Review Flashcards
Control Environment is made up of what factors
(1) integrity and ethical values, (2) commitment to competence, (3) human resource policies and practices, (4) assignment of authority and responsibility, (5) management’s philosophy and operating style, (6) board of directors or audit committee participation, and (7) organizational structure.
When analyzing a country’s balance of payments accounts, the capital account refers to…..
the transactions related to the international movement of financial capital.
what are the two main components of GDP?
labor productivity and total worker hours
Does the Federal Reserve System seek to achieve national economic objectives through its exercise of fiscal policy or monetary policy?
Monetary policy
Expected value.
calculates (and integrates) the likelihood of losses with the amount of losses. Hence, an expected value combines the information in low and high probability exposures and low and high-degree loss exposures into a decision-relevant, single, valuable (for decision analysis) number.
Which component of the COSO ERM framework is concerned with management’s decision to avoid, accept, reduce, or share risk and to develop a set of actions to align risk with the entity’s risk preferences?
Risk response
What graph shows the maximum combination of goods/services that can be produced at a given time if all available resources are used efficiently
productive-possibility curve
what coso process is the process of identifying, analyzing, and managing the risks involved in achieving the org’s objectives?
risk assessment
what are the policies and procedures that ensure that actions are taken to address the risks related to the achievement of management’s objectives (coso)
control activities
management’s philosophy toward controls, organizational structure, system of authority and responsibility, personnel practices, policies, and procedures (coso)
control environment
what are the objectives of internal control as included in the definition of internal control developed by the COSO?
- compliance
- financial reporting
- operations
Management of Warren Company has decided to respond to a particular risk by hedging the risk with futures contracts. This is an example of risk …
sharing
market risk
the risk that the value of the asset will decline as a result of a decline in general economic conditions
Currency put option
enables a company to lock in the price at which it could sell (put) the British pounds when received.
how is the internal rate of return defined?
the discount rate at which the NPV of the project equals zero.
An increase in the minimum wage rate would likely result in which one of the following?
The aggregate supply curve would shift inward. An increase in the minimum wage rate would be an increase in the cost of labor, which would shift the aggregate supply curve inward–a reduction in supply.
Put option
gives the company the option to sell the stock at a specified price in the future. If the price of the stock declines, the value of the put option will increase by a like amount.
Are depreciation and salvage value included in the calc of NPV?
Depreciation is a noncash flow so it is not.
Salvage value is included.
The best reason corporations issue Eurobonds rather than domestic bonds is that
These bonds are normally a less expensive form of financing because of the absence of government regulation.
Eurobonds
are issued in a currency other than the currency of the country in which they are issued. For example, U.S dollar-denominated bonds issued in an EEU country. these bonds are not subject to the government regulations of the country of the currency and, thus, avoid expense and disclosure requirements of that country.
The natural rate of unemployment includes….
All categories of unemployment except cyclical
Profitability calc
PV of after tax annual cash flows / initial investment
Credit instrument known as a bankers acceptance
is a time draft, payable on a specified future date, with the bank guaranteeing the payment.
Prime Rate
the interest rate that commercial banks charge their most creditworthy borrowers. While this rate would include an element of interest for deferring current consumption (the risk-free rate), it would also include a premium for the risks associated with making the loan.
Risk-free rate.
is the interest that would be charged on a borrowing that carried no risks (e.g., of default, inflation, etc.). This interest is required by lenders, not to cover risks, but to compensate the lender for deferring use of the funds by making an investment.
The discount rate
is the rate at which member banks may borrow short-term funds directly from a Federal Reserve Bank. Alternatively, the term refers to the interest rate used in determining the present value of future cash flows. In any case, the discount rate is not the return paid for deferring current consumption.
The effective rate
is the rate calculated as the interest received (or charged) divided by the actual cost of the investment (or loan). While this rate would include an element of interest for deferring current consumption (the risk-free rate), it would also include a premium for the risks associated with making the loan.
What risks can be hedged?
Foreign Exchange rate
Interest Rate risk
Default risk
The cost of debt most frequently is measured as
Actual interest rate minus tax savings
A short-term speculative rise in the worldwide value of domestic currency could be moderated by a central bank decision to
Selling domestic currency would increase supply and therefore decrease price.
A swap agreement
In an interest rate swap agreement one stream of future interest payments (e.g., floating-rate payments) is exchanged for another stream of future interest payments (e.g., fixed-rate payments) for a specified principal amount. In this case, an interest rate swap would hedge (mitigate) exposure to fluctuations in interest rates of the floating-rate bonds by exchanging those payments for a fixed-rate payment. would be recommended to hedge interest rate risk on long-term floating-rate bonds
What limitation is common to the calculations of payback period, discounted cash flow, internal rate of return, and net present value?
They all rely on forecasts of future cash flows.
What are limitations of the capital asset pricing model?
It assumes that there are no restrictions on borrowing at the risk-free rate of return. It assumes that no external costs are associated with the investment. It fails to consider risk derived from other than variances from the asset class benchmark.
What should the gov due in a period of deflation?
Increasing the money supply because in a period of deflation the government wants to encourage borrowing and investment to promote economic growth.
a decrease in government purchases will result in a(n)
decrease in aggregate demand (Aggregate demand includes government purchases. A decrease in government purchases will decrease aggregate demand.)
If Information about the sources of the product is widely available,
customers are able to comparison shop for the lowest price and are, therefore, more likely to be able to affect price.
What is the shape of a keynesian supply curve?
A Keynesian supply curve is horizontal up to the assumed level of output at full employment, at which point it “kinks,” or slopes, sharply upward, which reflects the point at which output is associated with higher prices.
What is an option
A contract that allows (doesnt require) the holder to purchase a specified quantity of a financial instrument at a specified price.
how much fundraising is allowed in the first 12months using crowdfunding
$1M
Which techniques consistently gives the best answer when evaluating investment projects that are mutually exclusive?
NPV
Company specific risk is also known as
Unsystematic risk, firm-specific risk, diversifiable risk. This risk includes those elements of business risk that can be eliminated through diversification. Specifically, this risk can be mitigated by diversification of projects, investments, etc.
Incremental costs
are those that are different between two or more alternatives under consideration.
