A company that produces soap, shampoo, lotion, and other personal care products has recently taken a
hit due to a competitor's new product line. The company decides to reduce wages for its labor force to
save money while the company focuses on building up its reputation again, but the company's l...
- D076 UNIT 3
Finance Skills EXAMS GRADED A+
A company that produces soap, shampoo, lotion, and other personal care products has recently taken a
hit due to a competitor's new product line. The company decides to reduce wages for its labor force to
save money while the company focuses on building up its reputation again, but the company's labor
force goes on strike to protest the pay cuts. What type of risk does the strike represent? - ✔✔✔✔
Idiosyncratic risk
adaptive expectations - ✔✔✔✔When the prices of goods and services go up, employees expect and
even demand higher wages to maintain their standard of living. An increase in wages therefore reflects
the increased prices of goods and services.
Although there are many sources of inflation, we are going to mention three main sources: - ✔✔✔✔
increased demand for goods and services, rising costs, and adaptive expectations.
An interest rate is determined by the market's supply and demand and is thus composed of the
following: - ✔✔✔✔Opportunity cost
Risk
Inflation
annual percentage rate (APR) - ✔✔✔✔The annual interest rate that is charged for borrowing money
or that is earned through investment.
annuity - ✔✔✔✔a stream of cash flows of an equal amount paid every consecutive period
annuity due - ✔✔✔✔paid at the beginning of consecutive periods. An example may be taking out an
auto loan
Bonds with a rating of BBB and above are considered - ✔✔✔✔investment-grade bonds
, Bonds with the ratings of BB or below are called - ✔✔✔✔non-investment grade
business cycle example - ✔✔✔✔oversupply leads to declining margins, which impacts an entire
industry for an extended period of time.
Compounding - ✔✔✔✔means finding a future value given a present value
compounding interest - ✔✔✔✔The interest on the principal plus the interest on earned interest. Total
interest=PrincipalX(1+Interest rate)number of periods-Principal
Compounding involves - ✔✔✔✔finding the future value of a cash flow (or a set of cash flows) using a
given discount or interest rate.
Correlation - ✔✔✔✔the way two variables move in relation to each other. For example, the returns
on two stocks might be correlated if one always increases when the other increases and always
decreases when the other decreases. When combining assets into a portfolio, we usually get some
amount of risk reduction but not total risk elimination. The lower the correlation among the assets in
the portfolio, the greater the risk reduction possibilities for the portfolio.
cost of capital - ✔✔✔✔The cost to a firm to use an investor's capital
default risk - ✔✔✔✔the probability of a loss resulting from a borrower's failure to repay a contractual
obligation.This is a firm-specific risk and affects both the bonds and stocks of the firm.
discount rate - ✔✔✔✔The name for interest rate when used in time value of money calculations.You
can find the future value or past value of today's dollars given. example, if you ask, "How much will I
have in 10 years if I save $1,000 today in an account with an interest rate of 5%?" then 5% is the
discount rate needed to find how much you will have in 10 years.
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