REVIEW TEST 2

Question 1

Agency Problems

Answer 1

a manager who is principally and agent for stakeholders, acts in his own interests instead of maximising market value

• claiming high expenses
• avert risk to secure own position

Question 2

ways to combat agency problems

Answer 2

• compensation plans
• board of directors
• takeovers
• monitoring

Question 3

Payback Period

Answer 3

time until cash flows recover the initial investment of the project
- no account of time value of money

Question 4

payback rule

Answer 4

specifies that a project be accepted if its payback period is less than the specified cut off period

Question 5

ROI

Answer 5

Return on Investment

• the ratio of cashflows (gained) and initial investment
• no account of time value of money or size of the project

Question 6

Net Present Value Rule

Answer 6

• accept all projects that are worth more than they cost (positive net present value)

Question 7

Profitability index

Answer 7

relationship between NPV and initial investment

Question 8

IRR

Answer 8

Internal Rate of Return

- discount rate at which NPV equals 0

Question 9

Costing Methods

Answer 9

• process costing
• job-order costing
• activity-based costing

Question 10

process costing

Answer 10

assigns average costs to each unit of production

Question 11

job-order costing

Answer 11

differentiates the direct costs per job, to see how profitable each job is

Question 12

activity-based costing

Answer 12

calculates what percentage of overhead should be assigned to a job

Question 13

depreciation

Answer 13

the expense part of an expenditure that falls within the period

Question 14

3 phases of cost estimation

Answer 14

1. the ‘decision’ phase
2. the ‘validation’ phase
3. the ‘execution’ phase

Question 15

decision phase

Answer 15

work of cost estimator to quickly assist decision maker in estimating cost of various concepts and estimating influence of potential technical uncertainties to the cost
- focus on product

Question 16

validation phase

Answer 16

make sure we will accomplish the project for the cost which has been decided upon
- focus shifts to activities

Question 17

execution phase

Answer 17

periodically, from the information which is collected, decide if the project will remain inside the allocated budget

Question 18

External Factors on Productivity

Answer 18

• market conditions

- environmental conditions

Question 19

Internal Factors on Productivity

Answer 19

• work conditions

- management conditions

Question 20

What can we do with risk?

Answer 20

• accept
• minimise/mitigate
• avoid
• insure (pass on to 3rd party)

Question 21

Fundamental steps of risk management process

Answer 21

• identification
• analysis
• response

Question 22

Risk Management Method

Answer 22

1. identify, characterise threats
2. assess vulnerability of critical assets to specific threats
3. determine the risk
4. identify ways to reduce those risks
5. prioritise risk reduction measures based on a strategy

Question 23

Risk Mitigation Handling Options

Answer 23

1, Avoid

2. Control
3. Transfer
4. Accept

Question 24

purpose of income statement

Answer 24

shows whether or not a company’s business is profitable

Question 25

equity formula

Answer 25

equity = assets - liabilities

Question 26

equity definition

Answer 26

(or net worth) is the capital invested by the owners of a company

Question 27

liabilities

Answer 27

obligations to third parties

Question 28

current liabilities

Answer 28

debts they have to pay within a year

Question 29

long term liabilities

Answer 29

obligations with a payback period of more than a year

Question 30

working capital

Answer 30

measure of short term financial strength of company