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Finance
Q:
Hernandez Corporation expects to have the following data during the coming year. What is Hernandez's expected ROE?Assets $200,000 Interest rate 8%D/A 65% Tax rate 40%EBIT $25,000 a. 12.51%b. 13.14%c. 13.80%d. 14.49%e. 15.21%
Q:
What is RAID?
Q:
A new company to produce state-of-the-art car stereo systems is being considered by Jagger Enterprises. The sales price would be set at 1.5 times the variable cost per unit; the VC/unit is estimated to be $2.50; and fixed costs are estimated at $120,000. What sales volume would be required in order to break even, i.e., to have an EBIT of zero for the stereo business?a. 86,640b. 91,200c. 96,000d. 100,800e. 105,840
Q:
Why is poor-quality systems documentation a prevalent problem?
Q:
Larsen Films' is analyzing its cost structure. Its fixed operating costs are $470,000, its variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit. What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?a. 391,667b. 411,250c. 431,813d. 453,403e. 476,073
Q:
What problems may occur as a result of combining applications programming and maintenance tasks into one position?
Q:
The world-famous discounter, Fernwood Booksellers, specializes in selling paperbacks for $7 each. The variable cost per book is $5. At current annual sales of 200,000 books, the publisher is just breaking even. It is estimated that if the authors' royalties are reduced, the variable cost per book will drop by $1. Assume authors' royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?
a. $600,000
b. $466,667
c. $333,333
d. $200,000
e. None of the above
Q:
What are the advantages of separting new systems development from systems maintenance?
Q:
Which of the following statements is CORRECT?
a. A change in the personal tax rate should not affect firms' capital structure decisions.
b. "Business risk" is differentiated from "financial risk" by the fact that financial risk reflects only the use of debt, while business risk reflects both the use of debt and such factors as sales variability, cost variability, and operating leverage.
c. The optimal capital structure is the one that simultaneously (1) maximizes the price of the firm's stock, (2) minimizes its WACC, and (3) maximizes its EPS.
d. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.
e. If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to decrease their use of debt.
Q:
What are the three primary IT functions that must be separated?
Q:
Which of the following statements is CORRECT?
a. There is no reason to think that changes in the personal tax rate would affect firms' capital structure decisions.
b. A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal.
c. If a firm's after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its WACC by increasing its use of debt.
d. Suppose a firm has less than its optimal amount of debt. Increasing its use of debt to the point where it is at its optimal capital structure will decrease the costs of both debt and equity financing.
e. In general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixed costs.
Q:
What is the purpose of a data library?
Q:
Barette Consulting currently has no debt in its capital structure, has $500 million of total assets, and its basic earning power is 15%. The CFO is contemplating a recapitalization where it will issue debt at a cost of 10% and use the proceeds to buy back shares of the company's common stock, paying book value. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain unchanged. Which of the following is most likely to occur as a result of the recapitalization?
a. The ROA would remain unchanged.
b. The basic earning power ratio would decline.
c. The basic earning power ratio would increase.
d. The ROE would increase.
e. The ROA would increase.
Q:
Cloud computing
a. pools resources to meet the needs of multiple client firms
b. allows clients to expand and contract services almost instantly
c. both a. and b.
d. neither a. not b.
Q:
Blueline Publishers is considering a recapitalization plan. It is currently 100% equity financed but under the plan it would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company's total assets, nor would it affect the firm's basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?
a. The company's earnings per share would decline.
b. The company's cost of equity would increase.
c. The company's ROA would increase.
d. The company's ROE would decline.
e. The company's net income would increase.
Q:
Which of the following disaster recovery techniques is has the least risk associated with it?
a. empty shell
b. ROC
c. internally provided backup
d. they are all equally risky
Q:
Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?
a. The costs that would be incurred in the event of bankruptcy increase.
b. Management believes that the firm's stock has become overvalued.
c. Its degree of operating leverage increases.
d. The corporate tax rate increases.
e. Its sales become less stable over time.
Q:
Which of the following is a feature of fault tolerance control?
a. interruptible power supplies
b. RAID
c. DDP
d. MDP
Q:
Which of the following statements is CORRECT, holding other things constant?
a. An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.
b. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.
c. An increase in the company's degree of operating leverage is likely to encourage a company to use more debt in its capital structure.
d. An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.
e. Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt.
Q:
Define the management assertions of: existence or occurrence, completeness, rights and obligations, valuation or allocation, presentation and disclosure.
Q:
If debt financing is used, which of the following is CORRECT?
a. The percentage change in net operating income will be equal to a given percentage change in net income.
b. The percentage change in net income relative to the percentage change in net operating income will depend on the interest rate charged on debt.
c. The percentage change in net income will be greater than the percentage change in net operating income.
d. The percentage change in sales will be greater than the percentage change in EBIT, which in turn will be greater than the percentage change in net income.
e. The percentage change in net operating income will be greater than a given percentage change in net income.
Q:
Which of the following statements is CORRECT? As a firm increases the operating leverage used to produce a given quantity of output, this will
a. normally lead to a decrease in its business risk.
b. normally lead to a decrease in the standard deviation of its expected EBIT.
c. normally lead to a decrease in the variability of its expected EPS.
d. normally lead to a reduction in its fixed assets turnover ratio.
e. normally lead to an increase in its fixed assets turnover ratio.
Q:
Internal control in a computerized environment can be divided into two broad categories. What are they? Explain each.
Q:
Discuss the advisory services that external auditors are no longer permitted to render to audit clients under SOX legislation.
Q:
Which of the following is NOT associated with (or does not contribute to) business risk? Recall that business risk is affected by a firm's operations.
a. Sales price variability.
b. The extent to which operating costs are fixed.
c. The extent to which interest rates on the firm's debt fluctuate.
d. Input price variability.
e. Demand variability.
Q:
Which of these items will not generally be affected by an increase in the debt ratio?
a. Total risk.
b. Financial risk.
c. Market risk.
d. The firm's beta.
e. Business risk.
Q:
In this age of high technology and computer based information systems, why are accountants concerned about physical(human) controls?
Q:
It is possible that two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS.
a. True
b. False
Q:
What are the key points of the "Issuer and Management Disclosure" of the Sarbanes-Oxley Act?
Q:
Why is an Independent Audit Committee important to a company?
Q:
Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk.
a. True
b. False
Q:
Firm A has a higher degree of business risk than Firm B. Firm A can offset this by using less financial leverage. Therefore, the variability of both firms' expected EBITs could actually be identical.
a. True
b. False
Q:
Explain the purpose of the PCAOB.
Q:
The text describes six internal control activities. List four of them and provide a specific example of each one.
Q:
If a firm utilizes debt financing, an X% decline in earnings before interest and taxes (EBIT) will result in a decline in earnings per share that is larger than X.
a. True
b. False
Q:
The PCAOB's standard No. 2 specifically requires auditors to understand transaction flows in designing their test of controls. What steps does this entail?
Q:
Provided a firm does not use an extreme amount of debt, financial leverage typically affects both EPS and EBIT, while operating leverage only affects EBIT.
a. True
b. False
Q:
Does a qualified opinion on management's assessment of internal controls over the financial reporting system necessitate a qualified opinion on the financial statements? Explain.
Q:
The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage, other things held constant.
a. True
b. False
Q:
Prior to SOX, external auditors were required to be familiar with the client organization's internal controls, but not test them. Explain.
Q:
Whenever a firm borrows money, it is using financial leverage.
a. True
b. False
Q:
Explain how general controls impact transaction integrity and the financial reporting process.
Q:
A firm's capital structure does not affect its calculated free cash flows, because FCF reflects only operating cash flows.
a. True
b. False
Q:
As the text indicates, a firm's financial risk has identifiable market risk and diversifiable risk components.
a. True
b. False
Q:
Section 404 requires management to make a statement identifying the control framework used to conduct their assessment of internal controls. Discuss the options in selecting a control framework.
Q:
Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no debt were used.
a. True
b. False
Q:
What are the key points of the section 404 of the Sarbanes-Oxley Act?
Q:
A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.
a. True
b. False
Q:
Define and contrast attestation services and advisory services.
Q:
Different borrowers have different risks of bankruptcy, and bankruptcy is costly to lenders. Therefore, lenders charge higher rates to borrowers judged to be more at risk of going bankrupt.
a. True
b. False
Q:
How do the tests of controls affect substantive tests?
Q:
What are the components of audit risk?
Q:
Wilson Dover Inc.The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility (σ) of Wilson Dover's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050.Refer to the data for Wilson Dover Inc. What is the yield on Wilson Dover's debt?a. 6.04%b. 6.36%c. 6.70%d. 7.05%e. 7.42%
Q:
Wilson Dover Inc.The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility (σ) of Wilson Dover's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050.Refer to the data for Wilson Dover Inc. What is the value (in millions) of Wilson Dover's debt if its equity is viewed as an option?a. $167.57b. $186.19c. $204.81d. $225.29e. $247.82
Q:
Contrast internal and external auditing.
Q:
Wilson Dover Inc.The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility (σ) of Wilson Dover's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050.Refer to the data for Wilson Dover Inc. What is the value (in millions) of Wilson Dover's equity if it is viewed as an option?a. $228.77b. $254.19c. $282.43d. $313.81e. $345.19
Q:
Distinguish between inherent risk and control risk. How do internal controls and detection risk fit in?
Q:
Distinguish between errors and irregularities. Which do you think concern the auditors the most?
Q:
When a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.a. Trueb. False
Q:
When a firm has risky debt, its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.
a. True
b. False
Q:
Explain the relationship between internal controls and substantive testing.
Q:
Discuss the key features of Section 302 of the Sarbanes-Oxley Act.
Q:
Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.
a. True
b. False
Q:
Define general controls.
Q:
Anson Jackson Court Company (AJC)The Anson Jackson Court Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. AJC's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00.Refer to the data for the Anson Jackson Court Company (AJC). Now assume that AJC is considering changing from its original capital structure to a new capital structure with 50% debt and 50% equity. If it makes this change, its resulting market value would be $820,000. What would be its new stock price per share?a. $58b. $59c. $60d. $61e. $62
Q:
Anson Jackson Court Company (AJC)The Anson Jackson Court Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. AJC's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00.Refer to the data for the Anson Jackson Court Company (AJC). Now assume that AJC is considering changing from its original capital structure to a new capital structure that results in a stock price of $64 per share. The resulting capital structure would have a $336,000 total market value of equity and a $504,000 market value of debt. How many shares would AJC repurchase in the recapitalization?a. 4,250b. 4,500c. 4,750d. 5,000e. 5,250
Q:
What are the objectives of application controls?
Q:
Which of the following statements is NOT correct?
a. After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise.
b. Investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued.
c. Companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends.
d. Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.
e. Stock repurchases can be used by a firm as part of a plan to change its capital structure.
Q:
COSO identifies two broad groupings of information system controls. What are they?
Q:
Which of the following actions will best enable a company to raise additional equity capital?
a. Declare a stock split.
b. Begin an open-market purchase dividend reinvestment plan.
c. Initiate a stock repurchase program.
d. Begin a new-stock dividend reinvestment plan.
e. Refund long-term debt with lower cost short-term debt.
Q:
Both the SEC and the PCAOB have expressed an opinion as which internal control framework an organization should use to comply with SOX legislation. Explain.
Q:
The Meltzer Corporation is contemplating a 7-for-3 stock split. The current stock price is $75.00 per share, and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that it thinks would follow the split. What is the stock's expected price following the split?a. $32.06b. $33.75c. $35.44d. $37.21e. $39.07
Q:
Sequentially numbering all sales invoices is an example of __________________________.
Q:
Downie Foods recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?a. $28.43b. $29.93c. $31.50d. $33.08e. $34.73
Q:
Not permitting the computer programmer to enter the computer room is an example of _______________________________.
Q:
Using cameras to monitor the activities of cashiers is an example of __________________________.
Q:
Brinkley Resources stock has increased significantly over the last five years, selling now for $175 per share. Management feels this price is too high for the average investor and wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share?a. 6.65b. 6.98c. 7.00d. 7.35e. 7.72
Q:
In recent years Constable Inc. has suffered losses, and its stock currently sells for only $0.50 per share. Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $25 per share. How many of the old shares must be given up for one new share to achieve the $25 price, assuming this transaction has no effect on total market value?a. 47.50b. 49.88c. 50.00d. 52.50e. 55.13
Q:
Approving a price reduction because goods are damaged is an example of __________________________.
Q:
Last week, Weschler Paint Corp. completed a 3-for-1 stock split. Immediately prior to the split, its stock sold for $150 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price?a. $50.00b. $52.50c. $55.13d. $57.88e. $60.78