BEC 8

Question 1

A company uses its company-wide cost of capital to evaluate new capital investments. What is the implication of this policy when the company has multiple operating divisions, each having unique risk attributes and capital costs?

High-risk divisions will over-invest in new projects and low-risk divisions will under-invest in new projects.

High-risk divisions will under-invest in high-risk projects.

Low-risk divisions will over-invest in low-risk projects.

Low-risk divisions will over-invest in new projects and high-risk divisions will under-invest in new projects.

Answer 1

High-risk divisions will over-invest in new projects and low-risk divisions will under-invest in new projects.

Question 2

What is the effect when a foreign competitor’s currency becomes weaker compared to the U.S. dollar?

The foreign company will have an advantage in the U.S. market.

The foreign company will be disadvantaged in the U.S. market.

The fluctuation in the foreign currency’s exchange rate has no effect on the U.S. company’s sales or cost of goods sold.

It is better for the U.S. company when the value of the dollar strengthens.

Answer 2

The foreign company will have an advantage in the U.S. market.

Question 3

Which one of the following is not a limitation of the basic Black-Scholes option pricing model?

It fails to consider the probability that the option will be exercised.

It assumes the stock does not pay dividends.

It assumes the risk-free rate of return used for discounting remains constant during the option period.

It assumes the option can be exercised only at the expiration date.

Answer 3

It fails to consider the probability that the option will be exercised.

Question 4

A company currently sells 100,000 units of product A at $10 per unit. The company also sells 100,000 units of product B at the same price. The company raises the price of both products by 10%. Product A has an elasticity of 1.5. Product B has an elasticity of 3.0. Which of the following effects will the price increase most likely have on company revenues?

Company revenues will increase for both products.

Company revenues will decrease for both products.

Company revenues will increase for product A but not product B.

Company revenues will increase for product B but not product A.

Answer 4

Company revenues will decrease for both products.

Correct. Elasticity is measured as the percentage change in quantity divided by the percentage change in price. An elastic product would have an absolute value coefficient greater than one meaning that the percentage change in quantity would be greater than the percentage change in price. Since both products have elasticity coefficients greater than one, then the percentage change in price will be less than the percentage change in demand, causing total revenue, quantity times price, to decrease for both products if there is a price increase.

Question 5

Which one of the following is central to determining the nature of market structure in a free-market economy?

The size of the market.

The nature of the good or service provided by the market.

The extent of competition in the market.

Whether the market provides goods or, alternatively, services.

Answer 5

The extent of competition in the market.

Question 6

If the central bank of a country raises interest rates sharply, the country’s currency will most likely

(This question is CMA adapted)

Increase in relative value.

Remain unchanged in value.

Decrease in relative value.

Decrease sharply in value at first and then return to its initial value.

Answer 6

Increase in relative value.

If the interest rate is increased investors will be able to get a larger return on investment in the country. Therefore, demand for the currency will increase for investment purposes, and the relative value of the currency will increase.

Question 7

In a macroeconomic free-market flow model, which of the following would be considered leakages?
Savings Taxes
Yes Yes
Yes No
No Yes
No No

Answer 7

Yes Yes

In a macroeconomic free-market flow model, leakages result when income is used for purposes other than domestic consumption. Both savings and taxes (as well as payments for imports) are uses of income for purposes other than domestic consumption.

Question 8

When erroneous data are detected by computer program controls, such data may be excluded from processing and printed on an error report. The error report should most probably be reviewed and followed up by the

Supervisor of computer operations.

Systems analyst.

Control group.

Computer programmer.

Answer 8

Control group.

This answer is correct because the control group is responsible for providing a continuous review function by supervising and monitoring input, operations, and the distribution of output (i.e., a continuous internal audit function).

Question 9

The following is selected information from the records of Ray, Inc.:

Purchases of raw materials $ 6,000
Raw materials, beginning 500
Raw materials, ending 800
Work-in-process, beginning 0
Work-in-process, ending 0
Cost of goods sold 12,000
Finished goods, beginning 1,200
Finished goods, ending 1,400

What is the total amount of conversion costs?
$5,500
$5,900
$6,100
$6,500

Answer 9

$6,500

This answer is correct because conversion costs are equal to labor and overhead costs used in production. The cost of raw materials used in production was $5,700 ($6,000 + $500 beginning inventory – $800 ending inventory). The total production costs for the month were $12,200 ($12,000 cost of goods sold + $1,400 ending inventory – $1,200 beginning inventory. Conversion costs are equal to total production costs ($12,200) minus raw material costs ($5,700), or $6,500.

Question 10

A company sells 1,500 units of a particular item each year and orders the items in equal quantities of 500 units at a price of $5 per unit. No safety stocks are held. If the company has a cost of capital of 12%, its annual cost of carrying inventory is
$150
$180
$300
$900

Answer 10

$150

This answer is correct. The annual cost of carrying inventory is the average inventory level times the cost per unit of inventory times the cost of capital. It is calculated as follows: Average inventory level × Unit cost × Cost of capital = (order size / 2) × $5 × 0.12 = (500 / 2) × $5 × 0.12 = $150.

Question 11

A manufacturing company discovers that its rollback and retention procedures do not include data from a key system related to production quality. Which of the following IT policies should address this violation?

Procurement

Service management and operational service problem solving

Quality

Security

Answer 11

Security

Correct! This problem relates to disaster recovery preparation, which is a subcategory of IT security policies.

Question 12

Which one of the following would an importer of goods from a new foreign supplier most likely use to assure the supplier of payment?

Line of credit.
Letter of credit.
Trade account application.
Commercial paper.

Answer 12

Letter of credit

Question 13

Which of the following is the most expensive form of additional capital?

New debt.
New preferred stock.
Retained earnings.
New common stock.

Answer 13

New common stock.

Question 14

Which type of report on a service organization controls (SOC) is presented in the Professional Standards, but is least related to SysTrust?

SOC 1
SOC 2
SOC 3
SOC 4

Answer 14

SOC 1

Question 15

A zombie computer is used most frequently to perpetrate a _________ attack:

DoS
Man-in-the-middle
Phishing
Session

Answer 15

DoS

Question 16

The primary and foreign keys that are used in the database are examples of properties of the:

Master data.
Data classification.
Logical data model
Physical data model

Answer 16

Physical data model

Question 17

In the short run, a severe hurricane creates an immediate strong increase in demand for roofers. Some roofers in other parts of the country are then attracted to the disaster area. Assume that in the long run the increase in demand still exceeds the increase in supply. Incorporating these facts in an analysis, the price for roofers in the short run increases, while in the long run the price will

Decrease below the original price.
Return to the original price.
Decrease, but remain above the original price.
Continue to increase.

Answer 17

Decrease, but remain above the original price.

Question 18

Which of the following risks increases the least with cloud-based computing compared with local server storage for an organization that implements cloud-based computing?

Data loss.
Vendor security failure.
Global visibility.
System hacks.

Answer 18

Global visibility.

Question 19

The trough of a business cycle is generally characterized by

Shortages of essential raw materials and rising costs.

Increasing purchasing power and increasing capital investments.

Rising costs and an unwillingness to risk new investments.

Unused productive capacity and an unwillingness to risk new investments.

Answer 19

Unused productive capacity and an unwillingness to risk new investments

Question 20

Which one of the following sets of characteristics should have the highest intensity of rivalry within an industry?

Industry Fixed Cost Structure Degree of Product Differentiation
High High
Low High
High Low
Low Low

Answer 20

High Low

The highest intensity of rivalry should be in an industry with a high fixed cost structure, in which producers seek to operate at full capacity, and a low degree of product differentiation, which results in products having many substitutes.

Question 21

Bates Corp. has $100,000 in bonds payable with a fair market value of $120,000. It also has 1,000 shares of common stock issued at $50 per share with a fair market value of $80 per share. What amount represents the corporation’s market capitalization?

$50,000
$80,000
$170,000
$180,000

Answer 21

$80,000

Correct! Market capitalization is the value of a company as determined by the total value of its outstanding shares of stock in the market in which it is traded. It is calculated by multiplying the total number of outstanding shares by the current market share price. Thus, the correct calculation is 1,000 shares × $80 per share = $80,000, the corporation’s market capitalization.

Question 22

The balanced scorecard generally uses performance measures with four different perspectives. Which of the following performance measures would be part of those used for the internal business processes perspective?

Cycle time.
Employee satisfaction.
Hours of training per employee.
Customer retention.

Answer 22

Cycle time

This answer is correct. Cycle time would be an important measure for the business processes perspective. It measures the time it takes to produce a product.

Question 23

Allen buys only beer and pizza. When the price of beer is $2.00 per bottle and the price of pizza is $10.00, Allen maximizes his total utility (satisfaction) by buying 5 beers and 4 pizzas. If the marginal utility of the 5th beer is 100 utils, which one of the following would be the marginal utility of the 4th pizza?

40 utils.
100 utils.
200 utils.
500 utils.

Answer 23

500 utils.

When total utility is maximized, the marginal utility (MU) of the last dollar spent on each and every item acquired must be the same. Thus, total utility is maximized when: MU of beers/price of beers = MU of pizza/price of pizza. Using the values given: 100 utils/$2.00 = MU of pizza/$10.00. The equation for beers = 100/$2 = 50 utils per dollar. The MU of pizza also must be 50 utils per dollar. Therefore, 50 = MU of pizza × $10 = 500 utils.

Question 24

All of the following are useful for forecasting the needed level of inventory except

(This question is CIA adapted)

Knowledge of the behavior of business cycles.

Internal accounting allocations of costs to different segments of the company.

Information about seasonal variations in demand.

Econometric modeling.

Answer 24

Internal accounting allocations of costs to different segments of the company.

Question 25

One of the major problems in a computer system is that incompatible functions may be performed by the same individual. One compensating control for this is use of

A tape library.

A self-checking digit system.

Computer generated hash totals.

A computer log.

Answer 25

A computer log.

Question 26

Delta Manufacturing Co. has had a problem with its product quality. The company has had a large amount of costs related to product recalls. In considering cost of quality methodology, if the company wants to reduce these costs, the most likely place to incur costs would be for

Prevention.
Appraisal.
Internal failure.
External failure.

Answer 26

Prevention

Question 27

The widespread adoption of the IoT will:

Speed the adoption of automated authentication.

Reduce the need for monitoring.

Reduce security.

Reduce costs.

Answer 27

Speed the adoption of automated authentication.

Question 28

Which of the following production processes best describes lean manufacturing?

Making a small number of a high variety of unique products with relatively low-skilled labor.

Making a large number of standardized products with highly skilled labor.

Making small batches of a high variety of unique products with cross-trained labor.

Making a large number of standardized products with relatively low-skilled labor.

Answer 28

Making small batches of a high variety of unique products with cross-trained labor.

Question 29

Near the end of its fiscal year, Pensaco Inc. has a quick ratio of 1.90. One of its loan covenants requires that Pensaco maintain a quick ratio no less than 2.00. Which of the following actions might Pensaco take in order to increase its quick ratio to be in compliance with its loan covenant at the end of its fiscal year?

Aggressively pursue collecting accounts receivable so to reduce accounts receivable and increase cash.

Enter into a short-term borrowing arrangement that would increase cash and short-term liabilities.

Make a significant cash payment on its accounts payable.

Arrange with its creditors to convert a significant amount of accounts payable into a short-term note.

Answer 29

Make a significant cash payment on its accounts payable.

Correct! Making a significant cash payment on its payable would increase the quick ratio. The quick ratio is computed as:
Cash and cash equivalents
+
Short-term marketable securities
+
Accounts receivable (net)
Current liabilities

A reduction in cash and accounts payable would reduce the numerator and the denominator by a like amount. Since, with a 1.90 current quick ratio, the numerator is larger than the denominator, a decrease in both by the same amount would decrease the numerator by a lower percentage than the denominator, resulting in an increase in the resulting value.

Assume the 1.90 quick ratio resulted from the following:

Quick assets = $190
Quick ratio = 1.90
Current liabilities = $100
If both are decreased by the same amount, say $10, the results would be:
Quick assets = $180
Current liabilities = $90
=
Quick ratio = 2.00, an increase in the quick ratio

Question 30

Which of the following most likely represents a significant deficiency in the internal control?

The systems analyst reviews applications of data processing and maintains systems documentation.

The systems programmer designs systems for computerized applications and maintains output controls.

The control clerk establishes control over data received by the information systems departments and reconciles totals after processing.

The accounts payable clerk prepares data for computer processing and enters the data into the computer.

Answer 30

The systems programmer designs systems for computerized applications and maintains output controls.