B1: Risk Management and Economic Analysis M# Question Answer Reason M# Question Answer Reason

when domestic currency appreciates,

domestic currency becomes more expensive. Statement I is incorrect, as an increase in the
appreciation of domestic currency
Exports become more expensive to minimum wage will move employers up, not
hurts domestic importers and
Which is incorrect regarding the impact of consumers bc imported goods purchasers overseas. Imports become less down, the labor demand curve, causing the
M1: Enterprise Risk Management Frameworks M2: Financial Risk Management M2 exchange rates on operations cost more expensive An increase in the minimum wage: quantity of labor demanded to fall.
I. Will move employers down the labor demand curve, Statement II is incorrect, as an inc in the
COSO; which components of enterprise causing the quantity of labor demanded to fall. minimum wage leads to a dec in the quantity
represents the exposure of the ownerr of the instrument to risk management addresses an entity's II. Is likely to increase the supply of labor, as more people demanded of labor and an inc in the quantity
Created benefits > resources used Interest Rate Risk (Yield Risk) flucuation in response to changing interest rates M1 operating structure? governance and culture M3 will be willing to work for the higher wage. Neither I nor II supplied of labor.
Market/Systematic/Nondiversifiab exposure of a security or firm to fluctuations in value as a result of increase in price will have price unit elastic means that price will have no If firms overlook the fact that few customers
Preserved operations effectively and efficiently create benefits le Risk operating within an economy M3 price unit elastic no effect on total revenue effect on total revenue care about the fact that a product is priced
Unsystematic/Firm- represents the portion of a firm's or industry's risk that is associated increase in price will result price does not affect how many people will Buyers become less price sensitive and start to lower than others and care more about brand
Value is...
Eroded inefficient/ineffective operations cause value to decline Specific/Diversifiable Risk with random causes and can be eliminated through diversification M3 price inelastic in increase in total revenue buy; overall revenue will increase M3 When do cost leadership strategies fail? have brand loyalty. loyalty
he Review and Revision Component of the
evaluates employees with Enterprise Risk Management Framework
responsibilities for financial reporting for human resources practices contains three principles: 1) Assesses
Classification
affects borrowers. exposure to credit risk includes a company's fulfillment of those responsibilities for should be designed to regular evaluation for competence links HR According to the COSO Enterprise Risk Management substantial change 2)Pursues improvement in
of Risk
inability to secure financing or secure favorable credit terms as a compesation and promotion purposes. faciliatate effective internal and the achievement of fin reporting framework, which component includes the principle titled enterprise risk management 3)Reviews risk
Realized benefits created are received by stakeholders Credit Risk result of poor credit ratings M1 these policies support: control over fin reporting objectives M1 "Pursues improvement in enterprise risk management"? Review and Revision and performance
affects lenders. credators are exposed to default risk to the extent
core purpose (why it exists and what it hopes to that it is possible that its debtors may not repay the principals or impact of government price support subsidy that will encourage suppliers to Shore Co. records its transactions in U.S. dollars. A sale of
Mission accomplish) Default Risk interest due M3 program would most likely result in: lead to surpluses increase supply beyond equilibrium point. goods resulted in a receivable denominated in Japanese
yen, and a purchase of goods resulted in a payable
corrolate to differentiation advantage this is not true becuase differentiation
denominated in euros. Shore recorded a foreign exchange Fewer yen must be equal to a dollar (for there
ERM strategy and may best be obtained by a advantage may be best obtained by a firm
gain on collection of the receivable and an exchange loss to be more dollars), so the number of yen
business affects lenders. exposed to liquidity risk when they desire to sell which is not correct regarding firm when it builds market that builds market share or increases (NOT
on settlement of the payable. The exchange rates are exchangeable into dollars decreased. To be a
Vision aspirations of the entity (what it hopes to achieve) objectives Liquidity Risk their security, but cannot do so in a timely manner M3 competitive advantage share or decreaes its price DECREASES) its price
expressed as so many units of foreign currency to one loss, it must take more dollars to buy the same
corrolate to exposure that investors have to a decline in the value of their dollar. Did the number of foreign currency units euros. Therefore, the number of euros
Core Values beliefs and ideals (good vs bad) culture Price Risk individual securities or portfolios exchangeable for a dollar increase or decrease between the Yen exchangable for $1 = decrease; euro exchangeable into dollars must have
Acceptance Self-insuring or simply tolerating the full exposure to risk Effective Annual Interest Rate Simple Interest (Amount) increase in minimum wage: i) will move Statement i is incorrect because an inc in M2 contract and settlement dates? exchangeable for $1 = decrease decreased.
employers down the labor demand minimum wage would move employers UP the
Avoidance disposal of a business unit, product line, or geographical segment
curve, causing the quantity of labor labor demand curve. Statement ii is incorrect
Sharing Insuring against losses demanded to fall ii) is likely to increase because inc in min wage leads to a DECREASE Patents are granted in order to encourage firms to invest in Patents prevent other rival firms (without
Risk action is taken that accepts increased risk to achieve improved the supply of labor, as more people will in the quantity demanded of labor and inc in the research and development of new products. Patents are patents) from entering the market.Patents can
Management Pursue performance M3 be willing to work for the higher wage Neither i or ii quantity supplied of labor. M3 an example of: Barriers to entry be "process-related" or "product-related."
if demand increases and
supply decreases,
diversification of product offerings rather than elimination of product equilibrium price will if quantity demanded goes up, drives price up.
Reduction offerings Compound Interest (Amount) M3 what is true about supply and demand? increase If supply decreases, also drive prices up.
COSO, which of the following
components of enterprise risk The data above best support which of the following
risk to an organization if management does nothing to alter the likelihood management addresses an entity's conclusions regarding the price elasticity of demand for the
Inherent Risk or impact of a negative event M1 control over information systems Information, communication, and reporting M3 two products? Substitutes are more readily available for Product A than for Product B.
When customers are distinct, a seller can
Risk
when does competition NOT become an charge different prices to different groups by
Assessment
risk to an organization after management takes actions to reduce the even stronger force impacting Price discrimination is accomplished most effectively in justifying that the products they are buying
Actual Residual Risk likelihood or impact of a negative event M3 profitability? the market is fast-growing M3 markets with which of the following characteristics? Fairly distinct segments of customers. are unique to that specific group.
which of the following factors is inherent business risk represents the risk associated Due to the extremely high costs of insurance premiums for
amount of risk an entity prefers to assume in pursuing its goals and in a firm's operations if it only utilizes with the unique circumstances of a company, hurricane coverage, a South Florida company chooses to self-insuring implies that the company will
Target Residual Risk objectives. M2 only equity financing? business risk as they might affect shareholder value M1 “self-insure.” This is an example of risk: Acceptance take no action
Maturity Risk Gasoline is a complement (they go together)
Residual risk = Inherent risk – Impact of management actions Premium (MRP) compensation that investors demand for exposure to interest rate risk over time to sport utility vehicles. As a result, a large
Purchasing increase in the price of gasoline would cause
Information, Power Risk or the demand curve for sport utility vehicles to
Governance and Strategy and Review and Communication, Inflation compensation investors require to bear the risk that price levels will change and shift left, leading to a decrease in both the
Culture Objective-Setting Performance Revision and Reporting Premium (IP) affect asset values or purchasing power Consider the market for sport utility vehicles. Suppose there quantity and price of sport utility vehicles.
is a large increase in the price of gasoline as well as an Steel is an input in the production of sport
Required Rate which of the following outcomes can a increase in the price of steel (an input in the production of utility vehicles. An increase in input costs
evaluates assesses leverages of Return additional compensation demanded by lenders for the risk that an investment company expect if it cannot find an sports utility vehicles). What is the predicted effect of these would cause the supply curve for sport utility
defines Desired alternative develops Substantial information and Liquidity Risk security cannot be sold on a short notice without making significant price alternative product supplier and its price will rise, and quantity events on the equilibrium quantity and price of sport utility Equilibrium quantity will fall and equilibrium vehicles to shift left, leading to a decrease in
culture Strategies portfolio View change Technology Premium (LP) concessions M3 supply curve shifts left? available will fall M3 vehicles? price may rise, fall, or stay the same. quantity and an increase in price.
pursues
Improvement economies of scale come into full play only if a
ERM formulates in enterprise large enough number of units is being
Framework exercises board business Assesses severity risk communicates Default Risk additional compensation demanded by lenders for bearing the risk that the issuer of In the long run, a firm may experience produced to make it worth while to set up a Which of the following situations illustrates a potential Company X supplies raw materials to the A company merging with one of its suppliers
Oversight Objectives of risk management risk Information Premium (DRP) the security will fail to pay interest and/or principal due on a timely basis M3 increasing returns due to: economies of scale fairly elaborate productive organization M5 vertical merger between Companies X and Y? production processes for Company Y. represents a vertical merger.
demonstrates Reviews risk reports on risk, what is the effect when a foreign foreign company will have foreign currency becomes weaker compared
committment to Analyzes business and culture, and competitor's currency becomes weaker an advantage in the US to US dollar, product becomes less expensive
core Values context Prioritizes risk performance Performance Risk Averse managers who demand more return on an investment as risk increases M2 compared with the US dollar market in US dollars Repatriation restrictions exist when a company
manufacturing costs of a this is false because manu costs of a firm are invests money in a foreign company but is
attracts, develops, Attitudes firm are less than those of less than those of close rivals doesn't A U.S. parent company is reviewing the cash flows from its restricted from bringing that money back to its
and retains Toward Risk close rivals, then the firm necessarily mean that the firm has a international subsidiaries. In addition to exchange rate risk, home country. These restrictions would affect
capable individuals defines Risk Identifies risks not true regarding competitive has a competitive market competitive market advantage. only if TOTAL which of the following items would be a primary the cash inflows expected from the
(Employees) appetite (events) Risk Seeking managers who seek reduced return for higher risk M3 advantage? advantage costs are less than close rivals M4 consideration in the company's cash flow analysis? Repatriation restrictions. investment.
establishes implement risk manager who is neutral with regard to the return associated with a particular
operating Structure Responses Risk Indifferent investment
Hagar Company's bank requires a Total interest for the loan is $100,000 × 7% or In an effort to encourage the employment of summer teens,
M3: Market Influences on Business M4: International Business Operations compensating balance of 20 percent on $7,000. The effective amount received is the federal government lowered the minimum wage from A price floor is only effective when it is set
Effect on Effect on a $100,000 loan. If the stated interest on $80,000 after the 20% compensating balance. $7 per hour to $6 per hour. The equilibrium wage for such The change should have no effect on teen above the equilibrium price. In this case, the
Equilibrium Equilibrium International the loan is 7 percent, what is the The effective interest is $7,000 / $80,000 = employees is $8 per hour. What effect should this change in employment because the minimum wage is $8 market price is already higher than both
Change in Demand Change in Supply Quantity Price Trade exporting/importing products or services M2 effective cost of the loan? 8.75% 8.75%. M3 the minimum wage have on teen employment? set below the equilibrium wage. the $7 and the $6 price floors.
General Increase Increase Indeterminate Licensing provde right to use processes or technologies in exchange for a fee
Affects of Methods of
marketing service or delivery strategy provide training and related service delivery The effective annual interest rate is equal to
Change in Conducting A lender and a borrower signed a
Increase Decrease Indeterminate Increase Franchising resources for a fee one plus the stated interest rate divided by the
Demand and International contract for a $1,000 loan for one year.
Supply take advantage of comparative advantage of one or both of the participants in interest periods raised the power of the
Business The lender asked the borrower to pay
Increase Decrease Indeterminate Joint Ventures marketing or delivering a product compounding periods.
Operations 3% interest. Inflation occurred and
Direct Foreign purchasing a foreign company as a subsidiary or by starting a subsidiary operation prices rose by 2% over the next year. The The $1,030 amount repaid is readily adjusted
Decrease Decrease Indeterminate Decrease Investment (DFI) within the borders of a foreign country borrower repaid $1,030. What is the for the 2% inflation by dividing it by a factor of
Decrease in Decrease in synchronization of all levels of product manufacturing, including research and amount worth in real terms, after 1.02 ($1,030 / 1.02 = $1,009.80), which is 1 plus
Increase in Demand Increase in Supply Demand Supply Global Sourcing development, production, and marketing, on an international basis M3 inflation? $1,009.80 the 2% inflation rate.
Limitations on Asset
Graph Shifts
Potential for Ownership or Joint Content or The Carters signed an agreement with an effective annual
Political and Asset Taxes and Venture Value Added Foreign Trade interest rate of 7.74%. Interest is payable semi-annually.
Shift Right Shift Left Shift Left Shift Right Relevant Legal Influences Exploration Tariffs Participation Limits Zones M2 What was the stated rate? 7.60%
Factors of Using the point method of calculating
High= can easily Centrally
International price elasticity of demand, if the price of
switch to a Economic Planned Market
Price Business a product drops from $25 to $15 and the
substitute Systems: Economies Economies Conglomerates
Elasticity of Operation demand for that product increases by
Acceptance Technology 25%, the price elasticity of demand and When the price elasticity of demand is less
Demand
Low= item is a Individualism vs Uncertainty of Leadership and the impact of the price decrease on than 1.0, it is considered to be inelastic
necessity Culture: Collectivism Avoidance ST vs LT Orientation Hierarchy Infrastructure M3 total revenue, respectively, are: Inelastic and TR decreases
Price Impact of a Price Impact of a Price Hedgehog International has a
Elasticity of Increase on Total Decrease on receivable valued at 500,000 local
Demand Implied Elasticity Revenue Total Revenue M5: The Economic Effect of Significant Transactions currency units from its foreign customer
Horizontal companies in the same industry that produce the same goods or services join due in 90 days. The current spot rate of
Elastic Greater than 1 TR decreases TR Increases Combination together under single MGMT the local currency unit is $.60.
Hedgehog purchases a put option to
Vertical
Types of sell the local currency unit in 90 days for
Inelastic Less than 1 TR increases TR decreases Combination combination of companies at different stages of production process
Business $.61 for a premium of $.005. The Hedgehog will not exercise
Circular different business units with relatively remote connections come together under exchange rate for the local currency the option and sell local
Combinations
Unit Elastic Equal to 1 TR is unchanged TR is unchanged Combination single MGMT increases to $.63 in 90 days. What will currency units collected
Price Diagonal company that engages in an activity integrates with another company that Hedgehog do on the receivable's from its receivable at the
Elasticity of Combination provides ancillary support for that primary activity M2 settlement date? spot rate.
Supply Merger two or more entities combine to form a single corporation A perfectly inelastic supply curve is vertical,
A firm has a perfectly inelastic supply which means that the quantity supplied will
Acquisition one company acquires another
curve, and it faces a downward sloping not change regardless of what happens with
Transactions a company makes an offer directly to shareholders to buy the outstanding shares of demand curve. Which of the following prices. If the demand curve increases, the
Cross Tender Offer another company at a specified price results best describes an increase in equilibrium price will necessarily rise as the
Elasticity Purchase of a portion (or all) of the selling company's assets are purchased by the acquiring demand when the supply curve is Price will rise, and quantity point at which the curves intersect will now be
Assets company, which many result in dissolution M3 constant? will be constant higher on the supply curve.
Sell-off outright sale of a subsidiary A company considers investing $20
An initial investment of $20 million is worth
million in a foreign company whose
create a new, independent company by separating subsidiary business from the 51,400,000 in foreign currency based on an
local currency is under pressure. The
Divestiture Spin-off parent exchange rate of 2.57 to $1.00.
Income company suspects that the exchange
subsidiary is made public through an IPO, thereby creating a new publicly listed After the exchange rate change (3.15 to $1.00),
Elasticity of rate may fluctuate soon. The exchange
Equity Carve-out company 51,400,000 is worth $16,317,460.
Demand rate at the time of the investment is 2.57
to $1.00. After the investment, the
exchange rate changes to 3.15 to $1.00. A decline from $20,000,000 to $16,317,460
What is the change in the value of the represents a decline of $3,682,540, or 18.4
M2 company's investment in U.S. dollars? 18.4% decrease percent.