BEC - ME 2 – WMC QUESTIONS AND VERIFIED
ANSWERS
According to the COSO of the Treadway Commission, what component of the internal
control integrated framework addresses an entity's financial reporting competencies? -
Answers - Control Environment
According to the COSO of the Treadway Commission, what component of the internal
control integrated framework addresses an entity's policies and procedures? - Answers
- Control activities
According to the COSO of the Treadway Commission, what component of enterprise
risk management addresses an entity's process for establishing the likelihood an impact
of events? - Answers - Performance
A company obtained a short-term bank loan of $500,000 at an annual interest rate of
eight percent. As a condition of the loan, the company is required to maintain a
compensating balance of $100,000 in its checking account. The checking account earns
interest at an annual rate of three percent. Ordinarily, the company maintains a balance
of $50,000 in its account for the transaction purposes. What is the effective interest rate
of the loan? - Answers - 8.56%
Interest paid = 500,000x.08 = 40,000
Interest earned = 50,000x.03 = 1,500
Total interest cost = 40,000 - 1,500 = 38,500
38,,000 = 8.56%
Would a company that trades in the Middle East, Europe, and North America
strategically adjust the sales mix between North America and Europw based upon the
exchange rate to mitigate transaction risk? - Answers - No, they would likely use a
forward hedge, futures hedge, or currency option hedge
A preferred stock is sold for $101 per share, has a face value of $100 per share,
underwriting fees of $5 per share, and annual dividends of $10 per share. If the tax rate
is 40 percent, the cost of funds (capital) for the preferred stock is: - Answers - 10.4%
preferred dividends / cash received = 10 / (101 - 5) = 10.4%
Wyley Inc purchases an item on credit with terms of 3/10, net 45. Based on a 360-day
year, Wyley's annual interest cost of forgoing the cash discount and making payment on
the last day of the credit period is: - Answers - 31.81%
, [360/(45-10)] * [3/(100-3)]
McLean Inc is considering the purchase of a new machine that will cost $150,000. The
machine has an estimates useful life of three years. Assume for simplicity that the
equipment will be fully depreciated 30, 40, and 10 percent in each of the three years
respectively. The new machine will have a $10,000 resale value at the end of its
estimated useful life. The machine is expected to save the company $85,000 per year in
operating expenses. McLean uses a 40 percent estimated income tax rate and a 16
percent hurdle rate to evaluate capital projects.
Discount rate for $1
Y1 - .862
Y2 - .743
Y3 - .641
Discount rate for OA
Y1 - .862
Y2 - 1.605
Y3 - 2.246
What is the net present value of this project? - Answers - $13,278
Add the depreciation tax shield to the annual savings (both after tax)
Present value the cash flows
Year 1 cash flow = -150
Year 2 cash flow = 51 + 18 = 69
Year 3 cash flow = 51 + 24 = 75
Year 4 cash flow = 51 + 18 + 6 = 75
What is an example of just-in-time being used for competitive advantage? - Answers -
BAC Company has decreased the number of job classifications to just a few
JIT = a more efficient use of employees with multiple skills
Would a company with just-in-time inventory use more or less suppliers? - Answers -
Less
How is total manufacturing cost calculated? - Answers - DM Used + DL + Applied OH
According to the COSO of the Treadway Commission, what component of enterprise
risk management addresses an entity's consideration of inherent and residual risk? -
Answers - Performance
ANSWERS
According to the COSO of the Treadway Commission, what component of the internal
control integrated framework addresses an entity's financial reporting competencies? -
Answers - Control Environment
According to the COSO of the Treadway Commission, what component of the internal
control integrated framework addresses an entity's policies and procedures? - Answers
- Control activities
According to the COSO of the Treadway Commission, what component of enterprise
risk management addresses an entity's process for establishing the likelihood an impact
of events? - Answers - Performance
A company obtained a short-term bank loan of $500,000 at an annual interest rate of
eight percent. As a condition of the loan, the company is required to maintain a
compensating balance of $100,000 in its checking account. The checking account earns
interest at an annual rate of three percent. Ordinarily, the company maintains a balance
of $50,000 in its account for the transaction purposes. What is the effective interest rate
of the loan? - Answers - 8.56%
Interest paid = 500,000x.08 = 40,000
Interest earned = 50,000x.03 = 1,500
Total interest cost = 40,000 - 1,500 = 38,500
38,,000 = 8.56%
Would a company that trades in the Middle East, Europe, and North America
strategically adjust the sales mix between North America and Europw based upon the
exchange rate to mitigate transaction risk? - Answers - No, they would likely use a
forward hedge, futures hedge, or currency option hedge
A preferred stock is sold for $101 per share, has a face value of $100 per share,
underwriting fees of $5 per share, and annual dividends of $10 per share. If the tax rate
is 40 percent, the cost of funds (capital) for the preferred stock is: - Answers - 10.4%
preferred dividends / cash received = 10 / (101 - 5) = 10.4%
Wyley Inc purchases an item on credit with terms of 3/10, net 45. Based on a 360-day
year, Wyley's annual interest cost of forgoing the cash discount and making payment on
the last day of the credit period is: - Answers - 31.81%
, [360/(45-10)] * [3/(100-3)]
McLean Inc is considering the purchase of a new machine that will cost $150,000. The
machine has an estimates useful life of three years. Assume for simplicity that the
equipment will be fully depreciated 30, 40, and 10 percent in each of the three years
respectively. The new machine will have a $10,000 resale value at the end of its
estimated useful life. The machine is expected to save the company $85,000 per year in
operating expenses. McLean uses a 40 percent estimated income tax rate and a 16
percent hurdle rate to evaluate capital projects.
Discount rate for $1
Y1 - .862
Y2 - .743
Y3 - .641
Discount rate for OA
Y1 - .862
Y2 - 1.605
Y3 - 2.246
What is the net present value of this project? - Answers - $13,278
Add the depreciation tax shield to the annual savings (both after tax)
Present value the cash flows
Year 1 cash flow = -150
Year 2 cash flow = 51 + 18 = 69
Year 3 cash flow = 51 + 24 = 75
Year 4 cash flow = 51 + 18 + 6 = 75
What is an example of just-in-time being used for competitive advantage? - Answers -
BAC Company has decreased the number of job classifications to just a few
JIT = a more efficient use of employees with multiple skills
Would a company with just-in-time inventory use more or less suppliers? - Answers -
Less
How is total manufacturing cost calculated? - Answers - DM Used + DL + Applied OH
According to the COSO of the Treadway Commission, what component of enterprise
risk management addresses an entity's consideration of inherent and residual risk? -
Answers - Performance
