An Increase in the Effectiveness of Internal Controls Will Have

question 13

Multiple Choice

An increase in the effectiveness of internal controls will have the effect of

• A)increasing inherent risk.
• B)reducing inherence risk.
• C)increasing control risk.
• D)reducing control risk.

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Definitions:

Interest Rate

The percentage charged on a loan or paid on deposits, representing the cost of borrowing or the income from lending.

Pre-Tax Cost

The expense or cost associated with an activity or asset before taxes are deducted.

Debt-Equity Ratio

A measure used to evaluate a company's financial leverage, calculated by dividing its total liabilities by stockholders' equity.

M&M II

The second proposition by Modigliani and Miller which states that in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a levered firm is equal to the value of an unlevered firm plus the present value of the tax shields due to debt.