BEC Chapter 6

Nondiversifiable Risk

"*market or systematic*" Nondiversifiable risk is attributable to market factors that affect all firms and cannot be eliminated through diversification. *Macro economic events* - attributable to factors such as war, inflation, international incidents and political events. ALL business are exposed too cannot be eliminated

Lean Manufacturing

"Cutting the fat" Lean manufacturing or lean production requires the use of only those resources required to meet the requirements of customers. It seeks to invest resources only in value-added activities (cost reduction) - waste reduction is the focus not quality - continuous improvement (Kaizen) analysis of production process to ensure that resource usage stays within target costs. - Activity based costing and management

Just-In-Time (JIT)

"Pull Approach" -JIT anticipates achievement of efficiency by scheduling the deployment of resource just in time to meet customer or production requirements - Avoid surplus Inventory - Inventory does not add value (carrying costs are high)

Six Sigma

"emphasis on cost reduction" - the program is a continuous quality - improvement program that requires specialized training. - expands on Plan - Do - Check - Act model of process management

Diversifiable risk

"non market or firm specific" - referred to as nonmarket, unsystematic, or firm specific risk that represents the portion of a single asset's risk that is associated with random causes and can be eliminated through diversification.

Annual Percentage Rate

*Multiply* The annual percentage rate of interest represents a noncompounded version of the effective annual percentage. The annual percentage rate is the rate required for disclosure by federal regulations. Annual percentage rate emphasizes the amount paid relative to funds available.

Risk Assessment

- Anticipate in advance - anticipate everything that could go wrong throughout - Analyze each risk - Prioritize each risk and determine which risk must be eliminated completely

Debentures and Bonds

- Bond owners are creditors = not adding new partnres - fixed costs with a maturity date - new debt decrease credit worthiness - but not owners, thus EPS is up Debentures and bonds represent longer-term indebtedness that is generally supported by formalized agreements knowns as indebtures, which specify the terms and conditions of the bond, including the coupon rate and the maturity date. Debentures are unsecured and bonds are often secured by pledges

Costs

- Capital: human and financial - Cost baseline represents the amount of money that is expected to be spent on a project. - The maximum expenditure of money generally occurs during the middle of the project. Middle = Most Expensive.

Project Sponsor

- Funding/resources - A project sponsor is an individual at the executive level of management who is responsible for allocating funding and resources to the project. The role of the project sponsor includes: - responsibility for overall project delivery - high level planning and leading - Pitch to BOD to get authorization - supervises the project manager and talks with BOD - Chair of the steering committee - Champion of the project - Communicate project needs to the *steering committee*

Risk Control

- Invest in proper risk control in advance - spend money in advance to mitigate or prevent the most severe risks - plan for emergencies - track the effects of the identified risks

Project Risk

- Risk is the chance that something will go wrong with a project and the event that will have an adverse impact on the success of the project. - Risk is inherent in every aspect of the project management process. To manage risk, the project manager must consider the kinds of things that could go wrong in the authorization, planning, implementing, monitoring, and closing phases.

Equity Financing

- adding partner - not legally required to pay partners - Variable cost to company with no maturity - increase in credit worthiness - But number of owners up, EPS goes down. - Degrees of ownership interest increase as rights to income decrease.

Scope management

- product scope must define the attributes of the product, service or result. - project scope defines the work that must take place to produce the product. - a scope baseline is the formal written statement describing both the end product and the project scope.

Deliverables (Smart)

1 Specific 2. Measurable 3. Attainable 4. Relevant 5. Time based

Developed vs Emerging nations

1. Developed nations are generally regarded as the worlds largest industrial economies 2. Emerging nations are generally regarded as the countries not included on the list of developed nations and are lead by Brazil, Russia, India, and China.

Behavioral Biases

1. Excessive Optimism 2. Confirmation Bias 3. Overconfidence 4. Illusion of Control

Inherent Risks of international business operations

1. Exchange rate fluctuations 2. Foreign Economies 3. Political Risk

Multipolarity and interdependence

1. Functional Interdependence - the participation of nations in worldwide institutions 2. Systematic Interdependence - "global issues" - all members of the global community share planet earth. 3. Multipolarity - will require an acknowledgment of the interdependence of nations and cooperation among nations consistent with shifts in the balance of power.

Techniques for Transaction Exposure Mitigation

1. Futures Hedge 2. Forward Hedge 3. Money Market Hedge 4. Currency Option Hedge

National Power dimensions

1. Geography 2. Population 3. Resources 4. Economy 5. Military 6. Diplomacy 7. Identity

Complications of Global Sourcing

1. Global Sourcing anticipates "multiple sources" for materials 2. Global sourcing anticipates multiple exchange rates

Various Types of Risk

1. Interest Rate Risk 2. Market Risk 3. Credit Risk 4. Default Risk

Methods of Conducting International Business Operations

1. International Trade - import/export 2. Licensing - right to use process or technologies 3. Franchising 4. Joint Ventures 5. Direct Foreign Investment 6. Global Sourcing (combination of methods)

Methods for Estimating Costs

1. Judgement 2. Parametric Estimating - statistical relationship 3. Analogous estimating - similar sized project 4. Work Breakdown Structure estimation - bottom up analysis 5. Three point estimates - best case, worst case, most likely case 6. Reserve Analysis - allow for uncertain cost estimations 7. Project management software 8. Vendor Bid Analysis 9. Earned Value management

Other techniques for transaction exposure mitigation

1. Long term forwards contracts 2. Currency Swaps 3. Parallel loan 1. Leading and lagging 2. Cross Hedging 3. Currency diversification

Impact of Loss Aversion

1. Losses are MORE distracting then gains. 2. Managers are generally averse to sure losses

Relevant Globalization Factors

1. Political and legal influences 2. Potential for Asset Appropriation 3. Taxes and Tariffs 4. Limitations on asset ownership or JV participation 5. Content or value added limits (NAFTA) 6. Foreign Trade Zones 7. Economic Systems 8. Cultures

Trade factors

1. Relative inflation rates (high inflation means low purchasing power which means low demand) 2. Relative income levels 3. Government Controls (artifically suppress the natural forces of supply and demand)

Financial Factors

1. Relative interest rates (currency with higher interest rates attracts investment thus demand is up and value of currency goes up.) 2. Capital flows

Risk Preference

1. Risk - indifferent behavior - increase in the level of risk does not result in an increase in management's required return 2. Risk - averse behavior - increase in the level of risk results in an increase in management's required rate of return. 3. Risk - Seeking behavior - increase in the level of risk in a decrease in management's required rate of return

Constraints (TOC)

A constraint is anything that impedes the accomplishment of an objective. a. Internal Constraints include: Equipment, People, Policies b. External Constraints include: Market

Forward Hedges

A forward hedge is similar to a futures hedge in that it entitles its holder to either purchase or sell currency units of an identified currency for a negotiated price at a future point. Forwards contracts are between businesses and commercial banks and normally are larger transaction. Accounts payable application - if you believe the (FC) value will go up then *BUY* Accounts Receivable Application - If you believe the (FC) value you will go down the *SELL*

Futures Hedge

A futures hedge entitles its holder to either purchase or sell a particular number of currency units of an identified currency for a negotiated price on a stated date. Future hedges are denominated in standard amounts and tend to be used for smaller transactions. Accounts payable application - if you believe the (FC) value will go up then *BUY* Accounts Receivable Application - If you believe the (FC) value you will go down the *SELL*

Money Market Hedges

A money market hedge uses international money markets to plan to meet future currency requirements. A money market hedge uses domestic currency to purchase a foreign currency at sport rates and invest them in securities timed to mature at the same time as related payables.

Project

A project is a "temporary undertaking" intended to produce a unique service, product, or result. Unlike continuing operations, a project has a *definite* beginning and an end.

Annuities

An annuity is a series of equal cash flows to be received over a number of periods. Assumptions: a. Recurring amount of the annuity b. Appropriate discount rate c. Duration of the annuity d. Timing of the annuity

Executive Steering Committee

An executive steering committee is to a project what the BOD is to a company; both groups direct, but they do not manage on a daily basis. - charged with regular oversight and with the responsibility for the business issues associated with a project. - approve deliverables - approve scope changes - help resolve issues - authorize the project in a project charter

Foreign Economies

An operation within a foreign economy carries the risk of functioning within the general health or weakness of a particular economy. a. Foreign Demand -income / purchasing power b. Interest Rates - cost of borrowing up AD down c. Inflation - our currency up our products look more expensive lower demand in foreign countries d. Exchange rates

Periodic Rate

Annual 1 year semi annual 2 Quarterly 4 Monthly 12

Business Process Management Approaches

BPM is a management approach that seeks to coordinate the functions of an organization to *customer satisfaction*. - BPM seeks effectiveness and efficiency through promotion of innovation, flexibility, and integration with technology

Business Process Re-engineering

BPR refers to techniques to help organizations rethink how work is done to *dramatically improve* customer satisfactions and services, cut costs of operations, and enhance competitiveness. BPR is not synonymous with BPM. BPM seeks *incremental* change while business process re-engineering seeks *radical* changes.

Project manager

CEO of the project The project manager is responsible for project administration on a "day to day" basis. - achieve project objectives - manage expectations - develop the project - manage project team - assign and delegate - communicate project metrics to stakeholders.

Motivations for International Business

Companies are encouraged to look beyond the political borders in which they are organized to maximize shareholder value. 1. Comparative advantage 2. Imperfect markets (must trade outside their borders to get resources) 3. Product Cycle (domestic success will result in domestic competition, encouraging exports)

Compound interest

Compound interest is the amount represented by interest earnings or expense that is based on the original principle plus any unpaid interest earnings or expense.

Implications of Shared Services

Consolidation of redundant services creates efficiency BUT might also result in the following issues: a. Service Flow Disruption b. Failure Demand - the demand caused by a failure to do something or to do something right for customer.

Credit Risk

Credit risk impacts borrowers. Exposure to credit risk includes a company's inability to secure financing or secure favorable credit terms as a result of poor credit ratings. Supply of Capital. As credit ratings decline the interest rates tend to increase.

Debt Covenants

Creditors use debt covenants in lending agreements to protect their interest by limiting or prohibiting the actions of debtors that might negatively affect the positions of the creditors. *Promise* Examples of Debt Covenants: 1. limitations on issuing additional debts 2. restrictions on payment of dividends 3. Limitations on disposal of certain assets. 4. Maintenance of specific financial ratios

Culture

Culture can be defined as the shared values and attitudes of the group. 1. Individualism v Collectivism 2. Uncertainty avoidance 3. Short term v long-term orientation 4. Acceptance of leadership hierarchy 5. Technology and infrastructure

Currency Option Hedges

Currency option hedges use the same principles as forward hedge contracts and money market hedge transactions. However, instead of requiring a commitment to a transaction, the currency option hedge gives the business the option of executing the option contract or purely settling its originally negotiated transaction without the benefit of the hedge, depending on which result is most favorable. Buy *put* if you believe the value of FC is going to go *down* Buy *call* if you believe the value of FC is going to go *up*

Implementation

Deliver the deliverables "assure quality" - Implementation activities are the activities that are associated with "completing the work" that has been specified in the project plan and producing the deliverables. a. perform work that has been planned b. perform quality assurance so deliverables conform to the standard c. distribute project assignments d. distribute relevant information to the stakeholders.

Demand flow

Demand flow manages resources using customer demand as the basis for resource allocation. Demand flow contrasts with resource allocations based on sales forecasts or master scheduling. - demand flow is akin to JIT - relationship to lean = demand flow is designed to maximize efficiencies and reduce waste

Economic exposure

Economic exposure is defined as the potential that the present value of an organizations cash flows would increase or decrease as a result of changes in the exchange rate. Economic Exposure is generally defined through local currency appreciation or depreciation and is measured in relation to organization earnings and cash flows.

Assessing Economic Exposure (translation exposure)

Economic exposure is defined by the degree to which cash flows of the business can be impacted by fluctuations in exchange rates. The extent to which revenues and expenses are denominated in different currencies could seriously impact the profitability of an organization and represent economic exposure.

Techniques for economic exposure mitigation

Economic exposures typically relate to organization wide issues and can usually only be mitigated with organization wide approaches that involve restructuring and adjustments to the business plan. - *Restructuring* Decrease in sales if the FX is going down Increases in Expenses if the FX is going down want sales to be denominate in currency you think is going up in value. denominate sales in FC going up denominate expenses when FC is going down.

Balance of Power

Emerging nations, notable china, have maintained an artificially low valuation of their currencies to those of developed nations (particularly the US Dollar), keeping their goods cheap.

Planning

Establish the baseline - what is the standard for quality Planning involves all the activities necessary to determine the scope of the project, refine project objectives, and define the course of action required to attain the project objectives. Planning is an ongoing process. Never Stops. Planning activities include: a. initial project management plan b. define and document stakeholder's requirements c. determine the deliverables d. define the activities that must be performed e. Estimate the costs f. Develop the budget g. Define the quality outcome is. The benchmark the project will be measured against.

International Risks - Exchange rate risk

Exchange rate risk exists because the relationship between currencies is not always stable.Risk factors include trade and financial factors. Risk exposure categories include transaction, economic, and translation exposure. - Financial managers must understand these risk factors and mitigate the risk exposure.

Gap Analysis

External Gap analysis determines the gap or difference between Industry best practices and the current practices of the organization. Gap analysis produces the following: a. target areas for improvement b. common objective database from which to develop strategic quality improvement.

Price to Sales ratio

Forecast current stock price This ratio may be used when earnings are low and would not produce meaningful results. Start ups Price to Sales Ratio = P zero / S one

PEG ratio

Given PEG solve for P/E or G (P zero / E one) / G PEG ratio calculates the P/E ratio per unit growth. P zero = PEG x E one X G

Impact of Globalization

Globalization is defined as the distribution of industrial and service activities across an increasing number of nations. Globalization produces a deeper integration of the world's individual national economies and makes them more interdependent. Reduced barrier to trades has increase globalization. Multinational Corporations - do business outside of home country.

Globalization

Globalization is often measured by world trade as a percentage of GDP - the greater the percentage, the greater the degree of globalization. - Globalization promotes specializations - Globalization imparts responsibility of World Citizenship

Transfer Pricing

Goal is to reduce taxable income btw related parties Maximize consolidated benefit (reduce taxable income) a. Strong cash position - leading b. Weak cash position - lagging

Selective Hedging

Hedging is a financial risk management technique in which an organization, seeking to mitigate the risk of fluctuations in value, acquires a financial instrument that behaves oppositely from the hedged item.

Subordinated debenture

High risk - a subordinated debenture is a bond issue that is unsecured and ranks behind senior creditors in the event of an issuer liquidation. Higher interest rates to allow for additional risks.

Default risk

Historically, US tbills have the lowest default risk Default risk impacts lenders. Creditors are exposed to default risk to the extent that it is possible that its debtors may not repay the principal or interest due on their indebtedness.

Interest Rate Risk

IR up, Value fixed income down, Yield does vary Interest rate risks is often used in the context of financial instruments and represents the exposure of the owner of the instrument to fluctuations in the value of the instrument in response to changes in interest rates

Income bonds

Income bonds represent securities that pay interest only upon achievement of target income levels. Income bonds represent a risk bond that typically only used in reorganization.

Adjusting Invoice Policies

International companies may hedge transactions without complex instruments by timing the payments for imports with the collection of exports.

Junk Bonds

Junk bonds are often unsecured and characterized by high risk high reward. Are often referred to as noninvestment grade by virtue of their high default rate risk.

Leasing Options

Leases represents agreements in which the owner of an asset, *the lessor*, allows another party, *the lessee*, to use the property in exchange for lease payments. 1. Operating Leases represent those instances in which a property is rented over a portion of the assets useful life with no obligation (or opportunity) to assume ownership of the property. - off B/S 2. Capital Lease - purchase disguised as a lease, record an asset and PV of the lease liability = LT Liability, leasing can get better rates than borrowing.

Long term financing Characterisitics

Long term financing is generally classified as noncurrent and will mature after one year. a. Rates associated with long term financing tend to be higher than short term rates and presume less liquidity on the part of the organization using long term financing. b. Strategies - extent to which organizations uses long term financing strategies is dependent on both the amount of the current assets it maintains and the risk tolerance of management. Longer term financing strategies anticipate higher levels of permanent working capital.

Short term financing decisions

Long term minimum needs at termed permanent working capital and seasonal needs are termed temporary working capital. Choices to use either long term or short term financing to meet these needs have different effects on a firm. Companies compare choices that provide higher risk, lower cost, and increase profitability with choices offering lower risk, higher cost and reduced profitability.

Measures

Measures or process metrics can be financial or non-financial and should correlate directly to the managed process.("indicators") (compared to expectation). Examples of measures: 1. Gross Revenue 2. Customer Contacts -non-financial 3. Customer Satisfaction (complaints) - non-financial 4. Operational statistics - non-financial

Monitoring

Monitoring and controlling consists of procedures that are performed to observe project execution so that potential problems can be identified in a timely manner and corrective action can be taken to ensure the completion of the project. a. reviewing against the baseline b. variance analysis c. prepare status reports identify any need for changes d. control scope, schedule, costs e perform quality control

Mortgage bonds

Negotiated debt - Mortgage bondholders are protected from default by a lien on assets of the issuing company. Trustees may act on behalf of the bondholder to foreclose on mortgage assets in the event of a default.

Net Transaction exposure

Net transaction exposure is the amount of gain or loss that might result from either a favorable or unfavorable settlement of a transaction. 1. selective hedging 2. identifying net transaction exposure 3. Adjusting Invoice Policies

Offshore Operations

Offshore Operations relate to outsourcing of services or business functions to an external party in a different country. Offshore Outsourcing generally comes in one of four types: a. Information tech outsourcing b. Business Process Outsourcing (call centers) c. Software research and development d. Knowledge process outsourcing

Outsourcing

Outsourcing is defined as the contracting of services to an external provider. Examples might include payroll services or a call center. A contractual relationship exists between the business and the outsource provider.

Price - Earnings Ratio

P/E Ratio = P zero / E one Price or value today Expected earnings in one year

Quality Control Principles - Total Quality Management

Pleasing Customers TQM represents an organizational commitment to customer focused performance that emphasizes both quality and continuous improvement.

Political Risk

Political risks represent noneconomic events or environmental conditions that are potentially disruptive to financial operations. Political climates can affect cash flows. The most severe is asset appropriation but some others include: corruption, attitude towards foreign firms, war.

Preferred Stock

Preferred stock is a hybrid security that shares the features of both debt and equity. PS are like debt because they offer or require a fixed dividend payment to their holders. They are like equity because the timing of the payment is at the discretion of the BOD and the dividend payments are not deductible. 1. Cumulative Dividends - In arrears - may require unpaid dividends on preferred stock be paid 2. Participating Feature - may participate in declared dividends along with common shareholders 3. Voting rights - very rare circumstances

Project Members

Project members perform the project tasks, and their roles generally include: - carrying out the work and producing the deliverable. Project members can be individuals and the company. - understanding the work that must be completed.

Closing

Project must end "An authorized project plan, implemented, monitored, and controlled, eventually ends when the objectives have been completed."

Quality Audits

Quality audits are technique used as part of the strategic positioning function in which management assess the quality practices of the organization. Quality audits produce the following: a. Analysis of strengths and weakness b. strategic quality improvement plan

Quality

Quality is broadly defined by the marketplace as a product's ability to meet or exceed customer expectations. Quality control principles - "cost of quality" - Conformance or Non conformance *Absolute conformance* = Zero Defects = most rigorous standards Conformance and nonconformance have a inverse relationship. As incurred costs of conformance increase then amount spent on nonconformance costs should decrease

Risks of Outsourcing

Risk include: a. Quality Risk b. Quality of Service - c. Productivity d. Staff turnover e. Language Skills f. Security g. Qualifications of outsourcers h. Labor insecurity

Trade-off between risk and return

Risk may be defined as the chance of financial loss. More formally, the term "risk" may be used interchangeably with the term "uncertainty" to refer to the variability of returns associated with a given asset. Return may be defined as the total gain or loss experienced on behalf of the owner an asset over a given period. Typically, greater risks yield greater returns. The seller of financial securities compensates the buyer of financial securities with increase opportunity for the profit by offering a higher rate of return. Risk and return are both functions of the market condition and preferences of the parties involved.

Diversification

Risk often reduced by *diversification*, which is the process of selecting investments of different (or offsetting) risks. Not all risk can be managed through diversification. Total Risk is the diversifiable and and non diversifiable risk of single asset

Shared Services

Share services refers to seeking out redundant services, combining them, and then sharing those services within a group or organization. The distinguishing feature of shared services is that they are shared within an organization or group of affiliates.

Short term financing Characteristics

Short term financing is generally classified as current and will mature within one year. a. Rates - rates associated with short term financing tend to be lower then long term rates and presume greater liquidity on the part of the organization using short term financing. b. Strategies - extent to which an organization uses short term financing strategies is depended on both the amount of the current assets it maintains and the risk tolerance of management. Shorter-term financing strategies anticipate higher levels of *temporary* working capital that require greater agility and flexibility.

Theory of Constraints

TOC states that organizations are impeded from achieving objectives by the existence of one or more constraints. The organization or project must be consistently operated in manner that either works around or leverages the constraint.

Authorization

The *project charter* is a document that contains a business justification to fulfill the needs and expectations of initial stakeholders by carrying out a statement of work that will achieve the project objectives. - Statement of work = describes the product or services the project must deliver at completion. (product scope)(the deliverable)

Benefits of JIT

The benefits of JIT implementation include: a. scheduling with demand b. supplies arrive at regular times throughout the production day (Cost per order is down) c. Improved coordination and team approach with suppliers d. Flow of goods between warehouse and production e. Reduce set-up time f. Employees with multiple skills are used with greater efficiency("Empower")

Nonconformance goods

The cost of *nonconformance* with quality standards are classified as *internal* and *external* costs. Nonconformance costs are often difficult to compute because most of the these costs are in the form of opportunity costs a. Internal Failure - costs to cure a defect discovered before the product is sent to the customer. These costs include: rework costs, scrap, tooling changes, costs to dispose, cost of the lost unit, and downtime. b. External failure (can measure product quality) costs to cure a defect *after* the product is sent to the customer. these include: warranty costs, costs of returning the goods, liability claims, lost customers, re-engineering en external failure.

Conformance Costs

The costs of ensuring *conformance* with quality standards are classified as *Prevention* and *Appraisal* costs. a. *Prevention (on the front end) includes*: employee training, inspection expenses, preventive maintenance, redesign of the product/process, search for high quality suppliers. b. *Appraisal Costs* (Detecting before) - are incurred to discover and remove defective parts before they are shipped to the customer or the next department. the costs include: 1. statistical quality checks 2. Testing 3. Inspection 4. Maintenance of the Laboratory

Constant Growth

The dividend discount model assumes that divident payments are the cash flows of an equity security that the intrinsic value of the company's stock is the PV of the expected future dividends. Assumptions: -must include constant growth rate -stock price will grow at the same rate as the dividend - required rate of return is greater than the dividend growth rate - R has to be greater then g

Shifts in Economic Balance of Power

The dominance of the united states as the world's lone superpower is referred to as a unipolar distribution of power. The expansion of the rest of the worlds economies, including those of the EU and the emerging nations such as Brazil, Russia, India, and China (BRIC), is expected to gradually shift, thereby ushering in an era of multipolarity, wherein power is distributed among many nations. The absolute strength of the US is not likely to decrease, its relative power is likely to decline.

Effective Annual Percentage Rate

The effective annual percentage rate represents the stated interest rate adjusted for the number of compounding periods per year. The effective annual percentage rate is abbreviated as APR. APR = ( 1 + (stated interest rate / periods))^periods - 1

Identifying Net Transaction Exposure

The net transaction exposure is the aggregate exposure associated with a particular foreign currency for a particular time and is computed as follows: a. accumulate the inflows and outflows of foreign currencies by subsidiary b. Consolidate the impact on the subsidiary by currency type c. compute the net impact in total

Resources

The project manager must put together staff to work on the project, assign each team member responsibilities for tasks, acquire the staff both internally and externally and develop the team members. The *human resource plan* formally documents these planning assumptions in writing. - money and labor

Institute of Internal Auditors

The standards for the internal audit profession are meant to provide internationally authoritative guidance within the context of an international practices framework.

Stated Interest Rate

The stated interest rate represents the rate of interest charged before any adjustments for compounding or market factors. - the stated rate is the rate shown in the agreement of indebtedness. - not calculated = stated

Implementing Improvement Initiatives

There are several crucial features of successful implementation activities, like: 1. *Internal leadership* (senior management must provide direction) 2. *Inspections* - ongoing implementation must be monitored 3. *Executive Support* - executive management must be visible supportive 4. *Internal Process Ownership*

Transaction Exposure

Transaction exposure is defined as the potential that an organization could suffer economic loss or experience economic gain upon settlement of individual transactions as a result of changes in the exchange rates. Transaction exposure is usually measured in relation to currency variability or currency correlation. Measurement of Transaction exposure is usually done in two steps: 1. project foreign currency inflows and foreign currency outflows = calculate net AR or AP 2. Estimate the variability (risk) associated with the foreign currency.

Translation Exposure

Translation exposure is the risk that assets, liabilities, equity, or income of a consolidated organization that includes foreign subsidiaries will change as a result of changes in exchange rates. Translation exposure is generally defined by: 1. Degree of Foreign Involvement 2. Locations of Foreign Investments (stability of the foreign currency)

Violation of Debt Covenants

When debt covenants are violated, the debtor is in "technical" default and the creditor can demand repayment of the entire principal. Most of the time, concessions are negotiated and real default , as opposed to a technical default, is avoided.

Perpetuities

When the periodic cash flows paid by an annuity last forever, the annuity is called a perpetuity or a perpetual annuity. P = D / R P is price D is dividend R is required return Assumptions: a. must specify dividend and assume it will never change b. must specify the required return (discount rate)

Letter of credit

a letter of credit represents a third-party guarantee, generally by a bank, of obligations incurred by the company. Letters of credit may be used by the company issuing otherwise unsecured debt to enhance its credit or can be required by a creditor to ensure payment.

Line of credit

a line of credit represents a revolving line of credit with a bank that is generally renewable on a periodic basis. Not a guarantee, lines of credit represents a loan from the bank. - negotiated debt from a bank

Selecting Improvement Initiatives

a. *Irrational* Irrational methods are intuitive and emotion. Lack structure and systematic evaluation b *Rational* Rational assessments are structured and systematic and tend to yield better results. Involve Strategic gap analysis, review of competitive priorities, review of production objectives, and choose improvement program.

Economic Systems

a. Centrally Planned economies - factors of production owned by *gov* and subject to restriction b. Market economies - factors of production owned by *individuals* c. Conglomerates - self-sustaining entities that could not exist in the US

TQM Seven Critical Factors

a. Customer focus b. Continuous Improvement c. Workforce Involvement - Quality Circles d. Top management support - delegation and empowerment e. Objective Measures f. Timely Recognition g. Ongoing training

Long term financing advantages

a. Decrease interest rate risk - long term financing locks in an interest rate over a long period of time b. Decrease credit risk - securing long term guarantees financing over a long period and reduces the company's exposure to any risk that refinancing might be denied

Long term Disadvantages

a. Decrease profitability b. Decrease liquidity c. Increased financing costs

BPM Techniques

a. Define - baseline b. Measure c. Analyze d. Improve e. Control - dashboards (real-time)

BPM Activities

a. Design - how process should function b. Modeling - scenario analysis (what-if analysis) c. Execution - design change implemented, "indicators of success" developed d. Monitoring - gathered, tracked, and compared (Variance analysis) e. Optimization - continues to refine the process

Trade Deficits

a. Developed nations have generally produced *trade deficits* as their domestic consumption results in more import than exports. b. Emerging nations often produce trade surpluses as their exports feed the consumption of developed nations

Dynamics of the "Balance of Power"

a. Developed vs Emerging nations b. Trade deficits c. Balance of powers

Benefits

a. Efficiency - fewer resources or less time b. Effectiveness - objectives accomplished with greater predictability c. Agility - Responses to change are faster and more reliable

Factors that drive globalization

a. Improvements in transportation b. technological advancements c. Deregulation of international financial markets d. organizational/operational options for international business

Short term financing disadvantages

a. Increased Interest Rate Risk - interest rates may abruptly change and require greater financing charges b. Increased Credit Risk - lender evaluation of the creditworthiness may change and thereby make financing impossible or less favorable by virtue of increased rates and less favorable terms

Short term financing advantages

a. Increased Liquidity b. Increased Profitability c. Decrease financing costs (lower rates)

BPM other techniques and approaches

a. Plan - design the planned process improvement b. Do - implement the process improvement c. Check - Monitor the process improvement d. Act - continuously commit to the process and reassess the degree of improvement.

Exchange rate fluctuations

a. Transaction Risk b. Economic Risk c. Translation Risk

Price to Cash Flow Ratio

calculate current stock price Price to cash flow = P zero / CF one Value of Equity P zero = ( P zero / CF one) CF one

Debentures

debentures represents an unsecured obligation of the issuing company. In the event of default, the holder of the debenture has the status of a general creditor. Risk associated with a debenture can be mitigated by a negative - pledge clause

Market Risk

inherent risk The exposure of a security or firm to fluctuations in value as a result of operating within an economy is referred to as a market risk.

Internal Auditing

is an independent and objective assurance and consulting activity designed to add value and improve an organization's operations.

Common Stock

no fixed return, all variable - voting rights but less claim in bankruptcy - Common stock represents the basic ownership security of a corporation. Common stock includes voting rights with options dividend payments by the issuer. Common stock are the last claim to assets upon liquidation.

Project Management

roles of the project manager: 1. Authorization 2. Planning 3. Implementation 4. Monitoring 5. Closing

Simple Interest

simple interest is the amount represented by interest paid only on the original amount of principal without regard to compounding P x R x T

Project scope

the challenge in managing scope is to include all the work required to complete a project and nothing else. There are an infinite number of wants and needs and a finite amount of of resources available to successfully product the product deliverables.

Effective Interest rate

the effective interest rate represents the actual finance charge associated with a borrowing after reducing loan proceeds for charges and fees related to a loan origination. = Interest Paid Per Period / Net Proceeds from loan Interest Paid per period = Principal x stated or periodic rate

Price multiple ratios assumptions

the price multiple ratios have similar assumption requirements, each of which can be influenced by management behaviors, including: a. Future Earnings b. Future Growth Rate c. Future Sales d. The duration of sales and earnings trend

Required Rate of Return

the required rate of return is calculated by adding the following risk premiums to the risk free rate RFR = US treasuries a. Maturity Risk Premium (interest rate risk, increases with the term of maturity b. Purchasing Power Risk or Inflation Premium c. Liquidity Risk Premium d. Default Risk Premium

Working Capital Financing

working capital financing contemplates the spontaneous financing of current assets with trade accounts payable and accrued liabilities with the expectations that maturities of current assets (collections) will coincide with the maturities of current liabilities (disbursement), often termed maturity matching.