BEC
According to the SEC's Regulation Crowdfunding, individual investments in all crowdfunding issuers over a 12-month period for an investor whose annual income or net worth is less than $______________ are limited to the greater of $________ or ___% of the lesser of annual income or net worth.
$100,000; $2,000; 5%
current money multiplier
(1 ÷ RR). The reserve ratio is 20% ($20 ÷ $100). Thus, the money multiplier is 5 (1.0 ÷ .2).
According to the SEC's Regulation Crowdfunding, individual investments in all crowdfunding issuers over a 12-month period are limited as follows
(1) if the investor's annual income or net worth is less than $100,000, investment is limited to the greater of $2,000 or 5% of the lesser of annual income or net worth (2) if the investor's annual income or net worth is $100,000 or more, investment is limited to 10% of the lesser of annual income or net worth.
when is a transaction that results in a profit for a director or shareholder appropriate?
(1) is fair to the corporation or (2) has been approved by a majority of informed, disinterested directors or shareholders
a price is predatory if
(1) it is below an appropriate measure of costs, and (2) the seller has a reasonable prospect of recovering its losses in the future through higher prices or greater market share.
what are the three ways to measure GDP
(1) the expenditures approach (2) the income approach (3) the production approach
English economist John Maynard Keynes (1883-1946) outlined three motives for holding cash:
(1) transactional motive, i.e., to use as a medium of exchange (2) precautionary motive, i.e., to provide a cushion for unexpected contingencies (3) speculative motive, i.e., to take advantage of unexpected opportunities.
reorder point calculation
(Average daily demand × Lead time in days) + Safety stock
how to calculate the reorder point
(average weekly demand x lead time) + safety stock
unemployment rate calculation
(number of unemployed / size of labor force) * 100
Leading Economic Indicators- A change in any of the following indicators suggests a future change in real GDP in the same direction:
-The average workweek for manufacturing workers -New orders for consumer goods -New orders for nondefense capital goods -Building permits for houses -Stock prices -The money supply growth rate -The spread between short- and long-term interest rates (yield curve) -Consumer expectations
If it were possible to construct a portfolio with a correlation coefficient of exactly ____ , investment risk would, in theory, be eliminated.
1
Enterprise risk management (ERM) helps management
1. Achieve objectives 2. Prevent loss of reputation and resources 3. Report effectively 4. Comply with laws and regulations ERM allows management to report effectively, not necessarily on a timely basis.
components of internal control:
1. Control environment 2. Risk assessment 3. Control activities 4. Information and communication 5. Monitoring
The risk management process: I ate pie for money
1. Identify risks. 2. Assess risks 3. Prioritize risks 4. Formulate risk responses 5. Monitor risk responses
A change in either of the following indicators suggests a future change in real GDP in the opposite direction:
1. Initial claims for unemployment insurance. An increase in unemployment slows business activity. 2. Vendor performance. Slower deliveries by vendors (low vendor performance) indicate higher demand (high GDP) because vendors are not fast enough to adjust output with changing demands. In an economic downturn, vendors with slack time are holding excess inventory and thereby make faster deliveries (high vendor performance).
Any information system performs four major tasks
1. Input: the system must acquire (capture) data from within or outside the entity 2. Processing/Transformation: raw materials (data) are converted into knowledge useful for decision making. 3. Output: the ultimate purpose of the system is to communicate the results to users. 4. Storage: before, during, and after processing, data must be stored in a database.
Fiscal and monetary policy can be combined to influence aggregate demand. What are the three components of monetary policy?
1. Open-market operations (most used) 2. The required reserve ratio 3. The discount rate (equals the rate charged by the Fed on loans to member banks)
ERM Concepts
1. Risk- the possibility that an event will occur and negatively affect the achievement of objectives. 2. opportunity- the possibility that an event will occur and positively affect the achievement of objectives by creating or preserving value. 3. Inherent risk- the risk in the absence of a risk response. 4. Control risk- the risk that controls fail to manage controllable risks effectively. 5. Residual risk- the risk that remains after a risk response. 6. Risk appetite- the amount of risk an entity is willing to accept in pursuit of value 7. Risk tolerance- the acceptable variation relative to the achievement of an objective.
Various Approaches to Quantify or Understand Risk 1. Sensitivity Analysis 2. Simulation 3. Monte Carlo Simulation 4. Delphi Approach 5. Time Series Analysis
1. Sensitivity Analysis- trial and error 2. Simulation- sophisticated but expensive 3. Monte Carlo Simulation- simulation 4. Delphi Approach- solicits expert oppinions 5. Time Series Analysis- projecting future trends based on the past.
expansionary policies under the keynesian theory
1. Taxes can be decreased and transfer payments increased, giving consumers more disposable income. 2. Government can increase its spending, increasing demand for goods and services from the private sector. 3. Federal deficit increases under expansionary policies.
contractionary policies to reduce aggregate demand (inflation) under the keynesian theory
1. Taxes can be increased and transfer payments decreased, giving consumers less disposable income. 2. Government can decrease its spending, reducing demand for goods and services from the private sector. 3. Federal deficit decreases under contractionary policies.
Open-market operations are the Fed's strongest tool regarding monetary policy.
1. U.S. Treasury securities are traded on the open market. The Fed can either purchase them from, or sell them to, commercial banks. 2. The Federal funds rate is the rate banks charge each other for overnight loans. A bank's excess reserves do not have to be idle. They can be lent on a short-term basis to other banks with deficient reserves.
The categories of risk responses under the COSO ERM model are
1. avoidance 2. acceptance 3. reduction 4. sharing If management does not insure a building, the response is acceptance. Ordinarily, acceptance is based on a judgment that the cost of another response is excessive. However, once management purchases insurance, the risk is shared with an outside party.
Organizations generally develop strategies at three different levels 1. corporate 2. business 3. functional
1. corporate-level strategy is concerned with market definition 2. business-level strategy applies to organizations that have independent business units that each develop their own strategy 3. functional-level strategy concentrates on a specific functional area of the organization such as treasury, information systems, human resources, and operations.
what must a corporations articles of incorporation include?
1. corporation name 2. number of authorized shares of stock 3. Street address of the corporation's registered office 4. name of the registered agent at that office 5. Name and address of each incorporator
What are the 8 components of the COSO ERM framework?
1. internal environment 2. objective setting 3. event identification 4. risk assessment 5. risk response 6. control activities 7. information and communication 8. monitoring
three types of objectives of internal control:
1. operations - achieving the entity's mission - safeguarding of assets. 2. reporting - reliable, timely, and transparent reporting 3. compliance - entity's adherence to applicable laws
Internal control can only provide reasonable assurance. what are the 6 inherent limitations that prevent it from providing absolute insurance?
1. suitable- objectives must be suitable for internal control 2. judgement- human judgement is faulty 3. breakdowns- errors may happen and internal control brakes down 4. management- Management may inappropriately override internal controls (fraud) 5. collusion- controls can be circumvented 6. external events- things beyond management's control
The annual report must contain the following:
1. that management established and maintains internal control over financial reporting 2. the name of the internal control model 3. an assessment of it's effectiveness 4. a statement that a firm registered with the PCAOB has assessed the system
When a project has IRR that is close to the company's reinvestment rate (e.g., required rate of return), the annual return is less distorted by the IRR calculation. If the IRRs are ____ or more above the reinvestment rate, annual return may be significantly distorted.
10%
According to the SEC's Regulation Crowdfunding, if an investor's annual income or net worth is $100,000 or more, investments in all crowdfunding issuers over a 12-month period is limited to ___% of the _____________ of annual income or net worth
10%; lesser
the calculation for average collection period:
360 days divided by the receivables turnover (net credit sales ÷ average accounts receivable)
Decision Support System (DSS)
A DSS is an interactive system that is useful in solving semistructured problems, that is, those with a structured portion (which the computer can solve) and an unstructured portion (which requires the manager's insight and judgment). DDS has three components: 1. database- raw data 2. model- equations and graphs into which data will be fed 3. dialog- user interface
indenture
A bond agreement. A bond is a formal contract to pay an amount of money (par value, maturity amount, or face amount) to the holder at a certain date (maturity date). Issuing bonds requires legal and accounting work. The expense is rarely justified for bonds with maturities of less than 5 years.
A call option A put option
A call option gives the buyer (holder) the right to purchase (the right to call for) the underlying asset (stock, currency, commodity, etc.) at a fixed price. A put option gives the buyer (holder) the right to sell (the right to put onto the market) the underlying asset (stock, currency, commodity, etc.) at a fixed price.
the most common form of draft
A check is the most common form of draft and can be used to delay the outflow of cash.
derivative instrument
A derivative instrument is an investment whose value is based on another asset's value, such as an option to buy shares (call option). season tickets to a favorite sports team are based on the entertainment value (i.e., how well the team will perform) of the respective sports team. If the team does well, the individual tickets for future games can be sold for more money than if the team does not do well. Thus, the tickets (a derivative instrument) are based on the value of the team's performance (the underlying).
divestiture
A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy.
what number current ratio is desirable and why?
A low current ratio indicates a possible lack of liquidity. An overly high ratio indicates that management may not be investing idle assets productively. This varies by industry, but often a 2:1 ratio is desirable.
margin account and margin requirement
A margin account is a brokerage account in which the investor borrows money (obtains credit) from a broker to purchase securities, such as derivative instruments. The broker charges interest on the credit provided. A margin requirement (set by the Federal Reserve Board's Regulation T) is the minimum down payment that the purchasers of securities must deposit in the margin account. When the margin account falls below the margin requirement, the broker informs the investor to add funds to the account. This is called a margin call.
clawback policy
A public company must have a clawback policy defining how to recover performance-based executive compensation after a financial restatement.
The effect of a boycott on a firm's demand curve can be depicted as
A. A leftward shift of the entire curve. A boycott is the decision by certain consumers to stop buying from a certain firm. By reducing the number of customers for the firm's product, the demand curve is driven to the left, resulting, for the duration of the boycott, in a lower equilibrium price and a lower equilibrium quantity.
From an investor's viewpoint, the least risky type of bond in which to invest is a(n) A. Mortgage bond. B. Debenture bond. C. Income bond. D. Deep discount bond.
A. Mortgage bond.
The demand for normal goods will fall following an increase in A.The price of complementary goods. B.Income. C.The price of substitute goods. D.Population.
A. When two normal goods are complements, the price of one good and the demand for the other are inversely related. For example, if the price of tennis rackets goes up, the demand for tennis balls will decrease.
Artificial Intelligence (AI) - definition and advantages
AI attempts to imitate human decision making, which hinges on this combination of knowledge and intuition (i.e., remembering relationships between variables based on experience). The advantage of AI in a business environment is that IT systems: 1. Can work 24 hours a day 2. Will not become ill, die, or be hired away 3. Are extremely fast processors of data,
when the income of an organization exceeds its expenses
Accounting profits
resources, events, agents processing (REA) advantages and disadvantages
Advantages include the following: -Debits and credits are not considered. -No general ledger is maintained since all balances are calculated through queries. -Ad hoc reports are easily produced A major disadvantage is implementation cost because it is usually so high that it is prohibitive. Considerable computer storage and processing power are needed. Many accountants and auditors are not familiar with REA, so training costs are high
Cloud computing can best be defined as a model that
Allows organizations to use the Internet to access and use services and applications that run on remote third-party technology infrastructure.
Implicit costs
An implicit cost is an opportunity cost, i.e., the maximum benefit forgone by using a scarce resource for a given purpose instead of the next-best alternative. normal profit is the income that the entrepreneur could have earned by applying his or her skill in another venture.
how do you hedge interest rate risk?
An interest rate swap is an agreement to exchange interest payments based on one interest structure (e.g., floating rate charges) for payments based on another structure (e.g., fixed rate charges). These swaps are used to hedge interest rate risk.
Volga Co. included a foreign subsidiary in its Year 6 consolidated financial statements. The subsidiary was acquired in Year 4 and was excluded from previous consolidations. The change was caused by the elimination of foreign currency controls. Including the subsidiary in the Year 6 consolidated financial statements results in an accounting change that should be reported A. By retrospective application to the financial statements of all prior periods presented. B. Currently with note disclosure of pro forma effects of retrospective application. C. Currently and prospectively. D. By note disclosure only.
Answer (A) is correct. A change in the reporting entity requires retrospective application to all prior periods presented to report information for the new entity. The following are changes in the reporting entity: (1) presenting consolidated or combined statements in place of statements of individual entities, (2) changing the specific subsidiaries included in the group for which consolidated statements are presented, and (3) changing the entities included in combined statements.
A working capital method that delays the outflow of cash is A. A draft. B. Factoring. C. A lockbox system. D. Electronic funds transfer.
Answer (A) is correct. A draft is a three-party instrument in which one person (the drawer) orders a second person (the drawee) to pay money to a third person (the payee). A check is the most common form of draft. It is an instrument payable on demand in which the drawee is a bank. Consequently, a draft can be used to delay the outflow of cash. A draft can be dated on the due date of an invoice and will not be processed by the drawee until that date, thereby eliminating the necessity of writing a check earlier than the due date or using an EFT. Thus, the outflow is delayed until the check clears the drawee bank.
Question: 8 Listed below are four numbers. Which of these numbers represents the coefficient of correlation of a stock portfolio with the least unsystematic risk? A. 100.0 B. -1.0 C. 1.0 D. 0.0
Answer (B) is correct. The correlation coefficient measures the degree to which any two variables, e.g., two stocks in a portfolio, are related. Perfect negative correlation (-1.0) means that the two variables always move in the opposite direction. Given perfect negative correlation, unsystematic risk would, in theory, be eliminated.
The following information is available on market interest rates: The risk-free rate of interest 2% Inflation premium 1% Default risk premium 3% Liquidity premium 2% Maturity risk premium 1% What is the market rate of interest on a 1-year U.S. Treasury bill? A. 7% B. 3% C. 5% D. 6%
Answer (B) is correct. The total return on a U.S. Treasury security consists of the risk-free rate of interest plus an inflation premium. In practice, the safest investment in the world has been U.S. Treasury Securities. While there is some risk in these investments, they have been regarded as the risk-free rate when used in a CAPM analysis. Therefore, the nominal rate of U.S. Treasuries is often used in practice as the risk-free rate in the CAPM analysis.
Question: 8 The phrases "too many dollars chasing too few goods" and "supply shock" are associated with, respectively, A. Stagflation and cost-push inflation. B. Cost-push inflation and deficient-demand inflation. C. Demand-pull inflation and cost-push inflation. D. Cost-push inflation and demand-pull inflation.
Answer (C) is correct. "Too many dollars chasing too few goods" describes what happens when the demand for goods rises and the supply cannot keep pace: the prices of existing goods rise, called demand-pull inflation. "Supply shock" describes a sudden shift to the left of the supply curve, indicating a shortage of a particular input. Because buyers must bid up the price of the input to get access to the now-limited supply, per-unit production costs are increased, termed cost-push inflation.
The stock of Fargo Co. is selling for $85. The next annual dividend is expected to be $4.25 and is expected to grow at a rate of 7%. The corporate tax rate is 30%. What percentage represents the firm's cost of common equity? A. 7.0% B. 8.4% C. 12.0% D. 5.0%
Answer (C) is correct. The cost of common stock may be calculated using a form of the dividend growth model. It is based on the assumption that common shareholders demand dividends that increase at a constant rate. Percentage cost = (Net dividend ÷ Net issue proceeds) + Dividend growth rate =($4.25 ÷ $85) + 7% =5% + 7% =12%
Which one of the following is not a determinant in valuing a call option? A. Exercise price. B. Underlying asset price. C. Forward contract price. D. Expiration date.
Answer (C) is correct. The price of an option is equal to its intrinsic value (exercise price - underlying asset price) plus the time premium that depends on the expiration date of an option.
Which of the following statements is correct as it relates to changes in accounting estimates? A. It is easier to differentiate between a change in accounting estimate and a change in accounting principle than it is to differentiate between a change in accounting estimate and a correction of an error. B. Most changes in accounting estimates are accounted for retrospectively. C. Whenever it is impossible to determine whether a change in an estimate or a change in accounting principle occurred, the change should be considered a change in principle. D. Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate.
Answer (D) is correct. A change in estimate inseparable from a change in principle is accounted for as a change in estimate (prospective application). An example is a change in a method of depreciation, amortization, or depletion of long-lived, nonfinancial assets.
Which of the following factors are included in an entity's control environment? A. Organizational structure, management philosophy, and monitoring. B. Risk assessment, assignment of responsibility, and human resource practices. C. Competence of personnel, segregation of duties, and fraud risk assessment. D. Integrity and ethical values, assignment of authority, and human resource practices.
Answer (D) is correct. Five principles relate to the control environment. The principles are as follows: (1) the organization demonstrates a commitment to integrity and ethical values; (2) the board demonstrates independence from management and exercises oversight of internal control; (3) management establishes structures, reporting lines, and authorities and responsibilities; (4) the organization demonstrates a commitment to attract, develop, and retain competent individuals in alignment with objectives; and (5) the organization holds individuals accountable for their internal control responsibilities. Therefore, integrity and ethical values, assignment of authority, and human resource practices are factors considered in the control environment.
In markets that are imperfectly competitive, such as monopoly and monopolistic competition, firms produce at an output at which A. Price equals marginal cost. B. Price equals average cost. C. Average costs are minimized. D. Marginal cost equals marginal revenue.
Answer (D) is correct. Whether a market is competitive or noncompetitive, a firm should produce at the level at which marginal cost equals marginal revenue. The difference between monopoly and perfect competition is reflected in the marginal revenue curve. In perfect competition, the price is a constant and therefore equals marginal revenue, which is represented by a horizontal line. In a monopoly (or in monopolistic competition), the price declines as output increases, resulting in a line of negative slope.
law of diminishing returns
As inputs are added to a process, each additional unit of input results in increased production. However, past the point of diminishing marginal returns, the increase is smaller with each unit. That is, the benefit of adding input units decreases.
Executive Support System (ESS)
At the strategic level, high-level decision makers get the information they need to set, and monitor progress toward, the organization's long-term objectives from an ESS, also called an executive information system (EIS). the information in an ESS comes from sources both within and outside the organization, including information from nontraditional computer sources.
simple calculation to get the cost of capital: Cox Company has sold 1,000 shares of $100 par, 8% preferred stock at an issue price of $92 per share. Stock issue costs were $5 per share. Cox pays taxes at the rate of 40%. What is Cox's cost of preferred stock capital?
Because the dividends on preferred stock are not deductible for tax purposes, the effect of income taxes is ignored. Thus, the relevant calculation is to divide the $8 annual dividend by the quantity of funds received from the issuance. In this case, the funds received equal $87 ($92 proceeds - $5 issue costs). Thus, the cost of capital is 9.2% ($8 ÷ $87).
In the enterprise risk management (ERM) model, the _______________ has an oversight role. They should determine that risk management processes are in place, adequate, and effective.
Board of directors
Business Intelligence (BI)
Business intelligence is what gives upper management the information it needs to know where the organization is and how to steer it in the intended direction. BI gives an executive immediate information about an organization's critical success factors. BI is replacing the older ESS model.
If an issuer is required to prepare an accounting restatement because of misconduct, the issuer's
CEO and CFO must forfeit 1.Any bonus or other incentive-based compensation received from the issuer during the previous 12 months and 2.Any profits received from the sale of stock of the issuer during the previous 12 months.
rganizations generally develop strategies at three different levels: 1. Corporate 2. Business 3. Functional
Corporate-level strategy is concerned with market definition (i.e., business and markets to focus resources). Business-level strategy applies to organizations that have independent business units that each develop their own strategy. Functional-level strategy concentrates on a specific functional area of the organization such as treasury, information systems, human resources, and operations.
a term that refers to practices, strategies, and technologies that companies use to manage and analyze customer interactions and data throughout the customer lifecycle
Customer relationship management (CRM)
The Sarbanes-Oxley Act of 2002 requires issuers to have an A. Annual financial audit. B. Annual SOX compliance audit. C. Independent board of directors. D. Audit committee.
D. Audit Committee
All of the following are trade-related factors affecting currency exchange rates except A. Trade barriers. B. Relative incomes. C. Relative inflation rates. D. Relative interest rates.
D. Relative interest rates is a financial, not a trade-related, factor affecting currency exchange rates.
who is required to make full disclosure of any financial interest they may have in any transaction to which they and the entity may be a party?
Directors and Officers
total costs (explicit and implicit).
Economic costs
how to calculate the effective rate on a loan that has a compensating blaance
Effective rate = Stated rate ÷ (1.0 - Compensating balance %)
______________________________ is the latest phase in the development of computerized systems for managing organizational resources. ERP is intended to integrate enterprise-wide information systems by creating one database linked to all of an organization's applications.
Enterprise Resource Planning (ERP)
a framework that extends the COSO internal control framework
Enterprise Risk Management. It is a basis for coordinating and integrating all of an entity's risk management activities.
backflush costing system
Entries to inventory may be delayed until as late as the end of the period. A backflush costing system eliminates the traditional sequential tracking of costs and calculation of manufacturing variances. More specifically, dispatch of goods, manufacture of goods, and use of raw materials are only recorded at the end of the period based on standard costing. It is cheaper to run, simplifies the accounting process, and addresses the need under a JIT system.
As described in the COSO ERM framework, risk appetite should be considered in
Evaluating strategic options Setting related objectives Developing risk management techniques
the risk of loss because of fluctuation in the relative value of a foreign currency in which the investment is payable.
Exchange Rate Risk
The formula for compound interest
FV = PV x (1 + i)^n
futures contracts versus forward contracts
Forward contracts are negotiated individually between the parties on a one-by-one basis. But futures contracts are essentially commodities that are traded on an exchange, making them available to more parties. futures contracts are available only for standard amounts (e.g., 62,500 British pounds, 100,000 Brazilian reals, or 12,500,000 Japanese yen) and with specific settlement dates (typically the third Wednesday in March, June, September, and December). This rigidity makes them less flexible than forward contracts because forward contracts are customized for the parties.
the practice of prohibiting banks from lending out all the money they receive on deposit.
Fractional reserve banking. The reserve ratio is the percentage of each dollar deposited that a bank is required to either (1) keep in its vault or (2) deposit with the Federal Reserve Bank in its district.
the combination of people, policies, procedures, and processes that help ensure that an entity effectively and efficiently directs its activities toward meeting the objectives of its stakeholders
Governance
Business IS strategy and business IT strategy differs how?
IS strategy focuses on determining what IT must be provided to accomplish the goals of the business strategy. IT strategy focuses on what information is needed and ensured that the IS strategy aligns with the business strategy. IT strategy also develops and explains the information architecture that will provide the best return for the organization.
complements
If a price increase in Product A results in a decrease in demand for Product B, Products A and B are complements. For example, if the price of bread increases, the demand for grape jam decreases because consumers rarely use grape jam alone.
when the demand elasticity coefficient is infinite, demand is __________________ (depicted as a horizontal line)
In pure competition, the number of firms is so great that one cannot influence the market price. The demand curve faced by a single seller in such a market is perfectly elastic (although the demand curve for the market as a whole has the normal downward slope). Consumers will buy a farmer's total output of soybeans at the market price but will buy none at a slightly higher price. Moreover, the farmer cannot sell below the market price without incurring losses.
If the return on the market portfolio is 10% and the risk-free rate is 5%, what is the effect on a company's required rate of return on its stock of an increase in the beta coefficient from 1.2 to 1.5? A. No change. B. 3% increase. C. 1.5% increase. D. 1.5% decrease.
In this situation, the risk premium is 5% (10% - 5%). Thus, the required rate of return when the beta coefficient is 1.2 is 11% [5% + (1.2 × 5%)], and the required rate when the beta coefficient is 1.5 is 12.5% [5% + (1.5 × 5%)]. This is an increase of 1.5% (12.5% - 11%).
income bonds versus revenue bonds
Income bonds pay interest contingent on the issuer's profitability. Revenue bonds are issued by governmental units and are payable from specific revenue sources.
_______________ is equal to the difference between current assets and quick assets
Inventory
investment- grade bonds versus noninvestment-grade bonds
Investment-grade bonds are safe investments and have the lowest yields. The highest rating assigned is AAA, and the lowest investment-grade bond is BBB-. Some fiduciary organizations (such as banks and insurers) are allowed to invest only in investment-grade bonds. Noninvestment-grade bonds, also called speculative-grade, high-yield, or junk bonds, have high risk. The ratings range from BB+ to DDD.
what does a zero balance account accomplish regarding cash management techniques?
It is a method of managing cash disbursements as well as maintaining higher balance in the master account for short-term investments. A zero-balance account (ZBA) is a practice in which at the end of each processing day, the bank transfers just enough from the firm's master account to pay all checks presented against the ZBA that day.
junk bonds
Junk bonds are high-risk and therefore high-yield securities that are normally issued when the debt ratio is very high. Thus, the bondholders have as much risk as the holders of equity securities. Such bonds are not highly rated by credit evaluation companies. Junk bonds have become accepted because of the tax deductibility of the interest paid.
the risk that a security cannot be sold on short notice without a loss.
Liquidity risk
_________________ is a firm's ability to pay its current obligations as they come due and thus remain in business in the short run. _______________ measures the ease with which assets can be converted to cash.
Liquidity; Liquidity
the additional output obtained by adding one extra unit of input
Marginal product
the combination of price and quantity at which the market demand and market supply curves intersect
Market equilibrium
he risk that an investment security will fluctuate in value between the time it was issued and its maturity date.
Maturity risk, also called interest rate risk
what type of competition are utilities an example of? Pure competition; Monopoly; Monopolistic Competition; Oligopoly?
Monopoly
mortgage bond backing versus debentures backing
Mortgage bonds are backed by specific assets, usually real estate. Debentures are backed by the issuer's credit, not specific assets.
______________ wages are the amounts actually paid (and received), and ___________ wages represent the actual purchasing power (goods and services) of ____________ wages.
Nominal; real; nominal
normal profit
Normal profit is the level of profit necessary to induce entrepreneurs to enter and remain in the market. Economists view this profit as an implicit cost of economic activity.
who are, by definition, agents of the corporation and as such may enter the corporation into legally binding contracts?
Officers
Multiple regression analysis involves the use of _____ dependent Variables and ___ independent Variables
One; More than one
what type of competition is the stock market an example of? Pure competition; Monopoly; Monopolistic Competition; Oligopoly?
Pure competition
for which markets is the long run profitability zero?
Pure competition and monopolistic competition. Because few barriers to entry exist and firms sell homogeneous products, long-run profitability in pure competition is zero. In the long run, the economic profit of all firms in monopolistic competition is zero because firms will enter a profitable industry and leave an unprofitable one.
transaction processing system (TPS) versus resources, events, agents processing (REA)
REA contrasts with the traditional TPS that uses double entry (debit and credit) by using single entry.
To facilitate year-to-year comparisons, nominal GDP is adjusted for changes in the general price level so that it can be reported in constant dollars. Its called ____________
Real GDP = Nominal GDP / Price Index in Hundredths
registered bonds versus bearer bonds
Registered bonds are issued in the name of the holder. Only the registered holder may receive interest and principal payments. Bearer bonds are not individually registered. Interest and principal are paid to whoever presents the bond.
a structured planning method that evaluates the strengths, weaknesses, opportunities, and threats of a project or business venture:
SWOT analysis
Personal income is defined as national income, minus
Social Security contributions, minus corporate income taxes, minus undistributed corporate profits, plus transfer payments
established to ensure consumers are provided with understandable and timely information and protected from unfair, abusive, deceptive, or discriminating practices.
The Bureau of Consumer Financial Protection
The act that enlarges the scope of the SEC's authority to prosecute those who aid and abet securities law violations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
what act created new residential mortgage regulations that result in consumer protections for high-cost mortgages.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(1) identify, in advance, financial system risks; (2) comment to the SEC about accounting issues; and (3) report annually to Congress about financial market and regulatory matters.
The Financial Stability Oversight Council
standard financial theory versus the modigliani-miller theorem
The Modigliani-Miller theorem disagrees with the standard financial theory. It asserts that no optimal capital structure exists for a firm. Thus, whether the firm finances with all debt, all equity, or some combination is irrelevant to shareholders' wealth. The Modigliani-Miller theorem disagrees with the standard financial theory. It asserts that no optimal capital structure exists for a firm. Thus, whether the firm finances with all debt, all equity, or some combination is irrelevant to shareholders' wealth.
Various Approaches to Quantify or Understand Risk: the Monte Carlo Technique
The Monte Carlo technique is often used in simulation to generate the individual values for a random variable. The performance of a quantitative model under uncertainty may be investigated by randomly selecting values for each of the variables in the model and then calculating the value of the solution.
The bylaws of a corporation
The bylaws state such matters as the authority of officers and directors, how they are selected, the lengths of their terms, their compensation, and how the decision to issue new stock will be made. They may contain any provision for managing its business and affairs that does not conflict with the law or the articles of incorporation.
an average of the possible outcomes weighted according to their probabilities.
The expected rate of return on an investment
bond sinking fund
The indenture may require the issuer to maintain a bond sinking fund. The objective of the fund is to accumulate sufficient assets to pay the bond principal at maturity. The amounts transferred into this account earn revenues over time. Thus, the bond sinking fund accumulates money to provide the necessary funds to repay the bonds in the future.
production approach to calculating GDP
The production approach calculates GDP by estimating the gross value added within the country. purchasers' prices minus the value of goods and services imported.
what is a limitation of the profitability index?
The profitability index is calculated using the present value of future net cash flows. It is the ratio of the net present value of the project to the initial investment. Thus, it requires detailed long-term forecasts of the project's cash flows. But making detailed long-term forecasts of the project's cash flows may be difficult and costly.
The common stock of Wisconsin's Finest Cheese has a beta coefficient of 1.7. The following information about overall market conditions is available: Expected return on U.S. Treasury bonds 6% Expected return on the market portfolio 8.5% Using the capital asset pricing model (CAPM), what is the risk premium on the market?
The risk premium on the market is the return on the market portfolio (8.5%) minus the risk-free return as measured by the return on U.S. Treasury securities (6%), or 2.5%.
The most important acts performed by the shareholders
They are required to hold an annual meeting: a.Amending the articles of incorporation, b.Voting on any matters requiring a general vote, and c.Electing or removing directors.
Who may bring a whistleblower claim under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?
Under Dodd-Frank, either an employee of the issuer or any another individual(s) whose claim does not originate from information obtained during an audit or investigation of the issuer may bring a whistleblower claim.
working capital = _________________ - ___________________
WC = Assets - Liabilities
stagflation
When SRAS shifts to the left, the price level rises and real GDP decreases. when inflation and recession occur at the same time. For example, when oil price greatly increases, it could cause a recession and a higher price level
the value of r describes the linear relationship between two variables. think of a graph. What type of line forms when r = 1 or is close to 1? What about when r = 0?
When r is 1 or close to one, a linear relationship exists. If it's 1, its a perfect direct relationship. -1 is a perfect inverse relationship. close to 1 is a strong direct relationship (.7) 0 can mean either no linear relationship (cluster of points on a graph) or a nonlinear relationship (pattern but not linear).
The phillips curve
When the unemployment rate is low, firms have to pay higher wages to attract workers, thereby increasing labor costs and product prices. Thus, the lower (higher) the unemployment rate, the higher (lower) the inflation. The Phillips curve applies only in the short-term. It is a downward sloping curve
calculation for a trade credit (calculating the cost of not taking the discount)
[discount % / (100% - discount $)] X [days in Year / (total payment period - discount period)]
the economic order quantity equation
[square root of (2 + quantity demanded + ordering cost) / carrying costs]
There are several types of Artificial Intelligence (AI): Neural networks
a collection of processing elements working together to process information much like the human brain, including learning from previous situations and generalizing concepts.
he significant difference between a forward contract and a listed option is that
a contract imposes obligations to fulfill the contractual obligations (e.g., delivering bushels of wheat or foreign currency). Both parties must meet those obligations, i.e., to deliver merchandise and to pay. On the other hand, listed options do not typically require fulfilling obligations. Forward contracts are frequently used in transactions to exchange foreign currencies.
Weighted-Average Cost of Capital (WACC)
a firm usually designates a target capital structure of long-term debt, preferred equity, and common equity. This model holds that shareholder wealth-maximization results from minimizing the weighted-average cost of capital. Thus, the focus of management should not be on maximizing earnings per share (EPS can be increased by taking on more debt, but debt increases risk).
Solvency
a firm's ability to pay its noncurrent obligations as they come due and to remain in business in the long run. It should be contrasted with liquidity, which is a firm's ability to pay short-term obligations.
Define Porter's five forces analysis and the five forces:
a framework that analyzes the level of competition within an industry. Three forces are from "horizontal" competition: the threat of substitute products or services, the threat of established rivals, and the threat of new entrants. Two forces are from "vertical" competition: the bargaining power of suppliers and the bargaining power of customers.
the single most important strategy for expediting the receipt of funds
a lockbox system
price index
a measure of the price of a market basket of goods and services in one year compared with the price in a designated base year. By definition, the index for the base year is 100. (CY price index - PY price index)/ PY price index = rate of inflation
compensating balance
a minimum amount that the bank requires the firm to keep in its demand account. Compensating balances are noninterest-bearing and are meant to compensate the bank for various services rendered, such as unlimited check writing. These funds are obviously unavailable for short-term investment and thus incur an opportunity cost.
A bond issued at par may carry a lower coupon rate than other similar bonds in the market if it has some feature that makes it more attractive to investors. What is commonly used to make the bond attractive?
a sinking fund reduces default risk. Hence, investors may require a lower risk premium and be willing to accept a lower coupon rate. Other features attractive to investors include covenants in the bond indenture that restrict risky undertakings by the issuer and an option to convert the debt instruments to equity securities. The opportunity to profit from appreciation of the firm's stock justifies a lower coupon rate. An improvement in a bond's rating from AA to AAA (the highest possible) also justifies reduction in the risk premium and a lower coupon rate.
Country risk is defined as the risks that are associated with investing in or conducting business in ___________________________. These types of risks could include both _________________ and ______________________ risk.
a specific foreign country; political; economic
term bond versus serial bond
a term bond has one maturity date at the end of its term while a serial bond matures in stated amounts at regular intervals
Diversification- The ideal portfolio consists of securities with ___________________________________ coefficients of correlation that ____________________ risk remains.
a wide enough variety of; only market
Fluctuations in currency exchange rates can significantly affect a firm's profits: a. transaction exposure b. economic exposure c. translation exposure
a. exchange rate variations between the transaction date and the settlement date. b. exposure to fluctuations in exchange rates resulting from overall economic conditions. c. risk that a foreign subsidiary's balance sheet items and results of operations, denominated in a currency different from the parent's, will change as a result of exchange rate fluctuations.
Additional purposes of a code of ethics
a.Communicating acceptable values to employees, b.Establishing objective standards against which employees can evaluate their conduct, and c.Communicating the corporation's values to outsiders.
How do you calculate National income when using the income approach to calculating GDP?
all income generated by U.S.-owned resources, no matter where located: Scholarly = Salaries and wages Research = Rents Interests = Interest Promote = Proprietor and partnership incomes Competition = Corporate profits
Unsystematic risk
also called idiosyncratic risk, company risk, and diversifiable risk, is the risk inherent in a particular investment. Thus, it is the risk of a specific firm. This type of risk is determined by the firm's industry, products, customer loyalty, degree of leverage, management competence, etc.
systematic risk
also called market risk and undiversifiable risk. Changes in the economy, such as inflation or the business cycle, affect all those in the market. Systematic risk is unavoidable.
In-memory analytics
an approach that queries data when it resides in a computer's random access memory (RAM), as opposed to querying data that is stored on physical disks. This results in shortened query response times and allows business intelligence and analytic applications to support faster business decisions.
Under SOX, each member of the issuer's audit committee must be
an independent member of the board of directors. To be independent, a director must not be affiliated with, or receive any compensation (other than for service on the board) from, the issuer.
There are several types of Artificial Intelligence (AI): An expert system is
an interactive system that attempts to imitate the reasoning of a human expert in a given field. It is useful for addressing unstructured problems when there is a local shortage of human experts.
put option
an option to sell assets at an agreed price on or before a particular date. The intrinsic value of a put option is the amount by which exercise price is greater than the current price of the underlying. The value of a put option will decrease as the price of the underlying increases since there is no advantage in selling at a lower-than-market price.
Credit rating agencies are to be examined___________ by the SEC. These agencies (1) must disclose their methods, (2) are subject to investor suits, and (3) must consent to use of their ratings in registration statements
annually
Tariffs
are taxes imposed on imported goods. Tariffs can discourage consumption of foreign goods, raise revenue, or both.
An issuer must disclose whether its audit committee has _____________ financial expert
at least one
The audit committee must be comprised of _________ fully independent members.
at least three
trigger price
automatically imposes a tariff barrier against unfairly cheap imports by levying a duty (tariff) on all imports below a particular reference price.
who makes decisions about the entity's capital structure, such as mix of debt and equity and consideration to be received for shares.
board of directors
the principal form of long-term debt financing for corporations and governmental entities.
bonds
Shifts of SRAS and aggregate demand cause
business fluctuation.
The combination of debt and equity constitute a firm's _____________ , or _________________ , structure. An entity's assets constitute its ____________ structure.
capital; financing; resource
The corporation's officers are responsible for
carrying out the entity's day-to-day operations.
A _______________ is a group of oligopolistic firms that agree to set prices. This practice is illegal except in international markets.
cartel
Business risk is the risk that the ________________ of an issuer will be impaired because of adverse economic conditions, making it difficult for the issuer to meet its operating expenses.
cash flow
The prime interest rate is the rate charged by
commercial banks to their best (the largest and financially strongest) business customers. It is traditionally the lowest rate charged by banks.
If permitted by the articles or bylaws, the board may delegate authority to
committees composed of its members or corporate officers. 1.Committees may exercise broad powers consistent with the limits of the resolutions by which they were established. 2.Every public corporation (i.e., issuer) must have an audit committee consisting of independent directors.
inferior goods
commodities for which demand is negatively (inversely) related to income (e.g., potatoes, used clothing, and bus transportation). In this situation, demand shifts to the left as incomes rise. These goods are often referred to as "less is better."
who has voting rights- common stockholders or preferred shareholders?
common shareholders.
two different types of inflation
cost-push inflation and demand-pull inflation
The current ratio (working capital ratio) is the most common measure of liquidity. what is the equation?
current assets / current liabilities = working capital ratio
Financial leverage is the degree of _________ in the firm's financial structure.
debt
When it experiences economies of scale, a company's long-run average costs will
decrease. Diseconomies of scale occur when the long-run average costs increase. Economies and diseconomies of scale are important determinants of the pattern of costs in the long run.
national income is GDP minus
depreciation and indirect business taxes
Demand for the factors of production (inputs) from the demand for the final goods (the outputs) is called ______________ demand
derived demand
The limitation of the learning curve in practice is the ______________________________________________________________. The existence of the learning curve effect is widely accepted, but the percentage to be used may not be known while the information is still useful. As a result, many simply assume an _____ learning curve and make decisions based on those results.
difficulty in knowing the shape of the learning curve; 80%
Who initiates fundamental changes, such as mergers and acquisitions
directors
who can remove officers?
directors
who is in charge of coordinating audit activities
directors
who sets executive compensation?
directors
who owes a fiduciary duty to the corporation?
directors and officers
discretionary and nondiscretionary fiscal policies
discretionary- spending that is under the control of individuals within the government, such as contracting for new weapons systems. nondiscretionary- enacted in law. Certain outlays, e.g., Social Security, must be made regardless of their consequences or source of funding because Congress has made them a legal requirement. No individual bureaucrat or group can choose to withhold (or increase) these expenditures.
the after-tax income of individuals.
disposable income
The component cost of preferred stock is the __________ divided by the _______________ (also called the dividend yield).
dividend; market price
RSS, which stands for rich site summary, allows the content of a website that changes often to be
downloaded and stored automatically to a user's computer. This saves the user the need to constantly revisit the site to get the latest information.
shift of LRAS leads to
economic growth
pure profit
economic profit is also called pure profit. Economic profits are not earned until the organization's income exceeds not only costs recorded in the accounting records, but the firm's total implicit costs.
how to calculate the effective rate on a discounted loan
effective rate = stated rate / (1.0 - stated rate)
Under perfect competition, the firm's demand curve is perfectly
elastic (horizontal) because its actions cannot affect the market price. The firm is therefore a price taker and must sell at the market price.
what do the midpoint method (arc method) and point method tell us?
elasticity of demand
Kanban
essentially a visual workflow management system developed by Toyota. For example, the Kanban card contains quantity, type of parts, and other product information. When the bin on the factory floor becomes empty, the empty bin and the Kanban card are sent to the factory store. The factory store replaces the empty bin with a filled bin and returns the bin along with the Kanban card to the factory floor. By producing only what is deliverable, Kanban prevents overproduction and reduces waste effectively.
The intrinsic value of a put option is the amount by which __________ peice is greater than the ___________ price of the underlying. The value of a put option will decrease as the price of the underlying ___________ since there is no advantage in selling at a lower-than-market price.
exercise price; current price; increases
The independent auditor's responsibility is to
express an opinion on whether the financial statements are fairly presented in accordance with GAAP. If the corporation is publicly held, the auditor also must assess internal control over financial reporting.
in theory, diversifiable risk should continue to decrease as the number of different securities held increases. But, in practice, the benefits of diversification become
extremely small when more than about 20 to 30 different securities are held. Moreover, commissions and other transaction costs increase with greater diversification.
limitation to calculating GDP: GDP includes only _______________ and services. Much economic activity involves the trading of _______________.
final goods; intermediate goods, such as when a manufacturer buys materials.
two tricky things that you don't include in GDP
financial transactions and second-hand sales
Keynesian theory calls for expansionary _______________ during times of recession and contractionary policy during _____________
fiscal policy; expansion
In the short run, a seller should produce (continue to operate) when it can earn a profit or incur a loss smaller than
fixed costs. This is because short-run costs include both variable costs and fixed costs (costs incurred even if a firm closes). Thus, a firm could lose less money by continually operating instead of shutting down.
In the long run, no resource costs are
fixed. In an analysis of long-run costs of production, "long run" means A period of time long enough for the firm to make all resource costs variable in nature. A firm can therefore vary the amount of any of its inputs. In the short run, one or more inputs are fixed.
Leverage is the relative amount of ________ cost in a firm's cost structure. In other words, leverage is the amount of _______ a firm has. Leverage creates risk because ______________
fixed; debt; fixed costs must be paid, regardless of sales.
Regression analysis is particularly valuable for budgeting and cost accounting purposes. Regression analysis is almost a necessity for computing the fixed and variable portions of mixed costs for flexible budgeting. The y-axis intercept is the ___________ portion and the slope of the regression line is the__________ portion.
fixed; variable
Frictional, Structural, and Cyclical unemployment
frictional- normal unemployment exists at any given time in a dynamic economy. This group can include those (a) moving to another location, (b) stopping work temporarily to obtain further education and training, and (c) who are between jobs. structural- The composition of the workforce does not match the need (technology changes/skills/location) cyclical- unemployment that happens due to a recession/depression
There are several types of Artificial Intelligence (AI): Rule-based expert systems
function on the basis of set rules to arrive at an answer. These cannot be changed by the system itself. They must be changed by an outside source (i.e., the computer programmer).
how to calculate the weighted average cost of capital
get the % weight of each type of capital (LT debt, common stock, RE) and multiply the % by the component cost of capital. Then add them to get the weighted cost of capital. COMPONENT COST FOR DEBT IS: 1 - % TAX RATE
Preferred shareholders
have the contractual right to receive dividends and liquidation distributions before common shareholders but usually do not have voting rights.
graphing a standard deviation- what shape does a small deviation take versus a large deviation?
he standard deviation measures the tightness of the distribution and the riskiness of the investment. A large standard deviation reflects a broadly dispersed probability distribution, meaning the range of possible returns is wide. But, the smaller the standard deviation, the tighter the probability distribution and the lower the risk. Thus, the greater the standard deviation, the riskier the investment.
Equity holders demand _______________ returns than debt holders.
higher. Providers of equity capital are exposed to more risk than are lenders because The firm is not legally obligated to pay them a return, and In case of liquidation, creditors have priority.
The ______________ the quick ratio, the more favorable for the firm. Maintaining a quick ratio of at least _____ is desirable.
higher; 1:1
exception reporting system
highlights abnormal conditions and allows the auditor to focus on problem areas. Exception reports, also called error listings, suspense listings, and edit reports indicate the errors discovered by the controls. They permit the auditor to evaluate the effectiveness with which errors are investigated and corrected and the corrected transactions resubmitted.
The party buying an option is the ________. The seller is the ________.
holder; writer
How do you calculate Net Domestic Product when using the income approach to calculating GDP?
income generated in the U.S., regardless of the ownership of the productive resources: I = Indirect Bought = Business Two = Taxes Nets = Net For = Foreign Fishing = Factor Income = Income
An ____________ in the volatility of the price of the underlying results in an increase in the value of the option (both calls and puts).
increase
when comparing two options that are similar except for time until expiration, an ___________ in the term of an option (both calls and puts) will result in an increase in the value of the option.
increase
R-squared is also known as the coefficient of determination. It is a measure of how good the fit between the
independent and dependent variable is.
Price elasticity: When the percentage change in quantity demanded is less than the percentage change in price, ________ demand exists.
inelastic. Dividing 3% (change in Q) by 5% (change in P) results in less than one, so the demand is inelastic.
if quantity demanded decreases when price is decreased, what type of good is it?
inferior good. Inferior goods are commodities for which demand is negatively related to income.
Real income will grow whenever the rate of increase in nominal income exceeds the ________________.
inflation rate
the risk that purchasing power of the currency will decline
inflation risk
A discounted loan is one in which the ______________ is paid at the beginning of the loan term.
interest
definition of internal control
internal control is a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.
The quick (acid-test) ratio excludes ________________ and ______________ items from the numerator. Such assets are difficult to liquidate at their carrying amounts. The quick ratio is therefore a more conservative measure than the current ratio.
inventories; prepaid.
there is an _________________ correlation between the bond rating (based on risk) and the interest rate
inverse. A high rating (i.e., low risk) will lead to a lower interest rate because the more likely the firm is to make its commitment to pay the interest and principal.
Repatriation
is the process of transferring money earned in a foreign location back to the domestic location.
What effect does an import quota have?
it improves a country's balance of payments by decreasing foreign outflow payments. real wages decline as does total world output.. prices increase as a result of the induced shortage.
idiosyncratic risk
it is the risk of a specific firm. This type of risk is determined by the firm's industry, products, customer loyalty, degree of leverage, management competence, etc.
If an audit committee does not have a financial expert, what does it have to disclose in order to be in compliance with the Sarbanes-Oxley Act of 2002? 2 things.
it needs to disclose the fact that it doesn't have a financial expert and the reason(s) why its audit committee lacks a financial expert.
Much of the growth in the United States' real GDP is attributable to increased
labor productivity
regression analysis determines ___________ relationships among _______________ variables.
linear; quantitative
An entity has a _________ position in an asset whenever the entity benefits from a rise in the asset's value.
long
who is responsible for the 1.Preparation and fair presentation of the financial statements and 2.The design, implementation, and maintenance of internal control relevant to their preparation and fair presentation
management
Inherent risk is the risk when
management has not taken action to reduce the effect or likelihood of an adverse event. Thus, it is risk in the absence of a risk response.
If components of enterprise risk management (ERM) are present and functioning effectively, no _____________________ exist
material weaknesses. Components should be present and functioning effectively. Consequently, the components are criteria for the effectiveness of ERM. "Present and functioning effectively" means that no material weaknesses exist and risk is within the risk appetite.
The overall goal of hedging is to
minimize changes in total value and have the hedge act as insurance against price (or value) fluctuations. Your favorite sports team is playing against its rival, and you bet on the rival. If your favorite team wins, you are happy it beats its rival. If your favorite team loses, your sorrows are negated by the happiness of winning the bet.
The purpose of the JIT inventory system (pull system) is to
minimize the cost associated with inventory control and maintenance by reducing the lag time between inventory's arrival and use. n a just-in-time (JIT) inventory system, the moving, handling, and storage of inventory are treated as nonvalue-adding activities.
what type of competition are restaurants/hotels an example of? Pure competition; Monopoly; Monopolistic Competition; Oligopoly?
monopolistic competition. A large number of firms but fewer than competition. There are differentiated products and it is highly elastic.
in which competition are products differentiated? pure competition or monopolistic competition?
monopolistic competition. in pure competition, products are standardized, so price is the only basis for competition.
A market in which all sellers must sell to a single buyer is a ______________
monopsony. An example is a "company town" in which there is a single buyer of labor for all workers.
The accounts receivable turnover is equal to
net credit sales divided by the average accounts receivable
Net working capital equation
net working capital = Current assets - Current liabilities Net working capital equals the resources the firm must have to continue operating in the short run if it must liquidate all of its current liabilities.
A public accounting firm is prohibited from performing certain _______________ services for an audit client. They include
nonaudit. Legal services, HR, IB services, appraisal services, and bookkeeping. They CAN perform tax services is it is preapproved by the audit committee.
shareholders have the right to a____________ vote on compensation for ___________________ at least once every ___` years.
nonbinding; specified corporate officers; 3
if quantity demanded increases when price is decreases, what type of good is it?
normal good. Normal goods are commodities for which demand is positively related to income.
Internal auditing
objective assurance and consulting activity designed to add value and improve an organization's operations. 1. promote ethics and values 2. Ensure effective performance management and accountability 3. communicate risk and control information 4. coordinate activities and communication among all levels.
who oversees the various functional areas (finance, accounting, information, etc.) of the entity
officers
who can enter the entity into legally binding contracts?
officers. they are agents of the corporation
which type of competition has a kinked demand curve?
oligopolistic. Its essence is that firms will follow a price decrease by a competitor but not a price increase. This is based on the assumption that a firm in an oligopoly strives to protect existing market shares.
The industry has few large firms. Firms operating in an _________________ are mutually aware and mutually interdependent. Their decisions as to price, advertising, etc., are significantly dependent on the actions of the other firms.
oligopoly
what type of competition is the steel/car market an example of? Pure competition; Monopoly; Monopolistic Competition; Oligopoly?
oligopoly. There are few large firms with high barriers to entry.
At least _____ member of the audit committee must be a financial expert.
one
The high-low method generates a regression line using
only the highest and lowest of a series of observations. The major criticism of the high-low method is that the high and low points may be abnormalities not representative of normal events.
The PCAOB was established to
oversee the audits of public companies. 1. Issues auditing and related standards; 2. Inspects and investigates accounting firms; and 3. Enforces compliance with its rules, professional standards, SOX, and relevant securities laws
Materials requirements planning (MRP) (push system) is a computerized system for
oving materials through a production process according to a predetermined schedule. The demand for materials is driven by the forecasted demand for the final product as programmed into the system.
Regression analysis assumes that ______________ are a basis for valid ___________. Regression does not determine ________________.
past relationships; projections; causality. Although x and y move together, the apparent relationship may be caused by some other factor. For example, car wash sales volume and sunny weather are strongly correlated, but car wash sales do not cause sunny weather.
Capital budgeting: payback period equation
payback period = initial investment / annual after tax savings This method ignores the time value of money. The advantage of the payback method is its simplicity. The payback period measures the risk and liquidity of an investment. The longer the period, the more risky the investment and the less liquid it is.
A business cycle has four stages (periodic cycles):
peak, recession, trough, and recovery.
when the demand elasticity coefficient is Equal to zero, demand is __________________ (depicted as a vertical line)
perfectly inelastic
when the demand elasticity coefficient is Equal to zero, demand is __________________ (depicted as a vertical line)
perfectly inelastic. Some consumers' need for a certain product is so high that they will pay whatever price the market sets. The number of these consumers is limited, and the amount they desire is relatively fixed. Drug addiction tends to result in demand that is unresponsive to price changes. Existing buyers (addicts) are not driven out of the market by a rise in price, and no new buyers are induced to enter the market by a reduction in price.
Liquidity risk is the
possibility that an asset cannot be sold on short notice for its market value. If an asset must be sold at a high discount, it is said to have a substantial amount of liquidity risk.
the income approach to GDP
produces the same number as the expenditures approach, but it is more complex and gives us more numbers: -National Income- all income generated by U.S. owned resources, no matter where located. -Net Domestic Product- income generated in the U.S., regardless of the ownership of the productive resources
The ______________________________ is a method for ranking projects to ensure that limited resources are allocated to the investments with the highest return per dollar invested.
profitability index (or excess present value index) PI = PV of future net cash flows or NPV of project / initial investment
There are several types of Artificial Intelligence (AI): Intelligent agents are
programs that apply a built-in or learned knowledge base to execute a specific, repetitive, and predictable task, for example, showing a computer user how to perform a task or searching websites for particular financial information.
primary purpose of a code of ethics
promote an ethical culture within the corporation. An ethical culture is best promoted by senior management setting the example. the code should provide for disciplinary action for violators
The business judgment rule
protects a director or an officer from personal liability for honest mistakes of judgment if (s)he 1.Acted in good faith; 2.Was not motivated by fraud, conflict of interest, or illegality; and 3.Was not grossly negligent.
A _____ option gives the buyer the right to sell the underlying asset at a fixed price. An option has an expiration date after which it can no longer be exercised.
put
when aggregate demand shifts to the left,
real GDP decreases
when aggregate demand shifts to the right,
real GDP increases
Explicit costs
require actual cash payments. For this reason, they also are known as out-of-pocket or outlay costs. Explicit costs are accounting costs. They are recognized in formal accounting records.
NPV assumes the cash flows from the investment can be reinvested at the project's
required rate of return.
a ___________ in interest rates makes call options more attractive to buyers and increases their value.
rise. buying a call option is similar to buying the underlying on credit. Buying the right to purchase the underlying asset (call option) is much cheaper than buying the underlying asset directly due to the cost to carry the underlying asset.
Antidumping
rules prevent foreign producers from selling excess goods on the domestic market at less than cost to squeeze out competitors and gain control of the market. This is a form of predatory pricing.
The intrinsic value of a call option
s the amount by which the exercise price is less than the current price of the underlying.
Factoring is an arrangement in which a firm
sells its accounts receivable at a discount to a factor, an entity that specializes in collections. Visa is an example of a factor. Visa remits the cash proceeds to the seller minus a typical fee in the range of 1.5%-4%. Visa assumes the risk that purchasers may not pay their credit card bills.
who determines the entity's risk management philosophy?
senior management
who is responsible for ensuring that all components of ERM are in place?
senior management
who has the ultimate responsibility for the enterprise risk management
senior management, specifically the CEO
Various Approaches to Quantify or Understand Risk: The benefit of ___________________ is that managers can see the effect of changed assumptions on the final objective.
sensitivity analysis. trial and error. A major use of sensitivity analysis is in capital budgeting, where small changes in prevailing interest rates or payoff amounts can make a very great difference in the profitability of a project.
The discount rate is the rate Federal Reserve banks charge for
short-term loans directly to commercial banks. -Increasing the discount rate reduces borrowing and the money supply. -Decreasing the discount rate increases borrowing and the money supply.
An entity has a ________ position in an asset when the entity benefits from a value decline.
short. Entities take short positions when they believe the value of the asset will fall.
firms with low hurdle rates prefer a _________________________ payback, while firms with high hurdle rates prefer a _____________________ payback.
slow and steady; quick and high
Diversifiable risk is also known as
specific risk, also known as unsystematic risk, residual risk, and unique risk, is the risk associated with a single investment security. Specific risk can be potentially eliminated by diversification.
The coefficient of variation ( ___________________ ÷ _________________) is useful when the rates of return and standard deviation of two investments differ. It measures the risk per unit of return. The ______ the ratio, the better the risk-return tradeoff.
standard deviation; expected rate of return; lower
The coefficient of correlation (r) ranges from 1 to -1. The more the scatter pattern resembles a _________________ , the greater the absolute value of r. An r of zero does not mean there is no relationship at all between the two variables, only that their relationship cannot be expressed as a ______________-.
straight line; linear equation
systematic risk sensitivity. 1 versus >1 versus <1
systematic risk sensitivity is stated in terms of a stock's beta coefficient. An average-risk stock has a beta of 1.0 which means returns are positively correlated with the market portfolio. when a systematic risk beta # is more than 1, it means that the systematic risk is high than the market portfolio. The opposite is also true.
The duty of loyalty requires directors and officers to
take certain steps when they are involved in a conflicting-interest transaction or are presented with a corporate opportunity. They are required to make full disclosure of any financial interest they may have in any transaction to which they and the corporation may be a party. Directors and officers must not make a secret profit.
he discounted payback method is sometimes used to overcome the major disadvantage of the basic payback method. The only difference between the two methods is that the discounted payback method
takes into account the time value of money.
Assimilation
the abandonment of one culture in favor of another when becoming part of a new workplace. The members of the acquired company gradually abandon their culture and willingly adopt the acquiring company's culture.
A firm's operating cycle is the time between
the acquisition of inventory and the collection of cash for its sale. The operating cycle dictates cash flow.
what is the component cost of long-term debt (as part of a firm's capital)
the after-tax interest rate on the debt because interest payments are tax deductible
A corporation comes into being when
the articles of incorporation are filed with the secretary of state of the relevant state. The secretary in turn issues a certificate of incorporation.
who hired the independent audit committee?
the board of directors.
who is responsible for providing oversight over enterprise risk management?
the board of directors.
All major corporate decisions are made or approved by
the board. Directly managing the day-to-day operations of the entity is management's responsibility. The board has an oversight role.
who coordinates risk management activities?
the chief risk officer
The component cost of preferred stock is calculated using
the dividend yield ration. Cash dividend on preferred stock / market price of preferred stock
What is this list? (1) act in good faith (2) act in a manner (s)he reasonably believes to be in the best interests of the corporation (3) act with the care that a person in a similar position would reasonably believe appropriate (4) Appropriately rely on others (5) be informed about pertinent corporate information when giving advice
the duty of care that directors and officers must act within
Economists consider the economy to be at full employment when
the economy is at the natural rate of unemployment. The natural rate of unemployment consists of frictional and structural unemployment combined (cyclical unemployment is omitted).
risk premium
the excess of an investment's expected rate of return over the risk-free interest rate. The risk-free rate is the interest rate on the safest investment. In practice, the stated interest rate on U.S. Treasury bills is considered to be the risk-free interest rate. Expected return on the market portfolio 12% Expected return on Treasury securities 5% Expected beta of Guilderland 2.2% Stock's risk premium=2.2 × (12% - 5%)
What is this list? (1) act in its best interests, (2) be loyal, (3) use due diligence in discharging responsibilities, (4) be informed about information relevant to the corporation, and (5) disclose conflicts of interest
the fiduciary duty that directors and officers owe to the corporation
what does this list describe? a medium of exchange, a unit of account, and a store of value.
the functions of money
mark-to-market practice on futures contracts
the market price is posted and netted to each person's account at the close of every business day. In other words, each party's gains or losses are tallied in its brokerage account. If significant losses are incurred in the brokerage account, the broker requires funds be added to the brokerage account. A mark-to-market provision minimizes a futures contract's chance of default because profits and losses on the contracts must be received or paid each day through a clearinghouse.
Consumer Price Index (CPI)
the most common price index for adjusting nominal GDP. It measures changes in the general price level by a pricing of items on a typical urban household shopping list. (cost of market basket in CY / cost of market basket in PY) * 100
A firm's cost of capital is
the required rate of return by investors on the firm's debt and equity (both preferred and common).
If a pair of securities has a coefficient of correlation of 1.0, the risk of the two together is
the same as the risk of each security by itself. If a pair of securities has a coefficient of correlation of -1.0, all specific (unsystematic) risk has been eliminated.
probability distribution
the set of all possible outcomes of a decision, with a probability assigned to each outcome
the expenditures approach to calculating GDP
the simplest of the three methods, calculates GDP as the sum of all expenditures within the economy. 1. consumer spending 2. investment spending 3. government spending 4. net exports (spending on American-made goods, no matter who purchases them, and excludes American spending on goods and services produced abroad (imports))
Corporations are formed under the laws of ___________________. very few corporations are incorporated under __________________.
the state of incorporation ; federal law
Efficient Market Hypothesis (EMH)
the stock price can immediately and fully reflect all relevant information. -The weak-form EMH is that public and non-public insider information may or may not be available to investors. The current stock price only reflects historical prices. -The semi-strong form EMH is that all public information is incorporated into the current stock price. -The strong-form EMH is that all information, including public information and nonpublic insider information, is incorporated into the current stock price.
Perfect negative correlation (-1.0) means that
the two variables always move in the opposite direction. If a pair of securities has a coefficient of correlation of -1.0, all specific (unsystematic) risk has been eliminated.
Perfect positive correlation (1.0) means that
the two variables always move together. If a pair of securities has a coefficient of correlation of 1.0, the risk of the two together is the same as the risk of each security by itself
common shareholders
those who have contributed the basic capital for the corporation to carry on its business
The CAPM formula is based on the idea that the investor must be compensated for an investment in two ways:
time value of money and risk. It measures how a particular security contributes to the risk and return of a diversified portfolio.
embargo
total ban. It is an extreme form of import quota.
Rather than charge cash interest, banks will sometimes require borrowers to maintain a compensating balance during the term of a financing arrangement. How do you calculate the total amount you need to borrow if you also have to maintain a compensating balance?
total borrowings = $ needed / (1.0 - compensating balance %)
Working capital is the excess of
total current assets (CA) over total current liabilities (CL)
The most common type of system used in the business information systems (BIS) environment is a
transaction processing system (TPS). A TPS captures the fundamental data that reflect the economic life of an organization. An example of a TPS is an accounting information system (AIS).
Which security is most often held as a substitute for cash?
treasury bills
The asset that is subject to being bought or sold under the terms of the option is the ____________________.
underlying
There are several types of Artificial Intelligence (AI): Case-based reasoning systems
use a process similar to that used by humans to learn from previous, similar experiences.
NPV is the ______________________ of all future cash flows. IRR is the rate at which the ____________________ from an investment equal zero
value today; NPV of all cash flows
for what type of corporation does the auditor assess the internal control of a corporation over financial reporting?
when the corporation is publically held.
the SEC may compensate _______________ who provide original information not obtained through audits or other investigations.
whistleblowers
The simple regression equation
y = a + bx y = the dependent variable a = the y intercept b = the slope of the regression line x = the independent variable