B1/B2

Question 1

ERM

Answer 1

Culture, capabilities, and practices that organizations rely on to manage risk in creating, preserving, and realizing value

Question 2

Cost of debt

Answer 2

Actual interest rate - tax savings

Question 3

Nominal dollars & inflation rate

Answer 3

Nominal dollars are the inflation rate applied to real dollars
Ex: if you have 200K in real dollars, and inflation rate is 6%, in two years to Calc nominal dollars you need to
200* (1.06) * (1.06)

Question 4

Simple interest formula

Answer 4

FV = PV * (1 + i) ^n

Question 5

Net cost of debt formula

Answer 5

Effective interest rate net of tax.
Ex: interest rate is 14%, and tax is 30%,
Take (1-t)* i
Or 70% * 14% = 9.8%

Question 6

Debt ratio

Answer 6

Total debt/ total assets

Question 7

Price to earning ratio

Answer 7

Current market price / annual earnings per share

Question 8

NPV formula

Answer 8

Initial investment - (cash inflows * PV factor)

Question 9

Debenture & subordinated debenture

Answer 9

Debenture: unsecured obligation of the issuing company

Subordinated debenture: bond issue that is unsecured and ranks behind senior creditors

Question 10

Working cap

Answer 10

Current asserts - current liabilities

Question 11

Cash conversion cycle

Answer 11

CCC = days in inventory + days in AR - days payable outstanding

Question 12

Methods to use to delay disbursements

Answer 12

Defer payments, drafts, line of credit, zero balance accounts

Question 13

Reorder point

Answer 13

RO = safety stock + (lead time x sales during lead time)

Question 14

Value realization

Answer 14

Value is realized when benefits created by the organization are received by stakeholders
Can be monetary (dividends) or non monetary

Question 15

What’s ERM framework provide

Answer 15

It’s a framework to MANAGE risk within an organizations risk appeitite, to provide a reasonable expectation in the achievement of entity objectives

Question 16

Governance, COSO, five frameworks (DOVES)

Answer 16

Desired culture
exercises board Oversight
demonstrates commitments to core Values
attracts capable Employees
establishes operating Structure

Question 17

Strategy and objective setting compomonent of COSO, frameworks (SOAR)

Answer 17

evaluates alternative STRATEGIES
formulates business OBJECTIVES
ANALYZES business context
defines RISK appetite

Question 18

Three risks considered by management under COSO

Answer 18

Inherent risk, actual residual risk, and target risidual risk

Question 19

Five components of ERM (GO PRO)

Answer 19

Governance & culture
strategy & OBJECTIVE setting 
PERFORMANCE
Review and revision 
information, communication, reporting (ONGOING)

Question 20

Risk sharing

Answer 20

INSURANCE

insuring against losses to address risk

Question 21

Risk reduction

Answer 21

Think diversification

Not eliminating risk, but diversifying options to reduce

Question 22

Risk sharing

Answer 22

Reduce severity of risk by bringing in an outside party

Question 23

Go pro

Answer 23

Governance and culture, sratecgy and objective setting, performance, review/revision, information communication and reporting

Question 24

Goals of ERM

Answer 24

achieve objectives/goals, assess risk regularly, achieve financial & reporting targets

Question 25

VAPIR

Answer 25

``` Performance part of coso; Portfolio view, assess severity of risk, prioritize risk, identify risk, implement risk response ```

Question 26

When is risk appetite exceeded

Answer 26

The likelihood and impact of negative events exceeds residual risk

Question 27

Organizational sustainability

Answer 27

The ability of an entity to withstand the impact of large scale events

Question 28

What is the difference between inherent and residual risk according to Coso

Answer 28

The difference arises because of management actions to reduce the inherent risk Residual risk is the risk AFTER management takes actions to reduce impact of negative event

Question 29

Under SOX, internal control must be evaluated when

Answer 29

Within 90 days PRIOR to issuer report

Question 30

EAR formula

Answer 30

EAR = 1 + (stated rate/n)^n

Question 31

How to reduce unsystematic risk

Answer 31

(Aka firm specific/ non-market risk) Reduce by diversification

Question 32

Forward contract

Answer 32

LARGE groups of transactions (think forward = for A LOT)

Question 33

Cost to issue formula

Answer 33

Face value - price paid + transaction costs

Question 34

Firm with higher degree of operating leverage compared to industry implies what

Answer 34

Firms profits are more sensitive to changes in sales volume

Question 35

LETTER OF CREDIT

Answer 35

3rd party guarantee of obligations | If company is saying “we guarantee” its a LETTER of credit

Question 36

Considering the SCOR model of supply chain, implementing changes in engineering falls into what key process?

Answer 36

MAKE

Question 37

Four components of SCOR

Answer 37

Plan, source, make, deliver

Question 38

SCOR; plan

Answer 38

Determining demand, planning inventory, configuring supply chain, make/buy decisions

Question 39

SCOR; source

Answer 39

Which vendors, vendor pmts, oversee quality assurance

Question 40

SCOR; Make

Answer 40

Manage production, manufacture product, test product, release inventory, analyze capacity

Question 41

SCOR; deliver

Answer 41

Manage ORDERS, ship products, label products, manage AR

Question 42

3 carrying costs

Answer 42

Insurance costs, cost of capital invested into inventory, cost of obsolescence, opportunity cost on inventory investment

Question 43

What increases EOQ

Answer 43

Remember formula for EOQ = SQRT ( [2 * SO] / C ) S= sales quantity in units O = cost per purchase ORDER C = cost of carrying one unit in stock for one year Order size will get larger as “S” or “O” gets bigger (numerator) or “C” gets smaller (denominator)

Question 44

Why would a company agree to debt covenant which limits % of its long term debt

Answer 44

Reduce coupon rate on NEW bonds sold

Question 45

Benefits of a lockbox system

Answer 45

Expedites cash inflows by having a bank receive pmts directly. This reduces AR outstanding Aka: (Minimize collection float)

Question 46

If the dollar price against the euro rises,

Answer 46

This means the dollar is DEPRECIATING against the euro | Euro will get more expensive

Question 47

What 3 things impact safety stock levels

Answer 47

Uncertain sales forecasts Dissastisfaction of customers Uncertain lead times

Question 48

What 3 things impact the optimal level of inventory

Answer 48

Time required to receive inventory (lead time), cost per unit of inventory ( & associated carry costs), cost of placing an order for merchandise

Question 49

MRP (materials requirements planning)

Answer 49

Inventory management technique that projects and plans inventory levels in order to control usage of raw materials in the production process

Question 50

Audit committee financial expert must have experience specifically with what

Answer 50

Internal accounting controls

Question 51

According to SOX 2002, how many years is the penalty for destroying, covering up documents under title VIII

Answer 51

20 years

Question 52

What is the purpose of a written code of conduct, according to coso

Answer 52

Helps management set tone for the organization; promoting honest/ethical conduct, teamwork, compliance, appropriate disclosure

Question 53

Liquidity risk

Answer 53

Risk associated with the ability to sell temporary investment in a short period of time without significant price concessions

Question 54

Definition of Price risk, and what technique would a company use to manage it

Answer 54

Price risk = exposure an investor has to a decline in the value of a portfolio or individual securities Using market value at risk analysis would help the company understand and quantify the value at risk

Question 55

Types of risk (DUNS)

Answer 55

Diversifiable, unsystematic (non-market/firm specific), non-diversifiable, systematic

Question 56

Put option

Answer 56

Gives the owner the option to sell a specific security at fixed conditions of price and time *PUT an offer to sell a security later vs CALL you when I want to buy it (since call options are options to buy)

Question 57

What does it mean when an investor’s certainty equivalent is greater than the value of an investment alternative?

Answer 57

This means the point at which the investor is indifferent about risk actually exceeds the expected return on the investment, so they are seeking lower return for higher risk This is risk seeking behavior

Question 58

Required rate of return is calculating by adding what 4 risk premiums to the risk free rate

Answer 58

MP+IP+LP+DRP Maturity risk premium (MP)(from exposure to the same interest rate over time) Purchasing power risk/inflation premium (IP)(based on risk of changing price levels) Liquidity risk premium (LP) (risk of not being able to convert an asset to cash at FMV) default risk premium (DRP) (risk issuer will fail to pay interest/principal)