Q&A Hero

Q: Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in agreeing on the terms of a merger. a. True b. False

Q: Distinguish between escapable and inescapable costs. Give an example.

Q: List four types of facts that should be gathered during an analysis of a system.

Q: Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth. a. True b. False

Q: List two ways that a systems project can contribute to the strategic objectives of the firm.

Q: Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price. a. True b. False

Q: A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and, thus, the tax returns of the parent and its subsidiary can't be consolidated. The parent receives annual dividends from the subsidiary of $2,500,000. If the parent's marginal tax rate is 34% and if the exclusion on intercompany dividends is 70%, what is the effective tax rate on the intercompany dividends, and how much net dividends are received?a. 10.2%; $2,245,000b. 10.2%; $2,135,000c. 23.8%; $1,905,000d. 10.2%; $1,750,000e. 34.0%; $1,650,000

Q: What are two purposes of the systems project proposal?

Q: A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship. a. True b. False

Q: Explain an advantage of surveying the current system when preparing a systems analysis for a new systems project.

Q: Explain why accountants are interested in the legal feasibility of a new systems project.

Q: If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary, this would be a vertical merger. a. True b. False

Q: One of the main reasons why foreign firms are interested in buying U.S. companies is to gain entrance to the U.S. market. A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive. a. True b. False

Q: What are program version numbers and how are the used?

Q: Describe a test of controls that would provide evidence that only authorized program maintenance is occurring.

Q: A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine. a. True b. False

Q: What are the auditor's objectives relating to systems development?

Q: Which of the following statements is most CORRECT? a. The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed. b. Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger. c. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm. d. Operating economies are never a motive for mergers. e. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.

Q: Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S. during the 1980s? a. A profitable firm acquires a firm with large accumulated tax losses that may be carried forward. b. Attempts to stabilize earnings by diversifying. c. Purchase of assets below their replacement costs. d. Reduction in competition resulting from mergers. e. Synergistic benefits arising from mergers.

Q: Why is the payback method often more useful than the net present value method for evaluating systems projects?

Q: Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that would benefit the target firm's stockholders. a. True b. False

Q: What is a systems selection report?

Q: ____________________ benefits can be measured and expressed in financial terms, while ____________________ benefits cannot be easily measured and/or quantified.

Q: The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share. a. True b. False

Q: Why is it important that the systems professionals who design a project not perform the detailed feasibility study of the project?

Q: The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers. a. True b. False

Q: Describe a risk associated with the phased cutover procedure for data conversion.

Q: A spin-off is a type of divestiture in which the assets of a division are sold to another firm. a. True b. False

Q: Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency. a. True b. False

Q: List three advantages and one disadvantage of commercial software.

Q: New system development activity controls must focus on the authorization, development, and implementation of new systems and its maintenance. Discuss at least five control activities that are found in an effective system development life cycle.

Q: In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values. a. True b. False

Q: List three methods used to control the source program library.

Q: Kitto Electronics DataKitto Electronics has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%. In order to support growth, Kitto must reinvest 20% of its EBIT in net operating assets. Kitto has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of 11%.Refer to data for Kitto Electronics. Using the compressed adjusted present value model, what is Kitto's value of equity?a. $1,492,000b. $1,529,300c. $1,567,533d. $1,606,721e. $1,646,889

Q: Contrast the source program library (SPL) management system to the database management system (DBMS).

Q: Kitto Electronics DataKitto Electronics has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%. In order to support growth, Kitto must reinvest 20% of its EBIT in net operating assets. Kitto has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of 11%.Refer to data for Kitto Electronics. Using the compressed adjusted present value model, what is the value of Kitto's tax shield?a. $156,385b. $164,616c. $173,280d. $182,400e. $192,000

Q: Project feasibility includes all of the following except a. technical feasibility b. conceptual feasibility c. operational feasibility d. schedule feasibility

Q: A local firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Using the compressed adjusted present value model, what is the value of your firm's tax shield, i.e., how much value does the use of debt add?a. $92,571b. $102,857c. $113,143d. $124,457e. $136,903

Q: Strategic systems planning is important because the plan a. provides authorization control for the Systems Development Life Cycle b. will eliminate any crisis component in systems development c. provides a static goal to be attained within a five-year period d. all of the above

Q: The market value of Firm L's debt is $200,000 and its yield is 9%. The firm's equity has a market value of $300,000, its earnings are growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Using the compressed adjusted present value model, what would Firm L's total value be if it had no debt?a. $358,421b. $377,286c. $397,143d. $417,000e. $437,850

Q: The role of the accountant/internal auditor in the conceptual design phase of the Systems Development Life Cycle includes all of the following except a. the accountant is responsible for designing the physical system b. the accountant is responsible to ensure that audit trails are preserved c. the internal auditor is responsible to confirm that embedded audit modules are included in the conceptual design d. the accountant is responsible to make sure that the accounting conventions that apply to the module are considered by the system designers

Q: The market value of Firm L's debt is $200,000 and its yield is 9%. The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Using the compressed adjusted present value model, what is Firm L's cost of equity?a. 11.4%b. 12.0%c. 12.6%d. 13.3%e. 14.0%

Q: Which of the following statements concerning the compressed adjusted present value (APV) model is NOT CORRECT? a. The value of a growing tax shield is greater than the value of a constant tax shield. b. For a given D/S, the levered cost of equity in the compressed APV model is greater than the levered cost of equity under MM's original (with tax) assumptions. c. For a given D/S, the WACC in the compressed APV model is greater than the WACC under MM's original (with tax) assumptions. d. The total value of the firm is independent of the amount of debt it uses. e. The tax shields should be discounted at the unlevered cost of equity.

Q: When developing the conceptual design of a system, a. all similarities and differences between competing systems are highlighted b. structure diagrams are commonly used c. the format for input screens and source documents is decided d. inputs, processes, and outputs that distinguish one alternative from another are identified

Q: Which of the following is not a tool of systems analysts? a. observation b. task participation c. audit reports d. personal interviews

Q: Which of the following statements concerning the compressed adjusted present value (APV) model is NOT CORRECT? a. The value of a growing tax shield is greater than the value of a constant tax shield. b. For a given D/S, the levered cost of equity is greater in the compressed APV model than the levered cost of equity under MM's original (with tax) assumptions. c. For a given D/S, the WACC is greater in the compressed APV model than the WACC under MM's original (with tax) assumptions. d. The total value of the firm increases with the amount of debt. e. The tax shields should be discounted at the cost of debt.

Q: Aspects of project feasibility include all of the following except a. technical feasibility b. economic feasibility c. logistic feasibility d. schedule feasibility

Q: Which of the following statements concerning the compressed adjusted present value (APV)model is NOT CORRECT? a. The value of a growing tax shield is greater than the value of a constant tax shield. b. For a given D/S, the levered cost of equity using the compressed APV model is greater than the levered cost of equity under MM's original (with tax) assumptions. c. For a given D/S, the WACC in the compressed APV model is less than the WACC under MM's original (with tax) assumptions. d. The total value of the firm increases with the amount of debt. e. The tax shields should be discounted at the unlevered cost of equity.

Q: Project planning includes all of the following except a. specifying system objectives b. preparing a formal project proposal c. selecting hardware vendors d. producing a project schedule

Q: Glassmaker Corporation DataGlassmaker Corporation has a currentcapital structure consisting of $5 million (market value) of 11% bonds and $10 million (market value) of common stock. Glassmaker's beta is 1.36. Glassmaker faces a 40% tax rate.Glassmaker plans on making big changes in operation and capital structure during the next several years. (Its tax rate will remain unchanged.) Under these plans, the free cash flows for Glassmaker are estimated to be $3.0 million for each of the next 4 years; the horizon value of the free cash flows (discounted at the rate assumed by the compressed adjusted present value (CAPV) approach) is $10.0 million at Year 4. The estimatedtax savings due to interest expenses areestimatedto be$1 million for each of the next 4 years; the horizon value of the tax shields (discounted at the rate assumed by the CAPV approach) is estimated to be $5 million at Year 4. Glassmaker has no nonoperating assets. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%.Refer to data for Glassmaker Corporation.Using the compressed adjusted present value model, whatwill Glassmaker's value of equity be if it successfully implements its planned changes in operations and capital structure? (Round your answer to the closest thousand dollars.)a. $16,019,000b. $17,111,000c. $18,916,000d. $22,111,000e. $22,916,000

Q: The role of the steering committee includes a. designing the system outputs b. resolving conflicts that arise from a new system c. selecting the programming techniques to be used d. approving the accounting procedures to be implemented

Q: Glassmaker Corporation DataGlassmaker Corporation has a currentcapital structure consisting of $5 million (market value) of 11% bonds and $10 million (market value) of common stock. Glassmaker's beta is 1.36. Glassmaker faces a 40% tax rate.Glassmaker plans on making big changes in operation and capital structure during the next several years. (Its tax rate will remain unchanged.) Under these plans, the free cash flows for Glassmaker are estimated to be $3.0 million for each of the next 4 years; the horizon value of the free cash flows (discounted at the rate assumed by the compressed adjusted present value (CAPV) approach) is $10.0 million at Year 4. The estimatedtax savings due to interest expenses areestimatedto be$1 million for each of the next 4 years; the horizon value of the tax shields (discounted at the rate assumed by the CAPV approach) is estimated to be $5 million at Year 4. Glassmaker has no nonoperating assets. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%.Refer to data for Glassmaker Corporation. According to the compressed adjusted present value model, what discount rate should you use to discount Glassmaker's free cash flows and interest tax savings?a. 10.01%b. 10.06%c. 11.29%d. 11.44%e. 13.49%

Q: The systems analysis report does not a. identify user needs b. specify requirements for the new system c. formally state the goals and objectives of the system d. specify the system processing methods

Q: Glassmaker Corporation DataGlassmaker Corporation has a currentcapital structure consisting of $5 million (market value) of 11% bonds and $10 million (market value) of common stock. Glassmaker's beta is 1.36. Glassmaker faces a 40% tax rate.Glassmaker plans on making big changes in operation and capital structure during the next several years. (Its tax rate will remain unchanged.) Under these plans, the free cash flows for Glassmaker are estimated to be $3.0 million for each of the next 4 years; the horizon value of the free cash flows (discounted at the rate assumed by the compressed adjusted present value (CAPV) approach) is $10.0 million at Year 4. The estimatedtax savings due to interest expenses areestimatedto be$1 million for each of the next 4 years; the horizon value of the tax shields (discounted at the rate assumed by the CAPV approach) is estimated to be $5 million at Year 4. Glassmaker has no nonoperating assets. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%.Refer to data for Glassmaker Corporation. What is Glassmaker's WACC, based on its current capital structure?a. 9.02%b. 9.50%c. 9.83%d. 10.01%e. 11.29%

Q: Systems analysis involves all of the following except a. gathering facts b. surveying the current system c. redesigning bottleneck activities d. reviewing key documents

Q: Sallie's SandwichesSallie's Sandwichesis financed using 20% debt at a cost of 8%. Sallie projects combined free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 value includes the combinedhorizon values of FCF and tax shields.) All cash flows are expected to grow at a 3% constant rate after Year 4. Sallie'sbeta is 2.0, and its tax rate is 34%. The risk-free rate is 8%, and the market risk premium is 4%.Using the data for Sallie's Sandwiches andthe compressed adjusted present value model, what is the total value (in millions)?a. $72.37b. $73.99c. $74.49d. $75.81e. $76.45

Q: A disadvantage of surveying the current system is a. it constrains the generation of ideas about the new system b. it highlights elements of the current system that are worth preserving c. it pinpoints the causes of the current problems d. all of the above are advantages of surveying the current system

Q: Sallie's SandwichesSallie's Sandwichesis financed using 20% debt at a cost of 8%. Sallie projects combined free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 value includes the combinedhorizon values of FCF and tax shields.) All cash flows are expected to grow at a 3% constant rate after Year 4. Sallie'sbeta is 2.0, and its tax rate is 34%. The risk-free rate is 8%, and the market risk premium is 4%.Using the data for Sallie's Sandwiches andthe compressed adjusted present value model, what is the appropriate rate for use in discounting the free cash flows and the interest tax savings?a. 12.0%b. 13.9%c. 14.4%d. 16.0%e. 16.9%

Q: If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date, then the compressed adjusted present value model calculates the horizon value by discounting the post-horizon free cash flows and post-horizon expected future tax shields at the weighted average cost of capital.a. Trueb. False

Q: Typically a systems analysis a. results in a formal project schedule b. does not include a review of the current system c. identifies user needs and specifies system requirements d. is performed by the internal auditor

Q: Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT? a. The value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity. b. The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows before the horizon date at the unlevered cost of equity. c. The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity. d. The CAPV approach stands for the accounting pre-valuation approach. e. The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.

Q: The formal product of the systems evaluation and selection phase of the Systems Development Life Cycle is a. the report of systems analysis b. the systems selection report c. the detailed system design d. the systems plan

Q: In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the after-tax cost of debt. a. True b. False

Q: Which technique is least likely to be used to quantify intangible benefits? a. opinion surveys b. simulation models c. professional judgment d. review of accounting transaction data

Q: Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT? a. The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt. b. The horizon value is calculated by discounting the expected earnings at the WACC. c. The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC. d. The horizon value must always be more than 20 years in the future. e. The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity.

Q: Intangible benefits a. are easily measured b. are of relatively little importance in making information system decisions c. are sometimes estimated using customer satisfaction surveys d. when measured, do not lend themselves to manipulation

Q: A tangible benefit a. can be measured and expressed in financial terms b. might increase revenues c. might decrease costs d. all of the above

Q: In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the WACC. a. True b. False

Q: In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the unlevered cost of equity. a. True b. False

Q: An example of an intangible benefit is a. expansion into other markets b. reduction in supplies and overhead c. more efficient operations d. reduced equipment maintenance

Q: Kitto Electronics DataKitto Electronics has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%. In order to support growth, Kitto must reinvest 20% of its EBIT in net operating assets. Kitto has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of 11%.Refer to data for Kitto Electronics. According to the compressed adjusted present value model, what is Kitto's unlevered value?a. $1,296,000b. $1,440,000c. $1,600,000d. $1,760,000e. $1,936,000

Q: An example of a tangible benefit is a. increased customer satisfaction b. more current information c. reduced inventories d. faster response to competitor actions

Q: MM showed that in a world without taxes, a firm's value is not affected by its capital structure.a. Trueb. False

Q: When implementing a new system, the costs associated with transferring data from one storage medium to another is an example of a. a recurring cost b. a data conversion cost c. a systems design cost d. a programming cost

Q: MM showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt. a. True b. False

Q: The testing of individual program modules is a part of a. software acquisition costs b. systems design costs c. data conversion costs d. programming costs

Q: According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing. a. True b. False

Q: Site preparation costs include all of the following except a. crane used to install equipment b. freight charges c. supplies d. reinforcement of the building floor

Q: In a world with no taxes, MM show that a firm's capital structure does not affect the firm's value. However, when taxes are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased. a. True b. False

Q: When converting to a new system, which cutover method is the most conservative? a. cold turkey cutover b. phased cutover c. parallel operation cutover d. data coupling cutover