Wiley CPA excel Exam Review 2014 Study Guide, Business Environment and Concepts

Module 43: Financial Risk Management and Capital Budgeting

Overview

This module describes the relationship between risk and return and the use of various techniques to manage financial risk. There is an inverse relationship between risk and return. Companies attempt to maximize return within the risk tolerance level of its owners. There are a number of ways in which management attempts to mitigate risk including diversification and hedging.

This module also covers the concepts of the time value of money. Understanding the topic of the time value of money is essential for successful completion of the BEC exam. You must understand the mechanics as well as the concepts. Specifically, you should understand how present value techniques are used to value financial assets and liabilities.

The concepts of present value provide the basis for the last topic in this module–capital budgeting. Capital budgeting is the term used to describe the process of evaluating and controlling capital investments. The most effective capital budgeting techniques rely on present value techniques. Before beginning the reading you should review the key terms at the end of the module.

A. Risk and Return

B. Return on a Single Asset

C. Portfolio Returns and Risk

D. Interest Rates

Derivatives and Hedging

A. The Nature of Derivatives

B. Risks in Using Derivatives

C. Uses of Derivatives

D. Financial Statement Effects of Derivative Transactions

E. Hedging Examples

Present Value

A. The Time Value of Money

B. Valuation ...