PTD8 Flashcards
Bander Co. is determining how to finance some long-term projects. Bander has decided it prefers the benefits of no fixed charges, no fixed maturity date, and an increase in the credit-worthiness of the company. Which of the following would best meet Bander's financing requirements? Bonds. Common stock. Long-term debt. Short-term debt.
Unlimited Practice Exam: Testlet 2 Results 11/30/2018
Question 1
AICPA.090350BEC
Bander Co. is determining how to finance some long-term projects. Bander has decided it prefers the benefits of no fixed charges, no fixed maturity date, and an increase in the credit-worthiness of the company. Which of the following would best meet Bander’s financing requirements?
Bonds.
Common stock.
Long-term debt.
Short-term debt.
This Answer is Correct
Issuing common stock to finance its projects would best meet Bander’s financing strategy. Specifically, issuing common stock would (1) not result in fixed charges, since dividends are at the discretion of the Board of Directors, (2) not result in a fixed maturity date, since common stock does not mature, and (3) would likely increase the credit-worthiness of the company because the issuance of additional common stock would reduce its debt to equity ratio by increasing equity.
A business with a net book value of $150,000 has an appropriate fair value of $120,000. Charles Harvey, one of three owners, has decided to sell his 10% interest in the business. Which one of the following is most likely the amount at which Harvey can sell his interest? $40,000 $15,000 $12,000 < $12,000
< $12,000
Harvey would likely receive less than $12,000 upon sale of his interest. While Harvey has a claim to 10% of the fair value of the business, because his ownership interest is very minor, the value of his interest upon sale would likely be less than $12,000 due to a noncontrolling interest discount.
Which of the following statements is correct?
I. An important advantage of flat file systems is that they are program independent.
II. Flat file systems contain little data redundancy.
Both I and II.
I only.
II only.
Neither I or II.
Neither I or II.
This Answer is Correct
Statement one is incorrect because, while flat file systems do contain program independence, this is seen as a disadvantage not an advantage. This is because the program independence of flat file systems means that multiple programs must be used to read, access and process the data. Statement II is incorrect because flat file systems contain a high degree of data redundancy.
Price discrimination is accomplished most effectively in markets with which of the following characteristics?
Fairly distinct segments of customers.
High competition that generates many price changes.
Advanced technology capabilities that determine optimal pricing.
Excess capacity that meets high demand at different price levels.
Fairly distinct segments of customers.
This Answer is Correct
CORRECT! As the term implies, price discrimination is a pricing strategy that charges customers in different market segments different prices for the same or largely the same product or service. When a market has distinct segments (i.e., buyers that are of fairly distinct types), suppliers are better able to charge different prices to different buyer types (market segments) for the same or essentially the same good or service. For example, it is common for pharmaceutical companies to charge different prices for the same drug to different geographic market segments. As a consequence, U.S. consumers pay almost twice what Europeans pay for the same drugs.
A favorable material price variance coupled with an unfavorable material usage variance would most likely result from
Machine efficiency problems.
The purchase and use of higher than standard quality material.
Labor efficiency problems.
The purchase of lower than standard quality material.
The purchase of lower than standard quality material.
This Answer is Correct
This answer is correct. Substandard materials may be less expensive but also may cause more waste. Therefore, purchasing them may result in both a favorable materials price variance and an unfavorable material usage variance.
What would be the primary reason for a company to agree to a debt covenant on new bonds limiting the percentage of the company’s long-term debt?
To cause the price of the company’s stock to rise.
To lower the company’s bond rating.
To reduce the risk for existing bondholders.
To reduce the interest rate on the bonds being sold.
To reduce the interest rate on the bonds being sold.
This Answer is Correct
The primary reason a company would agree to a debt covenant limiting the percentage of its long-term debt would be to reduce the interest rate on the bonds being sold. A debt covenant limiting the percentage of its long-term debt would give the bondholders greater certainty of repayment and, thus, reduce the risk associated with the new bond issue. The reduced risk would lower the interest rate demanded by investors.
A company has $1,500,000 of outstanding debt and $1,000,000 of outstanding common equity. Management plans to maintain the same proportions of financing from each source if additional projects are undertaken. If the company expects to have $60,000 of retained earnings available for reinvestment in new projects in the coming year, what dollar amount of new investments can be undertaken without issuing new equity? $0 $ 24,000 $ 90,000 $150,000
$150,000
This Answer is Correct
This answer is correct. The proportion of equity in the financial structure of the firm is the value of outstanding equity divided by the total value of all financing sources.
Value of equity = 1,000,000 = .40 Value of debt + Value of equity 1,000,000 + 1,500,000
Since the question states that the firm will maintain the same weight of each financing source, each dollar invested is composed of 40 cents of equity and 60 cents of debt. The first $60,000 of equity used in financing new projects is sourced from retained earnings. This source of equity is exhausted when the firm reaches an investment level of
$60,000 / .4 = $150,000.
When the level of investment exceeds this amount, equity financing must be raised externally.
Womping Wembley Corp. maintains three sets of backups, which are updated monthly, weekly, and daily. This approach illustrates a (an): Checkpoint and restart approach RAID approach Redundant backups approach. SANs approach
Redundant backups approach.
This Answer is Correct
Correct! This approach illustrates a grandfather, father, son approach to redundant backups which are often executed with this frequency.
At annual sales of $900,000, the Ebo product has the following unit sales price and costs:
Sales price $20
Prime cost 6
Manufacturing overhead
Variable 1
Fixed 7
Selling & admin. costs
Variable 1
Fixed 3
18
Profit $ 2
What is Ebo’s breakeven point in units?
25,000
31,500
37,500
45,000
37,500
Revenues – Variable costs – Fixed costs = Operating Income
Revenue is equal to the sales price, $20, multiplied by x, the unknown amount of units it takes to reach the breakeven point. Variable costs include variable manufacturing overhead and variable selling and administrative costs, as well as the prime cost per unit multiplied by the unknown. Fixed costs, which amount to $450,000, are found by multiplying unit fixed costs by the amount of units sold at annual sales of $900,000, which equal 45,000 units ($900,000/$20). Operating income at breakeven point is 0.
Applying this equation, we get
20x – 8x – 450,000 = 0
12x = 450,000
x = 37,500
The net present value (NPV) method of investment project analysis assumes that the project’s cash flows are reinvested at the
(This question is CMA adapted)
Computed internal rate of return.
Risk-free interest rate.
Discount rate used in the NPV calculation.
Firm’s accounting rate of return.
Discount rate used in the NPV calculation.
The NPV method assumes that cash flows can be reinvested at the discount rate used in the calculation. This is usually the cost of capital
The multi-location system structure that is sometimes called the "Goldilocks" solution because it seeks to balance design tradeoffs is Centralized. Decentralized. Distributed. ROM.
Distributed.
This question presumes a knowledge of the Grimms’ fairy tale, “The Story of the Three Bears.” In the fairy tale, Goldilocks wants her porridge neither too hot, nor too cold. Hence, the “Goldilocks” solution, which is sought by this question in relation to computing and file sharing, is a solution that is neither too centralized, nor too decentralized (metaphorically, neither too hot nor too cold).
Hence, this is the correct answer — a compromise between centralized and decentralized computing.
Which of the following risks relates to the possibility that a derivative might not be effective at hedging a particular asset? Credit risk. Legal risk. Market risk. Basis risk.
Basis risk.
Basis risk is the risk of loss from ineffective hedging activities.
Which one of the following identifies the rate of return required by investors to compensate them for deferring current consumption when making an investment? Prime rate. Risk-free rate. Discount rate. Effective rate.
The risk-free rate of interest, as the term implies, is the interest that would be charged on a borrowing that carried no risks (e.g., of default, inflation, etc.). This interest is required by lenders, not to cover risks, but to compensate the lender for deferring use of the funds by making an investment.
An information technology director collected the names and locations of key vendors, current hardware configuration, names of team members, and an alternative processing location. What is the director most likely preparing? Data restoration plan. Disaster recovery plan. System security policy. System hardware policy.
Disaster recovery plan.
This information would contribute to the development of a disaster recovery plan.
