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Q:
The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.
a. True
b. False
Q:
Which task is not essential during a data conversion procedure?
a. decomposing the system
b. validating the database
c. reconciliation of new and old databases
d. backing up the original files
Q:
Computer operators should have access to all of the following types of documentation except
a. a list of users who receive output
b. a program code listing
c. a list of all master files used in the system
d. a list of required hardware devices
Q:
Preferred stock typically has a par value, and the dividend is often stated as a percentage of par. The par value is also important in the event of liquidation, as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.
a. True
b. False
Q:
Typical contents of a run manual include all of the following except
a. run schedule
b. logic flowchart
c. file requirements
d. explanation of error messages
Q:
Preferred stockholders have priority over common stockholders with respect to dividends, because dividends must be paid on preferred stock before they can be paid on common stock. However, preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy.
a. True
b. False
Q:
Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period, for example, 4 quarters.
a. True
b. False
Q:
Which type of documentation shows the detailed relationship of input files, programs, and output files?
a. structure diagrams
b. overview diagram
c. system flowchart
d. program flowchart
Q:
System documentation is designed for all of the following groups except
a. systems designers and programmers
b. end users
c. accountants
d. all of the above require systems documentation
Q:
Unlike bonds, the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis. This is because dividends on preferred stock are not tax deductible, whereas interest on bonds is deductible.
a. True
b. False
Q:
The detailed design report contains all of the following except
a. input screen formats
b. alternative conceptual designs
c. report layouts
d. process logic
Q:
The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.
a. True
b. False
Q:
The output of the detailed design phase of the Systems Development Life Cycle (SDLC) is a
a. fully documented system report
b. systems selection report
c. detailed system design report
d. systems analysis report
Q:
Which of the following statements is most CORRECT?a. One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted, but exercising warrants does not bring in any additional funds.b. The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt even though investing in convertibles is more risky than investing in straight debt.c. The value of a warrant to buy a safe, stable stock should exceed the value of a warrant to buy a risky, volatile stock, other things held constant.d. Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual.e. Warrants have an option feature but convertibles do not.
Q:
Which step is least likely to occur when choosing a commercial software package?
a. a detailed review of the source code
b. contact with user groups
c. preparation of a request for proposal
d. comparison of the results of a benchmark problem
Q:
Which of the following statements concerning warrants is correct?
a. Warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops.
b. Warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen.
c. A firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
d. A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.
e. Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. However, if the option is exercised, the issuing company's debt declines if warrants were used but remains the same if it used convertibles.
Q:
Which of the following is not an advantage of commercial software? Commercial software
a. can be installed faster than a custom system
b. can be easily modified to the user's exact specifications
c. is significantly less expensive than a system developed in-house
d. is less likely to have errors than an equivalent system developed in-house
Q:
Neuman Corporation Convertible BondsThe following data apply to Neuman Corporation's convertible bonds:Maturity: 10 Stock price: $30.00Par value: $1,000.00 Conversion price: $35.00Annual coupon: 5.00% Straight-debt yield: 8.00%Refer to the data for the Neuman Corporation's convertible bonds. What is the minimum price (or "floor" price) at which the Neuman's bonds should sell?a. $698.15b. $734.89c. $773.57d. $814.29e. $857.14
Q:
A commercial software system that is completely finished, tested, and ready for implementation is calleda
a. backbone system
b. vendor-supported system
c. benchmark system
d. turnkey system
Q:
Neuman Corporation Convertible BondsThe following data apply to Neuman Corporation's convertible bonds:Maturity: 10 Stock price: $30.00Par value: $1,000.00 Conversion price: $35.00Annual coupon: 5.00% Straight-debt yield: 8.00%Refer to the data for the Neuman Corporation's convertible bonds. What is the bond's straight-debt value?a. $684.78b. $720.82c. $758.76d. $798.70e. $838.63
Q:
Examples of recurring costs include
a. software acquisition
b. data conversion
c. personnel costs
d. systems design
Q:
Neuman Corporation Convertible BondsThe following data apply to Neuman Corporation's convertible bonds:Maturity: 10 Stock price: $30.00Par value: $1,000.00 Conversion price: $35.00Annual coupon: 5.00% Straight-debt yield: 8.00%Refer to the data for the Neuman Corporation's convertible bonds. What is the bond's conversion value?a. $698.15b. $734.89c. $773.57d. $814.29e. $857.14
Q:
Examples of one-time costs include all of the following except
a. hardware acquisition
b. insurance
c. site preparation
d. programming
Q:
Neuman Corporation Convertible BondsThe following data apply to Neuman Corporation's convertible bonds:Maturity: 10 Stock price: $30.00Par value: $1,000.00 Conversion price: $35.00Annual coupon: 5.00% Straight-debt yield: 8.00% Refer to the data for the Neuman Corporation's convertible bonds. What is the bond's conversion ratio?a. 27.14b. 28.57c. 30.00d. 31.50e. 33.08
Q:
A cost-benefit analysis is a part of the detailed
a. operational feasibility study
b. schedule feasibility study
c. legal feasibility study
d. economic feasibility study
Q:
Mikkleson Mining stock is selling for $40 per share and has an expected dividend in the coming year of $2.00, and has an expected constant growth rate of 5.00%. The company is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value. The bonds would have an 8.00% annual coupon, and each bond could be converted into 20 shares of common stock. The required rate of return on an otherwise similar nonconvertible bond is 10.00%. What is the estimated floor price of the convertible at the end of Year 3?a. $794.01b. $835.81c. $879.80d. $926.10e. $972.41
Q:
Evaluators of the detailed feasibility study should not include
a. the internal auditor
b. the project manager
c. a user representative
d. the system designer
Q:
Convertible debentures for Kulik Corporation were issued at their $1,000 par value in 2012. At any time prior to maturity on February 1, 2032, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?a. $40.00b. $42.00c. $44.10d. $46.31e. $48.62
Q:
The benefits of the object-oriented approach to systems design include all of the following except
a. this approach does not require input from accountants and auditors
b. development time is reduced
c. a standard module once tested does not have to be retested until changes are made
d. system maintenance activities are simplified
Q:
The common stock of Southern Airlines currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2025. What is the conversion value of the bond?a. $707.33b. $744.56c. $783.75d. $825.00e. $866.25
Q:
Which statement is not correct? The structured design approach
a. is a top-down approach
b. is documented by data flow diagrams and structure diagrams
c. assembles reusable modules rather than creating systems from scratch
d. starts with an abstract description of the system and redefines it to produce a more detailed description of the system
Q:
Which of the following statements about convertibles is most CORRECT?
a. One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted.
b. Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt.
c. At the time it is issued, a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price.
d. For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock.
e. The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt.
Q:
Which is not a level of a data flow diagram?
a. conceptual level
b. context level
c. intermediate level
d. elementary level
Q:
Firms generally do not call their convertibles unless the conversion value is greater than the call price.
a. True
b. False
Q:
When the auditor reconciles the program version numbers, which audit objective is being tested?
a. protect applications from unauthorized changes
b. ensure applications are free from error
c. protect production libraries from unauthorized access
d. ensure incompatible functions have been identified and segregated
Q:
Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.
a. True
b. False
Q:
Which statement is not true?
a. An audit objective for systems maintenance is to detect unauthorized access to application databases.
b. An audit objective for systems maintenance is to ensure that applications are free from errors.
c. An audit objective for systems maintenance is to verify that user requests for maintenance reconcile to program version numbers.
d. An audit objective for systems maintenance is to ensure that the production libraries are protected from unauthorized access.
Q:
A convertible debenture can never sell for more than its conversion value or less than its bond value.
a. True
b. False
Q:
Program testing
a. involves individual modules only, not the full system
b. requires creation of meaningful test data
c. need not be repeated once the system is implemented
d. is primarily concerned with usability
Q:
The owner of a convertible bond owns, in effect, both a bond and a call option.
a. True
b. False
Q:
Which control ensures that production files cannot be accessed without specific permission?
a. Database Management System
b. Recovery Operations Function
c. Source Program Library Management System
d. Computer Services Function
Q:
Potter & Lopez Inc. just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?a. $3.76b. $3.94c. $4.14d. $4.35e. $4.56
Q:
Which statement is correct?
a. compiled programs are very susceptible to unauthorized modification
b. the source program library stores application programs in source code form
c. modifications are made to programs in machine code language
d. the source program library management system increases operating efficiency
Q:
McGovern Enterprises is interested in issuing bonds with warrants attached. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?a. 6.75%b. 7.11%c. 7.48%d. 7.88%e. 8.27%
Q:
Routine maintenance activities require all of the following controls except
a. documentation updates
b. testing
c. formal authorization
d. internal audit approval
Q:
Preissle Company, wants to sell some 20-year, annual interest, $1,000 par value bonds. Its stock sells for $42 per share, and each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?a. 7.83%b. 8.24%c. 8.65%d. 9.08%e. 9.54%
Q:
A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued. Most traded warrants are originally attached to bonds or preferred stocks.
a. True
b. False
Q:
Which test of controls will provide evidence that the system as originally implemented was free from material errors and free from fraud? Review of the documentation indicates that
a. a cost-benefit analysis was conducted
b. the detailed design was an appropriate solution to the user's problem
c. tests were conducted at the individual module and total system levels prior to implementation
d. problems detected during the conversion period were corrected in the maintenance phase
Q:
The problem of dilution of stockholders' earnings never results from the sale of call options, but it can arise if warrants are used.
a. True
b. False
Q:
Which control is not associated with new systems development activities?
a. reconciling program version numbers
b. program testing
c. user involvement
d. internal audit participation
Q:
A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.
a. True
b. False
Q:
The user test and acceptance procedure is the last point at which the user can determine the system's acceptability prior to it going into service.
Q:
Source program library controls should prevent and detect unauthorized access to application programs.
Q:
A warrant is an option, and as such it cannot be used as a "sweetener."
a. True
b. False
Q:
Mariano Manufacturing can issue a 25-year, 8.1% annual payment bond at par. Its investment bankers also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket. The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%, which would represent an after-tax risk premium. What coupon rate must be set on the preferred in order to issue it at par?a. 6.66%b. 6.99%c. 7.34%d. 7.71%e. 8.09%
Q:
Maintenance access to systems increases the risk that logic will be corrupted either by the accident or intent to defraud.
Q:
Which of the following statements is most CORRECT?
a. By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock.
b. From the issuer's point of view, preferred stock is less risky than bonds.
c. Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less.
d. Unlike bonds, preferred stock cannot have a convertible feature.
e. Preferred stock generally has a higher component cost of capital to the firm than does common stock.
Q:
Programs in their compiled state are very susceptible to the threat of unauthorized modification.
Q:
Legal feasibility identifies conflicts between the proposed system and the company's ability to discharge its legal responsibilities
Q:
Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price, which is desirable for liquidity portfolios, and they also benefit from the 70% tax exemption on preferred dividends received.
a. True
b. False
Q:
Intangible benefits are not physical, but can be measured and expressed in financial terms.
Q:
Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.
a. True
b. False
Q:
The payback method is often more useful than the net present value method for evaluating systems projects because the effective lives of information system tend to be short and shorter payback projects are often desirable.
Q:
Assume that a piece of leased equipment has a relatively high rather than low expected residual value. From the lessee's viewpoint, it might be better to own the asset rather than lease it because with a high residual value the lessee will likely face a higher lease rate.
a. True
b. False
Q:
Contrast the navigational databases with relational databases. What is the primary advantage of the relational model?
Q:
If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.
a. True
b. False
Q:
A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.
a. True
b. False
Q:
Replicated databases create considerable data redundancy, which is in conflict with the database concept. Explain the justification of this approach.
Q:
Carmichael Cleaners needs a new steam finishing machine that costs $100,000. The company is evaluating whether it should lease or purchase the machine. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 10%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. What is the NAL? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741.)a. $5,734b. $6,023c. $6,324d. $6,640e. $6,972
Q:
Distinguish between a database lockout and a deadlock.
Q:
Delamont Transport Company (DTC) is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck's 4-year life, so the interest expense for taxes would decline over time. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. What is the net advantage to leasing? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.15, and 0.07.)a. $849b. $896c. $945d. $999e. $1,047
Q:
Discuss the key factors to consider in determining how to partition a corporate database.
Q:
To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering a leasing arrangement. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.)a. $96b. $106c. $112d. $117e. $123
Q:
What services are provided by a database management system?
Q:
Ownership of data in traditional legacy systems often leads to data redundancy. This in turn leads to several data management problems. What are they? How does the database approach solve them?
Q:
Stanley Inc. must purchase $6,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Stanley can also lease the equipment for 5 end-of-year payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment.a. $177,169b. $196,854c. $207,215d. $217,576e. $228,455
Q:
A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased
a. is financed with long-term debt.
b. is financed with debt whose maturity matches the term of the lease.
c. is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC.
d. is financed with retained earnings.
e. is financed with short-term debt.
Q:
In a distributed data processing system, a database can be centralized or distributed. What are the options? Explain.
Q:
One purpose of a database system is the easy sharing of data. But this ease of sharing can also jeopardize security. Discuss at least three forms of access control designed to reduce this risk.
Q:
In the lease versus buy decision, leasing is often preferable
a. because, generally, no down payment is required, and there are no indirect interest costs.
b. because lease obligations do not affect the firm's risk as seen by investors.
c. because the lessee owns the property at the end of the least term.
d. because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.
e. because it has no effect on the firm's ability to borrow to make other investments.