Part 2: Section B LOS

Demonstrate an understanding of the dividend payment process for both common and preferred stock

1. Approval of BODs 2. Declaration Date 3. Ex-Dividend Date - the first day the stock will trade without the rights to the recently declare dividends 4. Record Date[two business days after the ex-dividend date] the day on which investors who are shareholders of record are determine to receive dividends 5. Payable Date

Demonstrate an understanding of the impact of changes in credit terms or collection policies on accounts receivable, working capital, and sales volume

1. Character - reputation 2. Conditions - customer financial condition 3. Cash position - its cash flows 4. Credit - customer's credit rating and status 5. Collateral • Liberalizing the Credit Policy Increases the Sales Increase the AR Increases the Cost of Default Increase the carrying cost of AR • Restricting the Credit Policy Decreases the Sales Decreases the AR Decreases the Cost of Default

Identify and evaluate debt issuance or refinancing strategies

1. Covenants 2. Availability of cash 3. Risk appetite of the company 4. Earnings potential 5. Credit Ratings [improving credit ratings = lower risk = lower interest rate = lower payments] 6. Macroeconomic environment

Demonstrate an understanding of economic order quantity (EOQ) and how a change in one variable would affect the EOQ

1. Demand is known or can be estimated, and is constant over the year. 2. Certainty: The ordering costs and carrying cost can be determined 3. No stock-outs 4. Lead time is constant and known Weakness 1. Assumptions used are unrealistic 2. Calculations are based on estimated cost and forecast demands

Identify methods of speeding up cash collections

1. Efficient collection points - In general, setting more collection points, the shorter the collection float. Setting the collection points closer to customer or near Federal Reserve bank for faster check-clearing purposes. However, the cost associated with additional collection points may be higher and should be considered. 2. Lockbox System - an arrangement between a firm and a banking institution in which all deposits are received directly by the bank and immediately deposited into the firm's account. [!: This improve the mail and processing float] 3. Electronic payments: facilitates a payment or a transfer in an electronic format. Two types: a. Fedwire - is the Federal Reserve's fund transfer system, which provides a real time method to transfer of fund immediately between two financial institution via their respective Federal Reserve Fund System. b. Automated Clearinghouses: system provides an electronic alterna-tive to checks. Payment information is processed and settled electronically. In the United States, the Federal Reserve is the main operator of ACH. 4. Concentration banking Systemsystematically transfers deposits received from field banks and/or lockbox banks to the firm's disbursement bank to create a centralized inventory of liquid reserves held as cash or for short-term credit or investment transactions !: Compensating balances does NOT reduce collection point

Identify and describe reasons for holding marketable securities

1. Income Generation - To earn interest on surplus idle cash. 2. Controllable outflows [use interest income as payments to outflows] 3. Reserve liquidity - to provide source of near cash or instant cash to cover any working capital imbalances.

Demonstrate an understanding of the factors involved in managing the costs of working capital

1. Risk appetite of the company 2. Nature of the industry. A manufacturing industry compare to service industry need inventory. 3. Seasonality of the Industry. Example, a company producing ski materials will have a higher demand in winter season. The working capital will be higher in this season compare to other seasons. 4. Level of Competition. The higher the competition, the higher the working capital to respond quick on customer demands - by maintaining higher level of inventory or competitive credit terms. 5. Dividend Policy. Companies must maintain an appropriate level of cash to satisfy the demands of the operations and from shareholders. 6. Credit Policy. A liberal credit policy demands HIGHER working capital to compensate the liquidity and tightening the policy reduces it. 7. Production Cycle. The longer the cycle time the higher would be the funds needed. 8. Growth and expansion. A growing company requires additional working capital to support the additional operations. Example, new capital investment will potentially increase the working capital to support the project.

Identify and explain the three motives for holding cash

1. Transactional. A firm must have sufficient cash reserves or near-cash reserves to meet payments arising from ordinary business operations (e.g., small pur-chases, employee compensation, taxes, and dividends). 2. Precautionary - holding cash is to provide a buffer for unexpected cash needs. 3. Speculative - involves the use of surplus liquid reserves to take advantage of short-term investments or other temporary opportunities that may arise. For example, the price of a raw material suddenly may decline and offer a substantial savings if purchased with reserve funds.

Identify methods of slowing down disbursements

1. Zero balance account (ZBA) - is a disbursement account against which a firm can write checks even though the balance is maintained at zero. The benefits of a ZBA system include control over account balances and the elimi-nation of idle excess balances in subsidiary accounts. 2. Centralized payables means payments are made through a single account, usually headquarters or a centralized processing center. Centralizing the payment function provides greater assurance that checks and funds will be disbursed when desired rather than with a decentralized payables system. However, centralizing payable systems handle a lot of accounts which requires careful monitoring to ensure that delayed payments do not result in the lost of cash discount or damage relation with payees. 3. A payable through draft (PTD) is a payment instrument that is drawn against the account of the issuer/payer at a specific bank. A PTD is a bank-created check that guarantees the availability of the funds to the payee.

Recommend methods of managing exchange rate risk

3 types of exchange risk exposure: 1. Translation exposure [accounting exposure] 2. Transaction exposure 3. Economic exposure [operating exposure] !: Translation and transaction exposure are based on ANticipated exchange flucations. !: Economic exposure are based on UNanticipated exchange rate fluctuation. [most difficult to hedge] These can be minimize by entering into 1. Currency swaps 2. Currency futures 3. Currency options

Identify the characteristics of the different types of financial markets and exchanges

> Capital markets within which long-term financial securities (e.g., bonds and stocks) are bought and sold. > Primary market is the market in which investors have the first opportunity to buy a newly issued security > Secondary market is a market in which an investor purchases an asset from another investor rather than from the issuing corporation

Identify and demonstrate an understanding of credit risk, foreign exchange risk, interest rate risk, market risk, industry risk, and political risk

> Credit risk or default risk—The risk that a borrower will not repay the investor as promised. When there is a greater probability that a borrower will default, the lender will charge a higher interest rate to compensate for the higher risk. > Interest rate risk—The risk that market interest rates will vary and impact the value of interest-bearing securities, such as bonds. >Foreign exchange risk or currency risk—The risk that economic value will be lost due to fluctuations in exchange rates. Companies exporting goods and services benefit when their home currency weakens relative to a foreign currency. More goods and services will be purchased by those using a foreign currency because the goods and services are relatively less expensive. In contrast, companies importing goods and services benefit when their home currency strengthens relative to a foreign currency because they can acquire the goods and services for relatively less money. > Industry risk—The risk associated with the factors specific to a given industry. For example, agricultural companies are likely to face the risk of a drought negatively affecting their performance, whereas financial companies would not be as affected by the risk of a drought. > Political risk—The risk that political influence and decisions may affect the profitability and effectiveness of an organization. For example, environmental regulations may affect the operations and costs of chemical producers and manufacturing firms.

Identify and explain the factors involved in determining an optimal credit policy

> Creditworthiness of the buyer > Credit Terms extended > Level of collection procedures Optimal Credit Policy: where cost and benefits are taken into account to maximize the net benefits.

Identify the factors influencing the level of receivables

> Defined credit policies and terms of sale > Provisions for the evaluation of customers creditworthiness[5 Cs] > Provisions for follow-up on overdue accounts and initiation of collection, procedures

Identify and describe factors influencing the levels of cash

> Firm's Liquidity Requirements. Liquidity refers to the ability to convert assets into cash quickly without incurring loss. Normally, cash inflows and outflows are NOT synchronized. An appropriate level of cash can cover the need for those outflows. Ultimately, an efficient cash management system can increase a firm's overall liquidity and reduced risk of insolvency. > Profitability and Risk Policies Profitability typically varies inversely with liquidity. Such investments must take into account the interrelationship and trade-offs between profitability and risk. For example, offering more liberal credit terms to customers may increase receivables. Thus, the firm may have to sell short-term securities, reduce cash bal-ances, and/or increase short-term funding from banks to maintain the level of liquidity and to generate cash flows. > Level of Operation. A heavy level of operations need a lot of cash to support its rapid operation. This is in order to pay those obligations and order the needed inventories. They also consider the cash cycle of the company.

Demonstrate an understanding of the relationship among inflation, interest rates, and the prices of financial instruments

> Inflation. Inflation eats into the return of a bond. If a bond's return is more than the inflation rate, the bond produces a positive return. A return of 6% and inflation of 4%, produces a real return of 2%. > Current yield is the annual rate of return expressed as a percentage of the annual interest payment relative to the current price of the bond > If interest rates fall, the interest payments and princi-pal that bond investors receive will have to be reinvested at lower rates. Thus, bond investors face reinvestment risk when interest rates fall

Define strike price (exercise price), option premium, and intrinsic value

> Strike price (or exercise price) refers to the fixed price of the contract > The premium is the initial purchase price of the option; it is usually stated on a per-unit basis. The writer (seller) of an option contract receives an up-front premium from the buyer (owner) of the contract. This premium obligates the writer to fulfill the contract (sell or buy the underlying asset) if the buyer chooses to exercise the option. > intrinsic value is the difference between the underlying asset's price and the option's strike price. If it's the call option, it is the price of the underlying asset minus the strike price, where as in put options, it is the strike price minus the price of the underlying asset. Intrinsic value only refers to in the money options - a negative intrinsic value would mean that the option is either at the money or out of the money. > Extrinsic value is calculated as the difference between an option's market price and its intrinsic value. So, if an option has a premium of $50 and an intrinsic value of $30, its extrinsic value would be $20.

Define the different types of marketable securities, including money market instruments, T-bills, treasury notes, treasury bonds, repurchase agreements, federal agency securities, bankers' acceptances, commercial paper, negotiable CDs, Eurodollar CDs, and other marketable securities

> U.S Treasury securities: securities backed by full faith and credit of the US government. a. T-bills: sold at a deep discount, mature at face value in one year or less, taxable b. T-notes: interest semiannually; mature at face value within one year to 10 years. c. T-bonds: interest semiannully; mature at face value generally longer than 10 years. > Repurchase agreement[repos]: securities purchased from another party, usually a bank or a dealer, who agrees to buy back of security for a fixed price on specified date. > Federal Agency Securities: it an interest-bearing security that backed by the US government but not in full faith and credit. Not quite marketable but still highly liquid - second form T-securities. - it is NOT discounted and has limited tax exposure [many are exempt from state and local income taxes but NOT from state franchise taxes] > Banker's Acceptance: an instrument representing a future promised payment by a bank. Essentially time drafts that results from international trade financing. > Commerical Papers: UNsecured short-term promissory notes issued by a corporation. Typically higher yield than similar securities because of its LOW marketability. Maturity normally ranges from 1 to 270 days. > Negotiable certificates of Deposits: a certificate that guarantees the holder to be paid back her deposit plus interest. These funds can't be withdrawn from the deposit account until the predetermined date but is exchanged in the active secondary market. a. Eurodollar CDs: dollar-denominated CDs issued by foreign branches of U.S. banks and foreign banks, primarily in London. b. Yankees CDs: these are dollar-denominated CDs issued by U.S branches of foreign banks. c. Thrift CDs - CDs issued by savings and loan associations, savings banks and credit unions. > Eurodollar Deposits - typically NON-negotiable dollar-denominated CDs issued outside the US > Auction rate preferred stock: securities with interest rates that are reset through auctions. > Short-term municipal: Municipal bonds is debt that is issued by state or local governments to finance capital expenditures. > American Depository Receipts: a certificate representing ownership of foreign stocks, allows foreigners to raise capital in the U.S, issued by American banks acting as custodians. of shares of foreign firms, and likely to allow Americans to invest abroad.[It does not facilitate the banking procedures for U.S. multinational firm]

Define the different types of dividends, including cash dividends, stock dividends, and stock splits

> cash dividend is paid in the form of cash, usually a check. Cash dividends typically are taxable to the stockholder > Stock dividend takes place when a company distributes new shares to existing shareholders on a pro-rata basis. This means that each shareholder maintains the same proportion of ownership. Stock dividends do not change the value of a company's assets. Stock dividends are simply accounting changes that result in shareholders' shares being more in number but worth the same amount. > Liquidating dividends are dividends that exceed the corporation's retained earnings. They are not taxable. > Stock split is similar to a stock dividend, but is larger in scale. In a stock split, each share is divided into multiple shares. research. The main benefit is that stock splits send a positive signal about the firm's outlook.

Define subsequent/secondary offerings

A secondary public offering or seasoned public offering takes place when a firm that already has publicly traded securities engages in a sale of additional securities. The advantage for firms issuing additional securities is that investors typically will pay higher prices for a second offering as opposed to a first offering. This is because the stock is better known and has higher liquidity.

Identify possible synergies in targeted mergers and acquisitions

A synergy is any effect that increases the value of a merged firm above the combined value of the two separate firms. 1. Cost[lower cost by elimination of repetitive costs], Achieve economies of scale Access to more suppliers or materials Shared information technology Access to R&D efforts Lower Salaries and Wages. merged companies wont be needing two CEOs 2. Revenue[increase market share] Obtain other companies assets/skills/technology/patents Obtain additional resources Additional distribution channel Diversifying product 3. Financial [lower cost of capital with greater debt potential] Obtain additional funds - increased debt capacity Greater cash flow Tax benefits Pooling of resources to be more credit worthy

Demonstrate an understanding of the following: i. mergers and acquisitions, including horizontal, vertical, and conglomerate ii. leveraged buyouts

Acquisition is when one firm buys a controlling interest, which is greater than 50% ownership, in another business. A horizontal merger/lateral inegration is when two firms in the same industry are combined. Examples are Facebook's acquisition of Instagram in 2012 and Walt Disney Company's acquisition of Pixar Animation Studios in 2006 A vertical merger is when two companies that make parts for a finished good are combined. An example is when a Fast Moving Consumer Goods[FMCG] company acquires an advertising firms - since these company are reliant on advertising. A conglomerate merger is when two companies are combined that are from different industries. An example is when a finance company acquires and healthcare company. A leveraged buyout is a merger where the buyer uses debt to finance a significant portion of the transaction. The assets of the business are collateral for the debt assumed to execute the leveraged buyout. The main advantage of a leveraged buyout to the company that is buying the business is the return on equity. Using a capital structure that has a substantial amount of debt allows them to increase returns by leveraging the seller's assets

Define beta and explain how a change in beta impacts a security's price

Beta (β) describes an investment's sensitivity to market movements. It is a quantitative measure (or index) of the volatility of a given investment relative to the overall market. U.S T-bills have a beta of 0 Market Beta = 1.0 > 1.0 = More Sensitive than average market movements < 1.0 = Less Sensitive

Identify and describe the basic features of a bond such as maturity, par value, coupon rate, provisions for redeeming, conversion provisions, covenants, options granted to the issuer or investor, indentures, and restrictions

Bond is a long-term instrument with a final maturity date, generally it is 10 years or more. > The maturity is the time when the company is obligated to pay the bond holder the par value of the bond. > The par value, also called as face value or principal amount, is the amount to be paid to the lender at the bond's maturity. Most interests are calculated based on the bond's par value. > The coupon rate is the stated rate of interest on a bond. The indenture[also called as the deed of trust] is the legal agreement between the issuing corporation and the bond holders, establishing the terms of bond issue and naming the trustee. > Protective convenants: sets limits or restrictions on certain actions the company might be taking during the term of the agreement. Two types: Negative and Positive - Negatives convenants: limit or prohibit the borrower from certain actions. [lending the collateral, selling major assets, mergin from other firms, issuing more debt/dividends] - Positive covenants: specify actions that the borrower promises to performs[making timely interest, maintaining ratio, preserving collateral] > Indenture/Deed of trust is the legal agreement among all parties involved in a bond issue. Contents include: - Terms and conditions - Stated Interest Rate/Coupon Rate - Protective Convenant - Conditions defining defualt - Sinking Fund Terms - Callability and conversion features - Collateral property to be pledged, if any - Designation and duties of trustee

Demonstrate an understanding of the interrelationship of the variables that comprise the value of an option; e.g., relationship between exercise price and strike price, and value of a call

Call option factors: 1. Stock Price = Increase 2. Stick Price = DEcrease 3. Time to Expiration = Increase 4. Volatility = Increase 5. Dividends = DEcrease 6. Risk-free rate = Increase Put option factors: 1. Stock Price = DEcrease 2. Stick Price = Increase 3. Time to Expiration = Increase 4. Volatility = Increase 5. Dividends = Increase 6. Risk-free rate = DEcrease [increase in rfr will increase stock price hence decrease]

Define and identify the characteristics of common stock and preferred stock

Common Stock:Common stocks are securities that represent the ultimate ownership and risk position in a corporation. Their liability is restricted to the amount of their investment. Charateristics: - No maturity date - return on capital is not guaranteed - can participate and vote in the company's meeting - in the event of liquidation, repayment are made after the bond holders and preferred stockholders[lowest priority] - Cannot be redeemed or converted - Not entitled arrears of dividends - principal is NOT return - dividends are not guaranteed nor fixed - Dividends are NOT tax deductible unlike interest Preferred Stock: Preferred stocks is a hybrid financing, combining features of debt and common stocks. - in the event of liquidation, repayment are made after the bond holders but before stockholders[lowest priority] - Carries stipulated fixed dividends - Dividends are discretionary rather than fixed obligations - the maximum return to preferred stockholders is usually limited to the specific dividends - NO maturity date - Can be callable, convertible, cumulative, and participating

Calculate whether a currency has depreciated or appreciated against another currency over time, AND evaluate the impact of the change.

Computing the forward premium and discount will help determine whether currency will depreciate or appreciate. Forward premium is a situation in which the forward or expected future price for a currency is greater than the spot price. It is an indication by the market that the current domestic exchange rate is going to increase against the other currency. This circumstance can be confusing because an increasing exchange rate means the currency is depreciating in value. A forward discount is the opposite. A forward discount is a term that denotes a condition in which the forward or expected future price for a currency is less than the spot price. It is an indication by the market that the current domestic exchange rate is going to decline against another currency Formula = [(F - S)/S] x 365/F period When asked on the impact of change, create a hypothetical effect on the income statement or cash flow. Example statement: If exchange rates of Canadian dollars to U.S. dollars were 10% higher than the forecasted amounts, collections for the quarter would be approximately $800,000 USD less. On the disbursement side, approximately 57% of the disburse-ments for the quarter relate to the imported parts from Mexico. If the exchange rates of Mexican pesos to USDs were 10% lower than the forecasted amounts, dis-bursements for the quarter would be approximately $1 million USD greater.

Define the cost of capital and demonstrate an understanding of its applications in capital structure decisions

Cost of capital is a composite of the costs of various sources of funds compris-ing a firm's capital structure. It represents the minimum rate of return that must be earned on new investments so that shareholders' interests won't be diluted. The cost of capital should be considered in capital structure decisions. Corporations can benefit from using the cost of capital to: - benchmark investment decisions[for assessing whether the risk and returns on a investment are high or low]. High CoC means high risk and low valuation. - to manage working capital (e.g., receivables and inventories) more efficiently. - to value in measuring and evaluating performance.

Demonstrate how currency futures, currency swaps, and currency options can be used to manage exchange rate risk

Currency futures are a exchange-traded futures contract that specify the price in one currency at which another currency can be bought or sold at a future date. Currency futures contracts are legally binding and counterparties that are still holding the contracts on the expiration date must deliver the currency amount at the specified price on the specified delivery date. A currency swap, sometimes referred to as a cross-currency swap, involves the exchange of interest - and sometimes of principal - in one currency for the same in another currency. Currency exchange rate is most effect on economic exposure. A currency option (also known as a forex option) is a contract that gives the buyer the right, but not the obligation, to buy or sell a certain currency at a specified exchange rate on or before a specified date. For this right, a premium is paid to the seller.

Define default risk

Default risk is the risk that a company, or an individual, will not make payments on debt obligations. To minimize default risk, firms need to set and maintain credit standards for credit extension, billing, and collection.

Define and demonstrate an understanding of derivatives and their uses

Derivative is a financial instrument whose characteristics and value are derived from the underlying price or value of some other, more basic financial instrument. The underlying asset (also known as an underlying or underlier) could be a bond, an equity investment, a commodity, or currency. Purpose: - To protect against from adverse changes in market factor.

Identify the interaction between high inventory turnover and high gross margin (calculation not required)

Higher IT = Lower Days of Inventory = Higher Gross Margin

Identify the variables that affect exchange rates

Determinants of Foreign Exchange Rates: > Inflation. country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies [indirect relationship] > Interest Rates. Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the country is much higher than in others, or if additional factors serve to drive the currency down. [direct relationship] > National Income. An increase in nation's income will increase it wealth. As a result, locals can spend more on foreign goods, resulting more imports. This likely increases the demand for foreign currency, decreasing the value of the local currency. [indirect relationship] > Currenct Account Deficits. current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest, and dividends. A deficit in the current account shows the country is spending more on foreign trade than it is earning, and that it is borrowing capital from foreign sources to make up the deficit. The excess demand for foreign currency lowers the country's exchange rate. [indirect relationship] > Terms of Trade. A ratio comparing export prices to import prices, the terms of trade is related to current accounts and the balance of payments. If the price of a country's exports rises by a greater rate than that of its imports, its terms of trade have favorably improved. Increasing terms of trade shows' greater demand for the country's exports. [direct relationship]

Demonstrate an understanding of disbursement float and overdraft systems

Disbursement float is the time between when the paying firm (payor) mails a check and when the funds are deducted from the paying firm's (payor's) account. Disbursement float has three components. 1. Mail Float - The time between when a check is mailed and when it is received by the payee or a processing site. 2. Processing Float - The time between when the payee or processing site receives a check and when it is deposited at a financial institution 3. Clearing Float - time between when the check is deposited by the receiving firm (payee) and when the paying firm's (payor's) account is debited.

Demonstrate an understanding of diversification

Diversification refers to holding a wide range of different investments in a portfolio. The primary goal of diversification is to reduce the variability (or risk) of a portfolio. Diversification reduces portfolio risk as long as the different investments are unlikely to all move in the same direction in perfect tandem

Identify and describe divestiture concepts such as spin-offs, split-ups, equity carve-outs, and tracking stock

Divestment is the opposite of an investment. A divestment, or divestiture, involves the sale of an operating unit or the reduction or elimination of a company's assets. - Spin off [issuing share; to allow grow to another firm]. It involves where an independent company is created through the sale or distribution of new shares of an existing business or division of a parent company. - Equity carve out [issuing minority share]. An equity carve-out is also known as a split-off initial public offering (IPO) or a partial spin-off and is a type of corporate reorganization in which a company (parent) creates a new subsidiary and subsequently facilitates an IPO of the new subsidiary without fully spinning it off - Split up [no issuance of share; to prevent "monopoly" ] split-up occurs when a single company splits into two or more separately run companies. Shares of the original company are exchanged for shares in each of the new companies. - Tracking stock [to oversee "strategic business unit"]. tracking stock is a stock issued by a parent company that tracks the financial performance of a particular division. Tracking stocks trade in the open market separately from the parent company's stock.

Demonstrate an understanding of duration as a measure of bond interest rate sensitivity

Duration gives an approximate sensitivity of bond/portfolio values to changes in yield to maturity. Thus, bond duration considers how the price of a bond changes in response to yield changes. The best interpretation of duration is the approxi-mate percentage price changes for a 1% change in yield to maturity. Convexity is a measure of the curvature of how the price of a bond changes as the interest rate change. Effective Duration. = [Total ∆ in Price] / [2 x Current Price x % ]

Demonstrate an understanding of the concept of market efficiency, including the strong form, semi-strong form, and weak form of market efficiency

Efficient Market Hypothesis - it is how market prices reflect immediately from information relative to the value of a security. 1. Strong form: The strong form of the theory states that all information (public or private) is incorporated in a security price. Therefore, it is not possible for insiders to earn abnormal profits. 2. Semistrong form: The semistrong form states that all publicly available infor-mation (no private information) is incorporated in a security price. Therefore, abnormal returns from insider trading are possible. 3. Weak form: The weak form of the theory says that security prices reflect all recent price movements only. Therefore, technical analysis will not provide a basis for abnormal returns.

Demonstrate an understanding of foreign currencies and how foreign currency affects the prices of goods and services

Exchange rates are relative and are expressed as a comparison of the currencies of two countries. Exchange rate quotations can be quoted in two ways - Direct quotation and Indirect quotation. Direct quotation is when the one unit of foreign currency is expressed in terms of domestic currency. Similarly, the indirect quotation is when one unit of domestic currency us expressed in terms of foreign currency. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. In order to maintain the rate, the central bank must keep a high level of foreign reserves[e.g. gold]. Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting," as any differences in supply and demand will automatically be corrected in the market. Rates are the function of: > Interest rate: in the Short-Run > Trade Imbalances: in the Medium-range > Purchasing Power Parity: in the Long-run

Demonstrate an understanding of factoring accounts receivable and calculate the cost of factoring

Factoring, receivables factoring or debtor financing, is when a company buys a debt or invoice from another company. Essentially factoring transfers the ownership of accounts to another party that then chases up the debt. Forfaiting is the purchase of an exporter's receivables - the amount that the importer owes the exporter - at a discount by paying cash. The purchaser of the receivables, or forfaiter, must now be paid by the importer to settle the debt. Two types of factoring: > Recourse factoring is the most common and means that your company must buy back any invoices that the factoring company is unable to collect payment on. You are ultimately responsible for any non-payment. > Non-recourse factoring means the factoring company assumes most of the risk of non-payment by your customers. Since it is risky for the factoring company, it invovles higher factoring rate. Many factoring companies offer non-recourse that only applies if a debtor declares bankruptcy. And they will limit non-recourse agreements to debtors that have a good credit rating Cost of Factoring includes the interest involve and commissions. Factor's holdback/the haircut is not cost of factoring since it will be returned after the agreement. This is set to protect against defualt risk.

Demonstrate an understanding of the use of the cost of capital in capital investment decisions

Firms can use the cost of capital - as a dis-count rate of return to evaluate the present value of project cash flows or - as a hurdle (threshold) rate to evaluate the internal rate of return. - provides a benchmark for assessing whether the risk and returns on a firm's securities are high or low.[High cost of capital = more risk =low valuation]

Identify and describe the basic features of futures and forwards

Forward contract is a customized agreement between two parties to buy or sell a specific amount of an asset at a future date for a set price. Similarities: - Can be either deliverable or cash-settled contracts. - Have contract prices set so each side of the contract has a value of zero value at the initiation of the contract. DS - Forwards are private contracts and typically do not trade. - Forwards are customized contracts satisfying the specific needs of the parties involved. - Forwards are contracts with the originating counterparty and therefore have counterparty (credit) risk. - Forward contracts are usually not regulated and do not trade in organized markets. Futures contract is a forward contract that is standardized and exchange-traded. DS: - Futures contracts trade on organized exchanges. - Futures contracts are standardized - specified quality quantity, and satisfy the minimum price fluctuations[daily tick size], daily cash settlements of gains/loss, margin [initial and maintenance margin] and price limits - A clearinghouse is the counterparty to all futures contracts. - The government regulates futures markets.

Explain how income taxes impact financing decisions

Generally speaking, debt has tax advantages at the corporate level because interest payments reduce the firm's taxable income, shielding it from federal and state taxes. Dividends and share repur-chases do not. Interest tax shields associated with this financing approach tend to support increased leverage, provided a firm balances the tax benefits of debt against the costs of financial distress. According to trade-off theory, optimal capital structure involves a trade-off between the benefit of debt due to the interest tax shelter and the costs of debt due to financial distress and agency costs. An agency cost is a direct or indirect expense that the principal bears as a result of having delegated authority to an agent

Identify and explain the benefits of international diversification

Going global has these benefits: 1. New revenue potential - larger base of customers 2. Ability to help more people = 3. Greater access to talents 4. Exposure to foreign investment opportunities 5. Improving the company's reputation 6. Diversifying company markets 7. Utilizing government incentives - numerous countries offer incentives such as lower taxes after deductions. 8. Overall, staying ahead competition Disadvantages 1. Compliance risk 2. Cost of establishing and terminating an entity 3. Business practice s and cultural barrier Considerations: 1. Returns and risks [policitical, economic and exchange risk involve] 2. Effects of inflation. Inflation will affect the local mar-ket by its impact on the price of resources and the price of the product or service produced. It also may affect demand for the product, depending on price elasticity. Currency exchange rates also respond to inflation; high inflation rates correlate with depreciating currency, and low inflation correlates with a strengthened currency. Finally, potential sources of borrowed funds will be more or less attractive depend-ing on the rate of inflation. Inflation generally favors the borrower and penalizes the lender. 3. Taxation. Divisions in high-tax countries generally should record the lowest profits on such transfers, while divisions in low-tax jurisdictions should record the highest profits. 4. Different acocunting. This creates added cost and complexity when analyzing returns according to the different systems. 5. Laws like repatriation of earnings restrictions. The restrictions are put in place by foreign governments to limit the outflow of capital from their country. In terms of forecasting cash flows, uncertainty about the limits and policies related to repatriation complicates the accuracy of estimating future cash flows

Demonstrate an understanding of how risk affects a firm's approach to its current asset financing policy (aggressive, conservative, etc.)

In determining the company's to current asset financing policy, the company must first determine its risk tolerance. Higher risk tolerance, the company is said to be a risk taker. Hence, company worry less about the high risk since the it will involve higher returns. Company with high tolerance prefer holding less current assets resulting lower working capital. A conservative financing policy results to less current liability and a lot of long-term liability to finance the company's asset.

Prepare forecasts of future cash flows

Initial Cash Flow + Issue Price Bond CF Y0 = + Issue Price Annual Cash Flow / Year 1 to Year X-1 - Cash interest ± Bond interest amortization = Total Interest Expense x Tax % = Total Tax Savings - Cash Interest + Total Tax Savings from Interest Expense = - Net Cash Flow Annual CFs = - Net of Tax Cash Flow Terminal Cash Flow / Year X: - Cash interest ± Bond interest amortization = Total Interest Expense x Tax % = Total Tax Savings - Cash Interest - Par Bond Repayment + Total Tax Savings from Interest Expense = - Net Cash Flow Maturity CF = - Net of Tax Cash Flow

Define initial public offerings (IPOs)

Initial public offerings (IPOs) refer to an event of a firm "going public" or offering ownership shares in the firm to the general public for the first time.

Define insider trading and explain why it is illegal

Insider trading involves the directors and management of a corporation buying or selling the corporation's securities to gain an advantage over investors who are not privy to the information. Law have been promulgated to prevent/minimize this unfair practices and penalizing the wrongdoers. > The Insider Trading Act of 1984 specifies civil penalties for illegal insider trad-ing of up to three times the profit gained or three times the loss avoided from the illegal trading. > The Insider Trading and Securities Fraud Enforcement Act of 1988 stipulates that brokers, dealers, and investment advisors must enact and enforce policies to prevent insider trading and to prevent the firm, its employees, or any associated persons from misusing material nonpublic information

Demonstrate an understanding of the roles of investment banks, including underwriting, advice, and trading

Investment banks are financial institutions that assist companies and governments in issuing securities. The services of an investment bank include providing advice, selling securities, and underwriting. When an investment bank acts as an under-writer, it bears some or all of the risks of selling and holding the securities in exchange for a premium. The investment bank or syndicate (group of investment banks) normally sets up a best efforts agreement with the IPO issuer. In a best efforts agreement, the invest-ment bank or syndicate agrees to use all reasonable efforts to sell as much of the issue to the public. Origination » Red-herring » Underwriting » IPO

Define lead time and safety stock; identify reasons for carrying inventory and the factors influencing its level

Lead time is the time between placing an order and getting the units in stock and ready for use. Safety stock (or buffer stock) generally refers to a quantity of stock held in inventory to protect against: - fluctuations in supply and demand, -production forecast errors, or - short-term changes in backlog Reasons for Carrying the Invetory and Factors influencing its level: > Volatility of Supply andDemand > Economies of Production > Coverage for emergencies > Maintenance of consistent level of operation > Expectation on trade discounts and future prices of the inventories > Lead Time and Coverage for potential delays > Carryings Costs and Ordering Cost involve

Describe lease financing, explain its benefits and disadvantages, and calculate the net advantage to leasing using discounted cash flow concepts

Lease financing is one of the important sources of medium- and long-term financing where the owner of an asset gives another person, the right to use that asset against periodical payments Advantages to the Lessor: 1. Assured Regular Income 2. Preservation of Ownership. Lessor transfers the risk and reward without the ownership. 3. High profitability with interest 4. Tax benefits from the depreciation Disadvantages 1. Unsupervised Asset 2. Unprofitable in case inflation outruns the profit Advantages to Lessee: 1. Tax Benefits from the Lease payments 2. Cheaper than spending resources on actual capital investment as 3. Receiving technical assistance Disadvantages 1. Ownership 2. Compulsion. It is non-cancellable and payments are obligations Computation: Net Benefit = Purchasing - Leasing > Purchasing: Y0 - Net Purchase Price Y1 - Maintenance Net of Tax + Depreciation Tax Savings Yx + Residual Value Net of Tax > Leasing Y1 to Yx - Lease payments net of Tax

define and identify characteristics of other sources of long-term financing, such as leases, convertible securities, and warrants

Lease: Legal contract through which the owner (the lessor) of an asset grants another party (the lessee) the right to use the asset for a certain period of time in return for a specified payment C: - Binds the lessee to make payments specified in the lease contract. - Can take various forms: • Operating leases: short-term, cancelable leases where the lessor bears the risk of ownership. • Financial lease (also known as full payout or capital lease): usually noncancelable and fully paid out (amortized) over its term and where the lessee bears the risks (i.e., the lessee bears the responsibility for maintenance, insurance, and taxes). Convertible security: fixed income security or a preferred stock that includes an option to exchange that security for a stated number of shares of another security Warrant Warrant: Long-term CALL option to purchase common stock directly from the corporation

Distinguish a long position from a short position

Long position: • The party who agrees to buy the underlying asset on a specified future date assumes a long position. Short position: • The party who agrees to sell that underlying asset on the specified date assumes a short position.

Explain the maturity matching or hedging approach to financing

Maturity matching or hedging approach is a strategy of working capital financing wherein short term requirements are met with short-term debts and long-term requirements with long-term debts. Simply: > Long-term Funds will finance = Fixed Assets + Permanent Working Capital > Short-term Funds will finance = Temporary working capital

Define options and distinguish between a call and a put by identifying the characteristics of each

Option is a contract between two parties wherein the purchaser of the contract has the right, but not the obligation, to buy or sell a given amount of an underly-ing asset. Call option is a type of option contract giving the owner the right to buy the underlying asset from the writer at a fixed price during the specified time period. Put option is a type of option contract giving the owner the right to sell to the writer the underlying asset at a fixed price during the specified time period. Factors: 1. Stock Price 2. Stick Price 3. Time to Expiration 4. Volatility 5. Dividends 6. Risk-free rate of interest [NOT the nominal rate] Volatility and Time to Expiration have the same effects on call and put options

Identify and calculate the costs related to inventory, including carrying costs, ordering costs, and shortage (stockout) costs

Ordering Costs + Freight-in + Inspection Cost Carrying Costs = + Opportunity Cost + Storage Costs, + Obsolesence and deterioration costs + Insurance during shipments [NOT on warehouse] + Taxes Shortage Cost + Overtime Cost + Special shipment cost

Evaluate key factors in a company's financial situation and determine if a restructuring would be beneficial to the shareholders

Overall objective of corporations that enter into restructuring transactions is to maximize shareholder wealth. Factors include: + Obtain another company's assets, skills or technology, + Achieve Economies of Scale + Obtain resources [suppliers and talents] + Obtain additional distribution channels + Obtian customers + Grow faster + Diversifying product Divesting motives include + To focus on operations they can do best. + Getting ride of underperforming or failing business + Pressure from regulations and or stockholders

Identify and explain common trade financing methods, including cross-border factoring, letters of credit, banker's acceptances, forfaiting, and countertrade

Payment Methods: - Letter of credit[importer] is a letter sent by a lender to an exporter on behalf of an importer stating that the bank will accept a draft (bill of exchange) with appropriate accompanying documentation and will back the obligation of the importer. - Demand draft or sight draft is a bill for imports that is payable immediately - Time draft is a bill that must be paid at a specified time in the future or upon completion of specified requirements by the exporter. Time drafts that result from commercial trade financing are BANKER'S ACCEPTANCE. - Consignment is when the exporter sends goods to the importer to be sold. - Open account occurs when the exporter mails documents to the importer (buyer) before there is any obligation on the part of the importer Financing Method - Bankers' acceptances (BAs) are forms of TIME drafts drawn to finance the export, import, domestic shipment, or storage of goods. Normally, BAs are traded at discount from face value in the secondary market - Countertrade is a generic term for forms of trade that involve exchanging goods or services with other goods or services (in whole or in part) rather than with money. - Forfaiting is a form of factoring that refers to the purchase of a receivable for capital goods, commodities, or a large project from an exporter in order for the exporter to obtain immediate cash. Forfaiting is typically without recourse, meaning that the for-faiter does not have the ability to go back to the exporter in the event of nonpayment. A typical forfaiting transaction is for a credit period of at least 180 days, but can be up to seven years. - Cross-border Factoring: Cross-border factoring is facilitated when there is a network of factors across bor-ders. The exporter's domestic factor may contact factors in other countries to handle the collection of accounts receivables.

Evaluate a proposed business combination and make a recommendation based on both quantitative and qualitative considerations

Quantitative Considerations: - Discount Cash Flow Method [NPV and IRR] - Adjusted Book Value. involves determining the market value of the target company's assets and subtracting the value of its liabilities. - Comparative P/E ratio method[PE ratio, PB ratio, PS ratio] establishes the exchange of the acquiring company's stock for the target company's stock so as to obtain a desired postmerger P/E ratio. Acquire target companies with low P/E ratio - implies greater EPS. Qualitative Considerations - Coverage to Laws, and Technical Standards [Tax treatment and Accounting Standards report requirements] - Improvements on the Operations - Staff Morale - Reputation of the target company - Transaction intangibles "Patents, customer lists, copyrights, goodwill, trademarks, employee non-compete agreements, brand recognition"

Demonstrate an understanding of relative or comparable valuation methods, such as price/earnings (P/E) ratios, market/book ratios, and price/sales ratios

Relative valuation model is a business valuation method that compares a company's value to that of its competitors or industry peers to assess the firm's financial worth. Relative valuation models are an alternative to absolute value models, which try to determine a company's intrinsic worth based on its estimated future free cash flows discounted to their present value. • P/E Ratio: measure of the share price relative to the annual net income earned by the firm per share. PE ratio shows current investor demand for a company share. Also, company with a high P/E ratio is trading at a higher price per dollar of earnings than its peers and is considered OVERvalued. Likewise, a company with a low P/E ratio is trading at a lower price per dollar of EPS and is considered undervalued. - Trailing P/E ratio: uses earnings over the most recent 12 months. - Leading P/E ratio: uses next year's EXPECTED renamings. • P/B Ratio: shows how much the market is willing to pay for equity • P/S Ratio: shows how much the market is willing to pay for a dollar of sales. it is useful for valuing a range of stocks form mature or cyclical industries. Disadvantages: - Revenue recognition practices can distort sales - P/S ratio disregards cost structure - not necessarily indicative to whether the company is earnings profits

Identify and discuss the factors that influence the dividend policy of a firm

Residual Dividend Policy: Dividends are considered in excess of the equity after financing to certain projects from retained earnings. This will result to fluctuating dividends depending on the year's expenditure and future plans. the passive residual policy reinvests earnings as long as there are opportunities whose returns exceed the company's required rate of return. Any residual is returned to the shareholders Active Dividend Policy: This policy results to a constant payment of dividends. The entity must able to maintain this dividend level, since a change would result to information signal to investor. using a constant dividend payout ratio will have dividends that vary from year to year. This method calculates dividend payments as a constant or fixed percentage of each year's earnings per share.

Explain the benefit of short-term financial forecasts in the management of working capital

Short-term financial forecasts are essential in planning for the working capital needs of a company. Good forecasts can help the firm avoid holding excess amounts of cash and inventories as well as plan for working capital financing beyond that provided by accounts payable. !: "Percentage of Sale method" of forecasting is often used for making short-term working capital forecasts. This method is based on the idea that most balance sheet and income statement items vary with sales. Benefits: - Better use of financing[whether to take the discount or not] - Utilize the resources accordingly - Avoid holding excess amount of cash and inventories by determining when inflows and outflows occur Working capital management refers to decisions made about a firm's current assets and the financing needed to support those assets. Working capital manage-ment policies are generally categorized as aggressive, conservative, or moderate. Management decides on the working capital policy for the firm, beginning with risk tolerance. Aggressive Working Capital[Low current assets level] Management tolerance of Risk: High Liquidity: Low Interest Cost: Low Profit: High Conservative Working Capital[High current assets level] Management tolerance of Risk: Low Liquidity: High Interest Cost: High Profit: Low Benefits: - Reduce both the operating cycle and cash cycle - Determine the appropriate level of cash, inventory and accounts receivables - Avoid/Lessen the opportunity costs, stock-out costs, spoilage cost, default costs tied in managing these current assets.

Demonstrate an understanding of compensating balances

Some banks may require a compensating balance. A compensating balance is a minimum bank account balance that a borrower agrees to maintain with a lender without earning interest or offsetting other service charges. A compensat-ing balance may be specified as a percentage of the total commitment, the unused portion of the commitment, or the outstanding borrowings. Compensating balance cuts down on the risk to the lender, and also provides surety that some of the funds may be recovered in case the borrower defaults on the loan.

Define share repurchase and explain why a firm would repurchase its stock

Stock repurchases, also known as treasury stock, take place when a company buys shares of its own stock on the open market. When a company repurchases its own shares, those shares are removed from circulation. This reduction in the shares outstanding means that the remaining owners of the company's stock have a larger claim on the company's value and dividends. Purpose - Attempt to go private - Mergers and Acquisitions. The acquired shares can be used later for currency for an acquisitions.. - Stock options and warrants. The acquired shares can be used later for stock options awards or warrants. - To control the price of the share and to send out positive signals. If the shares are undervalue, stock repurchase will decrease the stock outstanding but increase the intrinsic value of each shares. - To boost its key financial ratios [like EPS] - Preserve the capital with less dividends - Employee stock ownership plans. To remove shares from the market, as payment to employees under stock-based compensation plans. Considerations - Reduces a company's solvency

Define interest rate and foreign currency swaps

Swaps are agreements to exchange a series of payments on periodic settlement dates over a certain time period. The party with the greater liability makes a payment to the other party. [tenor = term] Plain vanilla interest rate swap, one party makes fixed-rate interest payments on a notional principal amount specified in the swap in return for floating-rate payments from the other party. How swaps are similar to forwards: - Swaps typically require no payment by either party at initiation. [initial margin] - Swaps are custom instruments. - Swaps are not traded in any organized secondary market. - Swaps are largely unregulated. - Default risk is an important aspect of the contracts.

Demonstrate an understanding of how income taxes impact capital structure and capital investment decisions

Taxes can affect a firm's capital structure in these ways: • The benefit of tax shields. Firms with large taxable income possibly can reduce taxes through more debt financing—which increases the total cash flows distributed to debt and equity holders. • The uncertainty of using the tax deductions and risk involve of using debt. Firms with volatile operating earnings pose a higher business risk and lower the probability that they will be able to use tax deductions from borrowing dur-ing lower-income years. These firms may not want to borrow as much as other firms that have lower business risk. !: Trade-off theory: the benefits of tax shield and risk of default and agency cost.

Define concentration banking

The Concentration Banking is the arrangement used by the firms, wherein the funds from all the regional banks in different locations gets concentrated or collected into the single bank account. A concentration account is a deposit account that aggregates funds from several locations (e.g., from the national company's many branches) into one centralized account. Banks may also employ concentration accounts for fund transfers, private banking transactions, trust and custody accounts, and international transactions. Purpose: - helps the organizations in reducing the mailing float since remittances from the customer are either collected in person or local posts - Also, it has reduced the cheque processing float at company's office, as the detailed list of all the remittances received is sent to the company's head office as a credit advice

Explain the importance of using marginal cost as opposed to historical cost

The calculation of the cost of capital, using the current or prospective cost of the various capital components is generally more appropriate than relying on historical costs. A primary use of the cost of capital is in deciding how to finance new capital investments in such projects as new products, equipment, or facilities. Therefore, relevant costs are the marginal costs associated with incremental funds the firm plans to raise, not historical costs of capital that the firm had already raised. 1. It aims in the change of overall cost of capital because of the raising of one more dollar of the fund. 2. It helps in decision making whether or not to raise further funds for business expansion or new projects by discounting the future cash flows with a new cost of capital. 3. helps in deciding by what means the new funds to be raised and in which proportion Historical Method implies 1. Firm's performance willNOT significantly change in the future. 2. No significant changes in interest rates will occur 3. Investor attitude toward risk will NOT change

Demonstrate an understanding of the Capital Asset Pricing Model (CAPM)

The capital asset pricing model (CAPM) is an economic model for valuing a portfo-lio by relating risk and expected return. The idea behind the CAPM is that investors demand an additional expected return (also known as risk premium) when asked to accept additional risk above that found in a risk-free investment (e.g., T-bills). The basic premise underlying the CAPM is that the risk premium varies in direct proportion to the beta in a competitive market. The expected risk premium for each investment in a portfolio should increase in proportion to its beta. This means that all investments in a portfolio should plot along an upward sloping line, known as the security market line if the market is in equilibrium. The security market line (SML) is a graphical representation of the CAPM, and it provides a benchmark for evaluating the relative merits of different stocks or portfolios.

Demonstrate an understanding of the two-stage dividend discount model

The discount method used should take into consideration: • Measure of cash flow. The dividends and free cash flows to equity • Expected holding period. Whether the expected period is finite (limited) or infinite • Pattern of expected dividends. Zero growth (no growth), growth, stable (con-stant) growth, or supernormal growth

Calculate the marginal cost of capital

The marginal cost of capital (MCC) is the weighted average cost of NEW capital calculated by using the marginal weights. It is the last dollar of new capital that the firm raises. The weighted marginal cost of capital (WMCC) is the incremental cost of financing beyond the previous MCC level. A break point (BP) is defined as the total financing a firm can raise before the cost of capital increases. It will compose debt, preferred stock or internal equity. [e.g. Debt portion of BP = BP x % Debt] BP = Retained Earnigns after paying out dividends / % Common Equity structure If the company has a capital budget greater than the breaking point, it will need to use more expensive common stock as the equity component. Thus, the company's marginal cost of capital will increase due to the higher cost of common stock com-pared with retained earnings.

Describe the role of the credit rating agencies

The purpose of the agencies is to assign a rating to each debt security based on creditworthiness of the company or government issuing the security. The rating assigned to a given debt shows an agency's level of confidence that the borrower will honor its debt obligations as agreed[default risk].This rating is used to determine the market rate of interest on the debt security. S&P Gloabl ratings/Standard & Poor's (S&P) is one of the many rating agencies, which scale ranks the instrument ranging form AAA[the highest rating which means the obligor has the capacity to meet its financial commitments] and down to C [the instrument is highly vulnerable to nonpayment], and could be labeled further down as D, - if it is subject to a distressed exchange offer.

Describe the term structure of interest rates, and explain why it changes over time

The relationship between an interest rate and the time to maturity is called the "yield curve" or the "term structure of interest rates. Yield curves plot interest rates of bonds of equal credit and different maturities. Interest rates changes over time to reflect the related related risk. In general, the longer the time to maturity, the greater the risk of fluctuation in the market value of the security. Thus, the shape of a nor-mal yield curve is upward sloping, and longer-term bonds normally pay returns (yields) higher than those of short-term bonds.

Identify and describe the different types of short-term credit, including trade credit, short-term bank loans, commercial paper, lines of credit, and bankers' acceptances

Trade Credit. A source of short-term financing created when a supplier grants credit terms to customers on purchases Unsecured short-term bank loan. A form of bank credit that is not backed by a pledge of specific collateral or assets. The borrower signs a promissory note as a for-mal obligation to repay the loan according to the specified terms. Secured short-term loan (or asset-based borrowing) is a form of credit based on the pledging of an asset for collateral. A/R and inventory are the most common assets used in this form of secured lending Line of credit is an agreement allowing a firm to borrow up to a specified limit during a particular time period. The borrower has access to the full credit-line amount but pays interest only on actual borrowings. Commercial paper (CP) is an unsecured short-term promissory note issued by a corporation. Banker's Acceptance. A securities in which a bank promises to pay a fixed future payment to the creditors. It is essentially a time draft and normally used in international transactions.

Identify and demonstrate an understanding of systematic (market) risk and unsystematic (company) risk

Unsystematic risk (also known as unique risk, diversifiable risk, or avoidable risk) is independent of economic, political, or other factors or general market movements. It is associated with a specific company or industry. Unsystematic risk comes from company-specific factors such as the company's financial leverage, effectiveness of business operations, strategy, sales cycle and seasonality, credit risk of customers, labor stoppages, and overall company management. Each company faces a unique set of risks. Investors can reduce their exposure to risk arising from one company by diversifying their equity investments across different industries and companies. Diversified portfolio can effectively eliminate unsystematic risk. Systematic Risk Systematic risk (also known as market risk, nondiversifiable risk, or unavoid-able risk) is associated with changes in return based on the market as a whole. Systematic risk is the risk that arises from high-level economic cycles and political environments. Systematic risk is affected by macroeconomic factors such as interest rates, inflation, growth rates of gross domestic product (GDP), currency exchange rates, government rules and regulations, and public policies. Investors cannot diversify away systematic risk. Systematic risk is often called nondiversifiable or market risk. A measure of systematic risk is called beta, which measures how correlated an individual stock's returns are with the broader market returns

Distinguish between individual security risk and portfolio risk

When evaluating a single investment, risk is often measured as the standard deviation of returns. In a diversified portfolio, the only risk of an individual asset comes from systematic risk. This is measured as the correlation between returns on an individual asset and the returns of the broader stock market.

Define working capital and identify its components

Working capital (or current capital) generally refers to the firm's investment in its current asset accounts. It is also referred to as gross working capital. Net work-ing capital refers specifically to the dollar difference between a firm's current assets and its current liabilities. Net working capital provides a measure of the immediate liquidity a firm has available to sustain and build its business. Net working capital includes the cash, marketable securities, accounts receivables, inventory, and short-term credit

Explain how a just-in-time (JIT) inventory management system helps manage inventory

additional cost savings by: • Reducing the manufacturing and warehousing space needed • Lowering property and overhead expenses • Reducing the investments for stock

Identify defenses against takeovers (e.g., golden parachute, leveraged recapitalization, poison pill (shareholders' rights plan), staggered board of directors, fair price, voting rights plan, white knight)

• Staggering terms for the board of directors instead of all of them coming up for election at the same time. • Golden parachutes for key executives providing exorbitant pay and benefits if discharged through a merger • Poison pills or shareholder rights plan, allow existing shareholders the right to purchase additional shares at a discount, effectively diluting the ownership interest of a new, hostile party. • Fair price amendment is a provision contained in a public company's charter or by-laws, which requires bidders to offer a fair market price for all the stock shares they attempt to acquire. It protects minority stockholders from getting a lower price per share than what major stockholders of the company may receive. [all same price] • White knight defense involves the target finding a friendlier buyer to merge with. • "Pacman" defense is when the target company attempts to buy out the so-called hostile buyer. • Litigation is when the target company challenges one or more aspects of a tender offer in an attempt to delay the takeover. • Greenmail is a targeted repurchase of the target company's stock by the target company after the potential acquirer has purchased a large number of shares of the target company's stock. • "Lobster traps" are when the target company issues a charter preventing individuals with more than 10% of convertible securities from converting them to voting stock. • Selling off the crown jewels is a tactic in which the target company sells off or disposes of certain assets that make it a desirable target. • Leveraged Recapitalization is a strategy where a company takes on significant additional debt with the purpose of either paying a large dividend or repurchasing shares