
Beginning Balance DR Net purchases (plus freight-in) CR Direct Materials Used = Ending balance (goes to BS)
31
# Cost Accounting What variables are used to calculated Work in Process (WIP)?
Beginning Balance (End Bal of Previous WIP) DR Direct Materials Used DR Direct Labor Used (Conversion Cost) CR COGM DR Factory Overhead Applied (Conversion Cost) = Ending Balance (Goes to BS)
32
# Cost Accounting What variables are included in Finished Goods calculations?
``` Beginning Balance DR COGM = COGAS (Cost of Goods Avail for Sale) CR COGS = Ending Balance (Goes to BS) ```
33
# Cost Accounting How does Freight In affect Cost Accounting calculations?
Inventory (Product) Cost Part of DM Purchases
34
# Cost Accounting How does Freight Out affect Cost Accounting?
Selling (Period) Cost Not part of inventory
35
# Cost Accounting When is Job-Order Costing used?
Used when costs are easily connected to a specific product or product line Can also be applied to services Calculation is the same as normal cost accounting – just use your T Accounts o DM to WIP to FG to COGS o You’re likely going to be solving for the last job in the queue
36
# Cost Accounting What is the Direct Method for allocating service department costs?
No services allocated between service departments- even if they serve each other. Only allocate to product(s)
37
# Cost Accounting What is the Step Method for allocating service department costs?
Services can be allocated to both other service departments and the product(s)
38
# Cost Accounting Under process costing- how are the units shipped calculated?
Beginning Inventory + Units Started - Ending Inventory = No. Units Shipped
39
# Cost Accounting Which two inventory methods are used under Process Costing?
FIFO Weighted Average
40
# Cost Accounting What is another name for Process Costing?
Equivalent Units of Production
41
# Cost Accounting How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?
EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)
42
# Cost Accounting How are Direct Materials calculated under the Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
43
# Cost Accounting How are Conversion Costs calculated under Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
44
# Cost Accounting How are Equivalent Finished Units calculated for Direct Materials?
Units Shipped + EI x % Complete DM = EFU (Weighted Average Method) - Beginning Inventory x % Complete = EFU (FIFO)
45
# Cost Accounting How are Equivalent Finished Units calculated for Conversion Costs?
Units Shipped + EI x % Complete CC = EFU (Weighted Average) - Beginning Inventory x % Complete = EFU (FIFO)
46
# Cost Accounting How are Direct Materials calculated under the FIFO method?
Current Costs / EFU FIFO Note: FIFO method uses Current Period costs only and ignores Beginning Inventory
47
# Cost Accounting How are Conversion Costs calculated under the FIFO method?
Current Costs / EFU FIFO FIFO method uses Current Period costs only and ignores Beginning Inventory
48
# Cost Accounting How is WIP calculated?
``` Beginning balance (DM- DL- OH) + Current Costs (DM- DL- OH) - COGM (Goes to Finished Goods) + DM EFU x Cost per DM EFU + CC EFU x Cost per CC EFU = Ending WIP ```
49
# Cost Accounting How do period costs and product costs relate to net sales- gross margin and operating income?
``` Net Sales - Product Costs = Gross Margin - Period Costs = Operating Income ```
50
# Cost Accounting What is the focus of Activity Based Costing (ABC)?
Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don’t want or don’t care about Inventory is expensive to store and storing something is not a value-added expenditure Uses Cost Pools - Different departments can have different OH rates Uses Several OH rates based on Activity - Cost Pool / Cost Driver
51
# Cost Accounting How do Cost Pools and Allocations compare under ABC versus traditional costing system?
Cost Pools and Allocations increase compared to a traditional costing system
52
# Cost Accounting What is Backflush Costing?
Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM) o Works backward to “flush out” COGS o ‘Mostly’ GAAP
53
# Cost Accounting What are the characteristics of By-Products?
Usually immaterial and common costs aren’t allocated to them o Low Market Value o Can be valued at NRV o Can be treated as a contra expense and netted against COGS o Can be treated as a contra sale and netted against Sales o Recognition rules are very flexible with valuing and classifying by-products
54
# Cost Accounting What are Cost Functions?
Measure how costs change relative to activity levels High-Low Method Change in Cost (High-Low pts) / Change in Activity (High-Low pts)
55
# Economics How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
56
# Economics What is a supply curve shift?
When supply changes due to something other than price.
57
# Economics What are the characteristics of a positive supply curve shift (shift right)?
Supply increases at each price point Higher Equilibrium GDP Number of sellers increases - market can get flooded Examples: Government subsidies or technology improvements that decrease costs for suppliers
58
# Economics What are the characteristics of a negative supply curve shift (shift left)?
Supply decreases at each price point Lower Equilibrium GDP Cost of producing item increases Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market
59
# Economics How does price affect the demand for an item?
When the prices of an item increases- demand for it decreases.
60
# Economics What is a Demand Curve Shift?
When demand changes due to something other than price.
61
# Economics What is a Positive Demand Curve Shift (Shift Right)?
When demand increases at each price point Price of substitutes go up - price of beef rises- so people buy more chicken Future price increase is expected - War in Middle East- people go out and buy gas Market expands - i.e. people get new free health care plan- demand at clinic rises Expansion - more spending increases equilibrium GDP
62
# Economics What is a Negative Demand Curve Shift (Shift Left)?
Demand decreases at each price point. Price of complement goes up - price of beef goes up- less demand for ketchup Boycott - Company commits social blunder- consumers boycott Consumer income rises - Demand for inferior goods drops as people have more money to spend Consumer tastes change Contraction - less spending decreases equilibrium GDP
63
# Economics What is the Marginal Propensity to Consume?
How much you spend when your income increases Calculate: Change in Spending / Change in Income
64
# Economics What is the Marginal Propensity to Save?
How much you save when income increases Calculate: Change in Savings / Change in Income Also equals 1 - Marginal Propensity to Consume
65
# Economics How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
66
# Economics How does increased spending by consumers and the government affect the demand curve?
As spending by consumers or the government increases- the demand curve increases (shifts right).
67
# Economics How does spending change due to the multiplier effect?
The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect. One consumer spends money- which: * Increases the income of a business * Increases the income of a vendor * Increases income of employees * Increases tax revenue
68
# Economics How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
69
# Economics Under elastic demand- how does price affect revenues?
Price increases- Revenue decreases Price decreases- Revenue increases
70
# Economics What conditions would indicate Elastic Demand?
``` Many substitutes (luxury items) Considered elastic if elasticity is greater than 1 10% drop in demand / 8% increase in price = 1.25 (Elastic) ``` Price increases- Revenue decreases Price decreases- Revenue increases
71
# Economics How does revenue react to price under Inelastic Demand?
Price increases- Revenue increases Price decreases- Revenue decreases
72
# Economics What conditions would indicate Inelastic Demand?
Few substitutes (groceries- gasoline) Considered inelastic if coefficient of elasticity is less than 1 5% drop in demand / 10% increase in price = .5 (inelastic) Price increases- Revenue increases Price decreases- Revenue decreases
73
# Economics What is Unitary Demand?
Total revenue will remain the same if price is increased Considered unitary if coefficient of elasticity = 1
74
# Economics How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in Income Normal goods greater than 1 (demand increases more than income) Inferior goods less than 1 (demand increases less than income)
75
# Economics What conditions occur under periods of inflation?
Interest rates increase Reduced demand for loans Reduced demand for houses- autos- etc. Value of bonds and fixed income securities decrease Inferior good demand to increase Foreign goods more affordable than domestic Demand for domestic goods decrease
76
# Economics What happens under Demand-Pull inflation?
Overall spending increases Demand increases (shifts right) Market equilibrium price increases
77
# Economics What happens under Cost-Push inflation?
Overall production costs increase Supply decreases (shifts left) Market equilibrium price increases Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
78
# Economics What is the Equilibrium Price?
The price where Quantity Supplied = Quantity Demanded
79
# Economics What is Optimal Production?
When Marginal Revenue = Marginal Cost
80
# Economics What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
81
# Economics What is GDP (Gross Domestic Product)?
The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests Included: Foreign company has US Factory Not included: US company has foreign factory
82
# Economics What is included under the income approach for calculating GDP?
``` Sole Proprietor and Corp Income Passive Income Taxes Employee Salaries Foreign Income Adjustments Depreciation ```
83
# Economics What is included under the Expenditure Approach for calculating GDP?
Individual Consumption Private Investment Government Purchases Net Exports
84
# Economics What is Nominal GDP?
Measures goods/services in current prices.
85
# Economics For what is a GDP Deflator used?
Used to convert GDP to Real GDP
86
# Economics What is Real GDP?
Nominal GDP / GDP Deflator x 100
87
# Economics What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
88
# Economics What is the Consumer Price Index (CPI)? How is it applied?
Price of goods relative to an earlier period of time- which is the benchmark. Year 1 = 1.0 ((CPI Current - CPI Last) ÷ CPI Last) * 100
89
# Economics How is disposable income calculated?
Personal Income - Personal Taxes
90
# Economics How is Return to Scale calculated?
% Increase in output / % Increase in input Greater than 1 = Increasing returns to scale Less than 1 = Decreasing returns to scale
91
# Economics When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
92
# Economics What is a Depression?
A prolonged- severe recession with high unemployment rates No requisite period of time for the economy to officially be in a depression
93
# Economics What are the stages of the Economic Cycle?
``` Peak (highest) Recession (decreasing) Trough (lowest) Recover (increasing) Expansion (higher again) ```
94
# Economics What are leading indicators?
Conditions that occur before a recession or before a recovery Example: Stock Market or New Housing Starts
95
# Economics What are lagging indicators?
Conditions that occur after a recession or after a recovery Examples: Prime Interest Rates- Unemployment
96
# Economics What are coincident indicators?
Conditions that occur during a recession or during a recovery Example: Manufacturing output
97
# Economics Which people are included in the calculation of unemployment?
Only people looking for jobs
98
# Economics What is Cyclical Unemployment?
GDP doesn’t grow fast enough to employ all people who are looking for work Example: People are unemployed in 2010 because there aren’t enough jobs available due to the economy
99
# Economics What is Frictional Unemployment?
People are changing jobs or entering the work force. This is a normal aspect of full employment. Example: A recent college graduate is looking for a job
100
# Economics What is Structural Unemployment?
A worker’s job skills do not match those necessary to get a job so they need education or training Example: A construction worker wants to work in an office- so they quit their job and get computer training
101
# Economics How does inflation relate to unemployment?
High Unemployment = Low Inflation (Vice Versa)
102
# Economics What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
103
# Economics What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
104
# Economics What is the Real Interest Rate?
Inflation-adjusted interest rate
105
# Economics What is the Nominal Rate?
Rate that uses current prices
106
# Economics What is the Risk-Free Rate?
Rate for a loan with 100% certainty of payback. Usually results in a lower rate. US Treasuries are an example.
107
# Economics What is included in the M1 money supply?
Currency- Coins- and Deposits
108
# Economics What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
109
# Economics What is Deficit Spending?
Increased spending levels without increased tax revenue. Lower taxes without decrease in spending Gamble that the multiplier effect will take over and boost economy
110
# Economics How can the Fed control the money supply?
By buying and selling the government's securities.
111
# Economics How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
112
# Economics What is a Tariff?
A tax on imported goods
113
# Economics What is a quota?
A limit on the number of goods that can be imported
114
# Economics How do international trade restrictions affect domestic producers?
They are good for domestic producers. Demand curve shifts right Fewer substitutes They can charge higher prices
115
# Economics How to international trade restrictions affect foreign producers?
They are bad for foreign producers Demand curve shifts left Fewer buyers They must charge lower prices
116
# Economics How do international trade restrictions affect foreign consumers?
They are good for foreign consumers Supply curve shifts right Goods purchased at lower prices in the foreign markets
117
# Economics How do international trade restrictions affect domestic consumers?
They are bad for domestic consumers Supply curve shifts left Fewer goods bought due to higher prices
118
# Economics What is Accounting Cost?
Explicit (Actual) cost of operating a business Implicit costs are opportunity costs
119
# Economics What is Accounting Profit?
Revenue - Accounting Cost
120
# Economics What is Economic Cost?
Explicit + Implicit Cost
121
# Economics What is Economic Profit?
Revenue - Economic Cost
122
What is the primary focus of working capital management?
Managing inventory & receivables (current assets & liabilities)
123
How is Net Working Capital calculated?
NWC = Current Assets - Current Liabilities
124
What are the characteristics of effective Working Capital Management?
Shorten the cash conversion cycle Don’t negatively impact operations
125
What is the Inventory Conversion Period?
Average time needed to convert materials into finished goods and sell them Average Inventory = (BI + E) / 2 Inventory Conversion Period = Average Inventory / Sales Per Day
126
What is the Receivables Collection Period?
Average time needed to collect A/R RCP = Average Receivables / Credit Sales Per Day
127
What is the Payables Deferral Period?
Average time between materials and labor purchase and their A/P payment Average Payables = (BP + EP) / 2 Payables Deferral Period = Average Payables / (COGS/365)
128
What is the Cash Conversion Cycle?
Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors) Inventory Conversion Period + Receivables Collection Period – Payables Deferral Period = Cash Conversion Cycle (Inventory Really (-Pays) Cash)
129
What traits should Cash and Short-Term Investments have?
Liquid Safe
130
For what are Letters of Credit used?
Used for importing goods. Issued by importer's bank.
131
What is the advantage of using Trade Credit?
No interest cost if paid timely.
132
What is a Lockbox System? What are the advantages?
Customer Payments are sent to a bank-managed PO box. Employees don't have access to cash. Deposits are more timely. Interest income from deposits should pay for the Lockbox fees (if they don't- lockbox is not beneficial)
133
What is float?
Time it takes to mail a payment and have it clear your bank account Maximize float on cash payments Minimize float on cash receipts
134
What are Zero Balance Accounts?
Regional bank sends enough cash to cover daily checks Advantages: Checks take longer to clear -more float Low amounts of cash tied up for compensating (minimum) balances
135
What is the difference between Treasury Bills- Notes and Bonds?
Treasury Bills: Short term (less than one year) Think: $1 Bill Treasury Notes: Medium term (less than 10 years- more than 1) Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money
136
What is commercial paper?
Similar to T-Bill- but issued by corporations instead of Government Greater than 9 Months Maturity Unsecured Issued by large firms
137
What are the advantages and disadvantages of Commercial Paper?
Advantages: Financing at less than Prime. No compensating balances required. Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.
138
What is Economic Order Quantity?
The order quantity that minimizes inventory costs. EOQ = Square Root of (2DO/C) ``` D = Unit Demand (Annual) O = Order Cost C = Cost of Inventory ```
139
What is Carrying Cost?
The cost of keeping inventory.
140
What is Order Cost?
Cost of executing an order and starting product production.
141
What is inventory reorder point?
How low inventory should get before it should be re-ordered. IOP = Average Daily Demand x Average Lead Time
142
What is a Just In Time (JIT) system?
Orders inventory so that you get it just in time for when it’s needed JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high
143
What is Factoring of receivables?
Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection
144
What is a Trade Discount?
Buyer saves if paid early Example: 1/10 Net 30 1% Discount if paid within 10 days If not- bill is still due in 30 days
145
What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
146
What is the Prime Rate?
A benchmark used for lending only to the best customers Most customers will be charged Prime + 3%- for example If the lending institution and the customer are not in the same country- the LIBOR rate is often used
147
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
148
How is Current Yield calculated?
CY = Interest Payment / Bond Price
149
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest = Bond Price
150
What is a Zero Coupon Bond?
No interest payments made Bond sold at a discount Interest reflected when Bond matures
151
What are the characteristics of a Junk Bond?
High interest rate High default risk
152
What are debenture bonds?
Bonds unsecured by collateral
153
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
154
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
155
What is a Callable Bond?
Borrower can pay off debt early
156
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
157
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
158
What is the disadvantage of Common Stock in comparison to bonds?
Common Stock is more expensive to issue than debt. Why? Investors demand a greater ROI than debtors (bondholders)
159
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
160
What is Weighted Average Cost of Capital?
A company uses this to determine the true cost of their capital ``` Example: Debt costs 5%; 40% of Cap. Equity costs 12%; 60% of Cap. (5% x 40%) + (12% x 60%) WACC = 9.2% ```
161
What is CAPM?
A stock’s expected performance is based on its beta (risk) compared to that of the stock market. More risk = more expected return.
162
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
163
# Financial Management What is the primary focus of working capital management?
Managing inventory & receivables (current assets & liabilities)
164
# Financial Management How is Net Working Capital calculated?
NWC = Current Assets - Current Liabilities
165
# Financial Management What are the characteristics of effective Working Capital Management?
Shorten the cash conversion cycle Don’t negatively impact operations
166
# Financial Management What is the Inventory Conversion Period?
Average time needed to convert materials into finished goods and sell them Average Inventory = (BI + E) / 2 Inventory Conversion Period = Average Inventory / Sales Per Day
167
# Financial Management What is the Receivables Collection Period?
Average time needed to collect A/R RCP = Average Receivables / Credit Sales Per Day
168
# Financial Management What is the Payables Deferral Period?
Average time between materials and labor purchase and their A/P payment Average Payables = (BP + EP) / 2 Payables Deferral Period = Average Payables / (COGS/365)
169
# Financial Management What is the Cash Conversion Cycle?
Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors) Inventory Conversion Period + Receivables Collection Period – Payables Deferral Period = Cash Conversion Cycle (Inventory Really (-Pays) Cash)
170
# Financial Management What traits should Cash and Short-Term Investments have?
Liquid Safe
171
# Financial Management For what are Letters of Credit used?
Used for importing goods. Issued by importer's bank.
172
# Financial Management What is the advantage of using Trade Credit?
No interest cost if paid timely.
173
# Financial Management What is a Lockbox System? What are the advantages?
Customer Payments are sent to a bank-managed PO box. Employees don't have access to cash. Deposits are more timely. Interest income from deposits should pay for the Lockbox fees (if they don't- lockbox is not beneficial)
174
# Financial Management What is float?
Time it takes to mail a payment and have it clear your bank account Maximize float on cash payments Minimize float on cash receipts
175
# Financial Management What are Zero Balance Accounts?
Regional bank sends enough cash to cover daily checks Advantages: Checks take longer to clear -more float Low amounts of cash tied up for compensating (minimum) balances
176
# Financial Management What is the difference between Treasury Bills- Notes and Bonds?
Treasury Bills: Short term (less than one year) Think: $1 Bill Treasury Notes: Medium term (less than 10 years- more than 1) Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money
177
# Financial Management What is commercial paper?
Similar to T-Bill- but issued by corporations instead of Government Greater than 9 Months Maturity Unsecured Issued by large firms
178
# Financial Management What are the advantages and disadvantages of Commercial Paper?
Advantages: Financing at less than Prime. No compensating balances required. Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.
179
# Financial Management What is Economic Order Quantity?
The order quantity that minimizes inventory costs. EOQ = Square Root of (2DO/C) ``` D = Unit Demand (Annual) O = Order Cost C = Cost of Inventory ```
180
# Financial Management What is Carrying Cost?
The cost of keeping inventory.
181
# Financial Management What is Order Cost?
Cost of executing an order and starting product production.
182
# Financial Management What is inventory reorder point?
How low inventory should get before it should be re-ordered. IOP = Average Daily Demand x Average Lead Time
183
# Financial Management What is a Just In Time (JIT) system?
Orders inventory so that you get it just in time for when it’s needed JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high
184
# Financial Management What is Factoring of receivables?
Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection
185
# Financial Management What is a Trade Discount?
Buyer saves if paid early Example: 1/10 Net 30 1% Discount if paid within 10 days If not- bill is still due in 30 days
186
# Financial Management What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
187
# Financial Management What is the Prime Rate?
A benchmark used for lending only to the best customers Most customers will be charged Prime + 3%- for example If the lending institution and the customer are not in the same country- the LIBOR rate is often used
188
# Financial Management What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
189
# Financial Management How is Current Yield calculated?
CY = Interest Payment / Bond Price
190
# Financial Management What is the Effective (YTM- Market) Rate?
PV of Principle + Interest = Bond Price
191
# Financial Management What is a Zero Coupon Bond?
No interest payments made Bond sold at a discount Interest reflected when Bond matures
192
# Financial Management What are the characteristics of a Junk Bond?
High interest rate High default risk
193
# Financial Management What are debenture bonds?
Bonds unsecured by collateral
194
# Financial Management What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
195
# Financial Management What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
196
# Financial Management What is a Callable Bond?
Borrower can pay off debt early
197
# Financial Management What is a Convertible Bond?
Lender can demand payment via company stock instead of money
198
# Financial Management What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
199
# Financial Management What is the disadvantage of Common Stock in comparison to bonds?
Common Stock is more expensive to issue than debt. Why? Investors demand a greater ROI than debtors (bondholders)
200
# Financial Management What is the advantage of Preferred Stock?
Hold dividend priority over common stock
201
# Financial Management What is Weighted Average Cost of Capital?
A company uses this to determine the true cost of their capital ``` Example: Debt costs 5%; 40% of Cap. Equity costs 12%; 60% of Cap. (5% x 40%) + (12% x 60%) WACC = 9.2% ```
202
# Financial Management What is CAPM?
A stock’s expected performance is based on its beta (risk) compared to that of the stock market. More risk = more expected return.
203
# Financial Management How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
204
# Fnancial Planning What is a Static Budget?
Budget targeted for a specific segment of a company.
205
# Fnancial Planning What is a Maser Budget?
Budget targeted for the company as a whole Includes budgets for Operations and Cash Flows Includes set of budgeted Financial Statements
206
# Fnancial Planning How do Fixed Costs affect budgeting?
Costs independent of the level activity within the relevant range Property Tax is the same whether you produce 100-000 units or zero units However – Fixed Costs per unit vary given the amount of activity If you produce fewer units- fixed costs per unit will be greater than if you produce more units – i.e. less units to spread the cost over
207
# Fnancial Planning How do Variable Costs affect budgeting?
The more Direct Materials or Direct Labor used- the more Variable Costs per unit However – Variable Costs per unit don’t change with the level of activity like Fixed Costs per unit
208
# Fnancial Planning How are Material Variances calculated?
SAM: Standard Material Costs - Actual Material Costs = Material Variance
209
# Fnancial Planning How are Labor Variances calculated?
SAL Standard Labor Costs - Actual Labor Costs = Labor Variance
210
# Fnancial Planning How are Overhead Variances calculated?
OAT Overhead Applied - Actual Overhead Cost = Total Overhead Variance
211
# Fnancial Planning How does Absorption Costing compare to Variable Costing?
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
212
# Fnancial Planning How is Contribution Margin calculated?
Sales Price (per unit) - Variable Cost (per unit) = Contribution Margin (per unit)
213
# Fnancial Planning How is Break-even Point (per unit) calculated?
Total Fixed Costs / Contribution Margin (per unit) = Break-even Point Per Unit Assumption: Total Costs & Total Revenues are LINEAR
214
# Fnancial Planning What is the focus in a Cost Center?
Management is concerned only with costs
215
# Fnancial Planning What is the focus in a Profit Center?
Management is concerned with both costs and profits
216
# Fnancial Planning What is the focus in an Investment Center?
Management is concerned with costs- profits- and assets
217
# Fnancial Planning What is the Delphi technique?
Forecasting technique where Data is collected and analyzed Requires judgement/consensus
218
# Fnancial Planning What is Regression Analysis?
A forecasting technique where Sales is the dependent variable. Simple Regression - One independent variable Multiple Regression - Multiple independent variables
219
# Fnancial Planning What are Econometric Models?
Forecast sales using Economic Data
220
# Fnancial Planning What are Naive Forecasting Models?
Very Simplistic “Eyeball” past trends and make an estimate
221
# Fnancial Planning How does a Moving Average compare to Exponential Smoothing?
Both project estimates using average trends from recent periods Difference: Exponential Smoothing weighs recent data more heavily
222
# Fnancial Planning What are the characteristics of Short-term Cost Analysis?
Uses Relevant Costs Only Ignore Sunk Costs Opportunity Cost is a Must
223
# Financial planning What is a Static Budget?
Budget targeted for a specific segment of a company.
224
# Financial planning What is a Maser Budget?
Budget targeted for the company as a whole Includes budgets for Operations and Cash Flows Includes set of budgeted Financial Statements
225
# Financial planning How do Fixed Costs affect budgeting?
Costs independent of the level activity within the relevant range Property Tax is the same whether you produce 100-000 units or zero units However – Fixed Costs per unit vary given the amount of activity If you produce fewer units- fixed costs per unit will be greater than if you produce more units – i.e. less units to spread the cost over
226
# Financial planning How do Variable Costs affect budgeting?
The more Direct Materials or Direct Labor used- the more Variable Costs per unit However – Variable Costs per unit don’t change with the level of activity like Fixed Costs per unit
227
# Financial planning How are Material Variances calculated?
SAM: Standard Material Costs - Actual Material Costs = Material Variance
228
# Financial planning How are Labor Variances calculated?
SAL Standard Labor Costs - Actual Labor Costs = Labor Variance
229
# Financial planning How are Overhead Variances calculated?
OAT Overhead Applied - Actual Overhead Cost = Total Overhead Variance
230
# Financial planning How does Absorption Costing compare to Variable Costing?
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
231
# Financial planning How is Contribution Margin calculated?
Sales Price (per unit) - Variable Cost (per unit) = Contribution Margin (per unit)
232
# Financial planning How is Break-even Point (per unit) calculated?
Total Fixed Costs / Contribution Margin (per unit) = Break-even Point Per Unit Assumption: Total Costs & Total Revenues are LINEAR
233
# Financial planning What is the focus in a Cost Center?
Management is concerned only with costs
234
# Financial planning What is the focus in a Profit Center?
Management is concerned with both costs and profits
235
# Financial planning What is the focus in an Investment Center?
Management is concerned with costs- profits- and assets
236
# Financial planning What is the Delphi technique?
Forecasting technique where Data is collected and analyzed Requires judgement/consensus
237
# Financial planning What is Regression Analysis?
A forecasting technique where Sales is the dependent variable. Simple Regression - One independent variable Multiple Regression - Multiple independent variables
238
# Financial planning What are Econometric Models?
Forecast sales using Economic Data
239
# Financial planning What are Naive Forecasting Models?
Very Simplistic “Eyeball” past trends and make an estimate
240
# Financial planning How does a Moving Average compare to Exponential Smoothing?
Both project estimates using average trends from recent periods Difference: Exponential Smoothing weighs recent data more heavily
241
# Financial planning What are the characteristics of Short-term Cost Analysis?
Uses Relevant Costs Only Ignore Sunk Costs Opportunity Cost is a Must
242
# Information Technoloby Which IT personnel roles should always be segregated?
Operators Programmers Librarians
243
# Information Technoloby What are the duties of a systems analyst?
Designs or purchases IT system Responsible for flowcharts Liaison between Users and Programmers Note: Think IT Manager
244
# Information Technoloby What is the primary duty of a Systems Administrator?
A Systems Administrator controls database access.
245
# Information Technoloby What are the duties of a Systems Programmer?
Writes- Updates- Maintains- & Tests software- systems- and compilers
246
# Information Technoloby Which duties should a Systems Programmer NOT have?
In order to maximize internal control- a Systems Programmer should NOT have application programming duties/abilities or be an Operator on the system.
247
# Information Technoloby What are the duties of a Systems Operator?
Schedules and Monitors Jobs Runs IT Help Desk
248
# Information Technoloby What duties should a System Operator NOT have?
For internal control purposes- they should not be a Programmer on the system.
249
# Information Technoloby If it is not possible to segregate duties in an IT System- what actions should be taken to compensate for internal control purposes?
Include Computer Logs. Control Group should review the logs.
250
# Information Technoloby What is the purpose of a Management Information System (MIS)?
To assist with decision making.
251
# Information Technoloby What is an Accounting Information System (AIS)?
A type of Management Information System (MIS) that processes accounting transactions.
252
# Information Technoloby What are the characteristics of an Executive Information System (EIS)?
Specialized for Company Executive needs Assists with Strategy Only No Decision-Making Capabilities
253
# Information Technoloby What are the characteristics of an Expert System (ES)?
Computer uses reasoning Structured No human interpretation needed
254
# Information Technoloby What are the characteristics of a Decision Support System (DSS)?
Computer provides data Gives Interactive Support Human interpretation needed
255
# Information Technoloby What are the characteristics of an Ad Hoc computer report?
User initiates the report. The report is created upon demand.
256
# Information Technoloby When are Exception reports generated?
Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem
257
# Information Technoloby What is a query?
A type of Ad Hoc report- initiated by a user.
258
# Information Technoloby What is End-User Computing?
The User develops and executes their own application.
259
# Information Technoloby What is the primary benefit of E-commerce?
E-commerce makes business transactions easier.
260
# Information Technoloby What are the risks of E-commerce?
Compromised data or theft. Less paper trail for auditors.
261
# Information Technoloby What are the benefits of Electronic Data Interchange?
Uses globally-accepted standards Efficient
262
# Information Technoloby What is a File Server?
A file server stores shared programs and documents.
263
# Information Technoloby What is the purpose of a Database?
Located on a File Server- a Database allows users to share documents.
264
# Information Technoloby What is the purpose of a LAN (Local Area Network)?
It connects computers in close proximity.
265
# Information Technoloby What is the purpose of a WAN (Wide Area Network)?
It connects computers that are far apart.
266
# Information Technoloby What are the characteristics of a VAN (Value-Added Network)?
Privately-owned Network Serves as 3rd Party Between 2 Companies Routes EDI Transactions Accepts wide range of Protocols Very Costly
267
# Information Technoloby What is the purpose of a Firewall?
Prevents unauthorized access to a network.
268
# Information Technoloby What are the characteristics of a virus?
Takes over a computer Needs a host program to run
269
# Information Technoloby What are the characteristics of a computer worm?
Takes over multiple computers Doesn't need a host program to run
270
# Information Technoloby What is the purpose of Automated Equipment Controls?
They prevent and detect hardware errors.
271
# Information Technoloby What is RAM?
Random Access Memory. Internal memory in the computer used during immediate processing.
272
# Information Technoloby What is a CPU?
Computer Processing Unit It processes commands within a computer.
273
# Information Technoloby What is Job Control Language?
It schedules and allocates system resources.
274
# Information Technoloby What are examples of input devices?
``` Keyboard Mouse Scanner Magnetic Ink Reader Magnetic Tape Reader EDI Point of Sale Scanner ```
275
# Information Technoloby What are examples of Output Devices?
Speakers Monitors Printers
276
# Information Technoloby What are the characteristics of Magnetic Tape storage?
Sequential Access – Sorts data in order Slower data retrieval Header Label prevents Operator error by loading wrong tape External Labels prevent accidental destruction by operator
277
# Information Technoloby What are the characteristics of Magnetic Disks?
Random Access - Finds data in random spots Faster data retrieval Uses Boundary Protection for data
278
# Information Technoloby What is a Gateway?
Connects one network to another Note: the Internet is connected by Gateways
279
# Information Technoloby What are Parity Checks?
A control that detects internal data errors. A bit is added to each character- it checks to see if a bit was lost.
280
# Information Technoloby What is an Echo Check?
Transmitted data is returned to the sender for verification (it echoes back to the sender)
281
# Information Technoloby What is a Change Control?
It authorizes program changes and approves program test results.
282
# Information Technoloby What is security software?
Software that controls access to IT systems. Note: Don't confuse this with anti-virus software
283
# Information Technoloby What is the purpose of a Digital Signature?
It confirms a message has not been altered.
284
# Information Technoloby List the types of computers from smallest to largest
PDA/Smartphone/Tablet Microcomputer - PC- Laptop (cost-effective) Minicomputer - Like a Mainframe- but smaller Mainframe - Large computer with terminals attached Supercomputer - Very powerful and very big
285
# Information Technoloby What are the units of computer data from smallest to largest?
Bit - 1 (on) and 0 (off) Byte - 8 bits to a byte/character Field - group of related characters/bytes (i.e. Name- Zip Code- Serial #) Record - Group of related fields (i.e. Member name- address- phone number) File - Group of related records (i.e. Membership directory)
286
# Information Technoloby What is the duty of a design engineer?
Determine language used for a specific computer- on a computer-to-computer basis
287
# Information Technoloby What are object programs?
Programs written in base computer language- not similar to English.
288
# Information Technoloby How can source programs be recognized?
They are written in a language close to English.
289
# Information Technoloby What is the purpose of a Compiler?
Takes Source language (English) and converts to Object (Computer) Language
290
# Information Technoloby How does Online Analytical Processing work?
It uses a Data Warehouse to support management decision making.
291
# Information Technoloby What is Data Mining?
Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.
292
# Information Technoloby What is the purpose of online transaction processing?
To process a company's routine transactions.
293
# Information Technoloby What are the characteristics of batch processing?
Data held- updates multiple files all at once Leaves a better audit trail Uses Grandfather-Father-Son backup (3 levels of backup kept in 3 locations)
294
# Information Technoloby What does an output control check for?
Checks to see if output data is valid- distributed and used in an authorized manner.
295
# Information Technoloby What does a processing control check?
Checks if data processing produced proper output
296
# Information Technoloby What is a hash total?
An input control number- a meaningless sum of values included in the input. Example would be summing a list of SSNs to make sure the data is the same once entered as it was prior to input into the system.
297
# Information Technoloby What is a validity check?
Checks to see if data in existing tables or files belongs in the set For example- is there a # in an alpha-only field or a letter in a numeric-only field
298
# Information Technoloby What is a limit check?
Checks to see if numbers surpass a certain limit- i.e. in an age field is the number greater than 110.
299
# Information Technoloby What is a check digit?
An input control that adds an identification number to a set of digits – usually at the end
300
# Information Technoloby What is a field check?
An input check that prevents invalid characters- i.e. checks for alphabetic letters in a SSN field
301
# Information Technoloby What is a Hot Site?
A disaster recovery system where if the main system goes down- a Hot Site is ready to take over immediately.
302
# Information Technoloby What is a Cold Site?
If a main system goes down- a Cold Site will take time to get set up and running.
303
# Information Technoloby What is the most common database language?
SQL - Standard Query Language
304
# Information Technoloby What is a Data Definition Language?
Defines SQL Database Controls SQL Tables
305
# Information Technoloby What is a Data Manipulation Language?
Queries SQL Database tables
306
# Information Technoloby What is a Data Control Language?
Controls Access to SQL Database
307
# Information Technoloby What are the characteristics of a Relational Database?
Logical structure Uses rows and columns similar to spreadsheet
308
# Information Technoloby What are the characteristics of a Hierarchical Database?
Has various levels Uses trees to store data
309
# Information Technoloby What are the advantages of a database?
Data is more accessible Reduced redundancy
310
# Information Technoloby What are the disadvantages of a database?
Cost of installation Skilled personnel required to maintain
311
# Information Technoloby What are the components of a database?
Desktop client Application Server Database Server Think: Your desktop computer runs applications and saves to a database
312
# Performance Measures What four perspectives are included in Balanced Scorecard?
Financial - ROI- Revenue Growth- Profitability Customer - Increase Customers- Increase Satisfaction Internal Business Processes - Efficient and Effective Operations- Improve Quality- Reduce Defects Learning & Growth - Training- Personnel Development
313
# Performance Measures Why was Balanced Scorecard created?
To measure Performance.
314
# Performance Measures What are Strategy Maps?
Diagrams of Strategic Cause and Effect Relationships.
315
# Performance Measures What is a Strategic Initiative?
A plan to achieve goals.
316
# Performance Measures What measures are used under Value-Based Management?
``` Return on Investment Residual Income Spread Economic Value Added Free Cash Flow ```
317
# Performance Measures How is Return on Investment (ROI) calculated?
ROI = Return / Investment Example: You Invest $100 to buy a machine that generates $60 in Operating Income $60 / $100 = 60% ROI
318
# Performance Measures How is Residual Income calculated?
Operating Income - (Required Rate of Return x Invested Capital) = Residual Income
319
# Performance Measures What is another name for Required Rate of Return (RROR)?
RROR is also called 'Cost of Capital'
320
# Performance Measures What is Weighted Average Cost of Capital (WACC)? How is it calculated?
Cost of Capital is the weighted average of the interest rates you pay for your Capital. Includes Debt and the Rate of Return your Equity Shareholders expect Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12% Your Cost of Capital is: (.45 x .09) + (.55 x .12) = 10.65%
321
# Performance Measures How is Spread calculated?
Spread = ROI - Cost of Capital
322
# Performance Measures What is the primary point of Economic Value Added? How is it calculated?
Investments should exceed costs- with an emphasis on stockholder value. Economic Value Added = Operating Income After Tax - (Net Assets x WACC)
323
# Performance Measures How is Free Cash Flow calculated?
``` Operating Income After Tax + Depreciation & Amortization - Capital Expenditures - Change in Net Working Capital = Free Cash Flow ```
324
# Performance Measures What is measured by Six Sigma?
It measures a product versus its quality goal.
325
# Performance Measures What is the Asset Turnover Ratio?
Sales / Average Assets
326
# Performance Measures What does the Current Ratio tell us? How is it calculated?
Can the company pay their short-term liabilities? Current Ratio = Current Assets / Current Liabilities
327
# Performance Measures What does the Debt to Equity Ratio tell us? How is it calculated?
How is the company financing its capital? Debt to Equity Ratio = Total Debt / Total Equity
328
# Performance Measures What does the Debt to Total Assets ratio tell us? How is it calculated?
What proportions of the company's assets are encumbered with debt? Debt to Total Assets = Total Liabilities / Total Assets
329
# Performance Measures What does Gross Margin % tell us? How is it calculated?
How profitable is the product after COGS? Gross Margin = Gross Profit / Net Sales
330
# Performance Measures What does Operating Profit Margin tell us? How is it calculated?
How profitable is the product after all expenses (except interest and taxes)? Operating Profit Margin = Operating Profit / Net Sales
331
# Performance Measures How is Times Interest Earned calculated and what does it mean?
Can the company make their interest payments? Times Interest Earned = Earnings Before Tax & Interest / Interest Expense
332
# Performance Measures What does Return on Assets tell us? How is it calculated?
What % return are the assets generating? Return on Assets = Net Income (net of interest & taxes) / Average Total Assets
333
# Performance Measures How is Market/Book ratio calculated?
Market Value of Common Stock / Book Value of Common Stock
334
# Performance Measures What is Inventory Turnover and how is it calculated?
How quickly does inventory get sold? Inventory Turnover = COGS / Average Inventory
335
# Performance Measures What is the Quick Ratio and how is it calculated?
It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory) Quick Ratio = (Current Assets - Inventory) / Current Liabilities
336
# Performance Measures What is Average Collection Period- and how is it calculated?
How many days does it take the company to collect payment on A/R? Average Collection Period = Average AR / Average Sales Per Day
337
# Performance Measures What is an Internal Failure?
Products have quality defects- but are caught BEFORE they leave the warehouse.
338
# Performance Measures What is an External Failure?
Product reaches the customer- but they are not satisfied with the quality of the product. This includes recalls.
339
# Performance Measures What is Appraisal Cost?
Quality control- testing & inspection costs.
340
# Risk Management Define Market Risk
The risk that a sluggish economy will affect the value of a debt instrument
341
# Risk Management Define Sector Risk
The risk that an event in the investment’s business sector will harm the investment For example- the banking sector is sluggish- so even stocks of healthy banks suffer
342
# Risk Management Define Credit/Default Risk
The risk that a debtor will be unable to make loan payments or pay back the principal
343
# Risk Management Define Interest Rate Risk
The risk that a change in interest rates will adversely affect the value of the note Example: Bond is for 10% but prevailing market rate is now 12%. If bondholder wants to sell it- they will have to sell it at a discount.
344
# Risk Management What does Standard Deviation measure?
It measures the volatility of an investment.
345
# Risk Management What is Systematic Risk?
Risk that impacts the entire market and can’t be avoided or reduced through diversification Example: Wars
346
# Risk Management What is Unsystematic Risk?
Relates to a particular industry or company Example: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest
347
# Risk Management What does Beta measure?
Beta measures how volatile the investment is relative to the rest of the market. In other words- how quickly (and in what amount) does the value of the stock change when the market sways?
348
# Risk Management What is Variance?
It compares volatility of an investment to the market average. Factors include both Systematic and Unsystematic Risk.
349
# Risk Management What is a Derivative?
An asset whose value is DERIVED from the value of another asset. Derivatives are measured at Fair Value.
350
# Risk Management How is an Option used?
Gives the buyer the option to buy or sell a financial derivative at a certain price Traders use them to speculate where they think the price will be at a certain point and make a profit Hedgers use them to offset risk
351
# Risk Management What is a Future?
A Forward Contract with a future value. They are sold and traded on the futures market.
352
# Risk Management What is an Interest Rate Swap?
Forward Contract to swap payment agreements They are highly liquid and often valued using the Zero-Coupon method. Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR
353
# Risk Management What is Legal Risk?
Risk that a law or regulation will void the derivative
354
# Risk Management What is a Fair Value Hedge?
Hedge that protects against the value of an asset or liability changing. Changes in value are reported in earnings.
355
# Risk Management What is a Cash Flow Hedge?
A hedge that protects against a set of future cash flows changing. Changes in value are reported in OCI.
356
# Risk Management What is a Foreign Currency Hedge?
A hedge that protects against the value of a foreign currency changing. For example- a foreign currency hedge might be used to protect against the following: If you have receivables denominated in a foreign currency and that currency dips in value – your receivables are worth less than before.

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