IMA CMA-STRATEGIC-FINANCIAL-MANAGEMENT Online Practice Questions and Exam Preparation

IMA CMA-STRATEGIC-FINANCIAL-MANAGEMENT Online Questions & Answers

• Question 1:

  An accounting manage' is deciding which performance measurement tool would be most appropriate to compare firms within their company s industry given that the firms vary in size significantly. Which one of the following analysis methods would be the most appropriate?

  A. Cash flow analysis
  B. Horizontal analysis
  C. Sensitivity analysis
  D. Vertical analysis
  D. Vertical analysis

• Question 2:

  Explain one reason each Tot and against issuing bonds with a call feature Essay Quality Digital Design (QDD) Inc is a public-traded technology company Selected financial data of QDD for the prior year are as follows

  

  QDD's stock was trading at $160 per share at the beginning of the yea: and at $176 per share by the end of the year. The company paid dividends of S5 per share. The company "s stock had a beta of 1 4 The stock market provided a total return of 12% last year, well above the 3皁 risk free rate of return QDD is considering the issuance of $200 million of bonds to fund the repurchase of $200 million of its stock. QDD is evaluating the bond, including its term structure, maturity, and whether it should be callable obtaining the lowest coupon interest is an important objective of QDD. The CFO has estimated that sales for the current year would remain the same as last year and the new bond would add S12 million in annual interest payments

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  Explanation

  Reason in favor of issuing callable bonds:

  A call feature gives QDD flexibility to refinance if interest rates fall or if the firm’s credit rating improves. By calling and reissuing bonds at a lower coupon, QDD can reduce its long-term financing costs and improve profitability.

  Reason against issuing callable bonds:

  Because the call option favors the issuer and disadvantages investors, investors demand compensation in the form of a higher coupon rate on callable bonds relative to similar non-callable bonds. This increases QDD’s initial cost of debt and reduces the benefit of the repurchase plan in the short term.

• Question 3:

  Marsalls Products Inc. manufactures and sells two products CD-ROMs and DVD's. The latest forecast on me products and their costs tor the coming year is shown in the following table.

  Note 1: Fixed manufacturing cost of Si.500 000 per year is allocated to products based on the number of machine hours required to produce the product at a rate of S3 per machine hour

  The Manufacturing Team leader just informed the CEO that a fire occurred at one of the manufacturing lines and that line would be unavailable for the next 12 months. The result is that mere will only be 400 000 machine Hours available The CEO requested the management team to revise the plan for the coming year based on the new constraint. The Marketing Team leader stated that in order to minimize customer complaints about the shortage, a minimum of 100,000 units of each product should be produced With the new information from the Manufacturing and Marketing teams what is the optimal product mix for the coming 12 months'' Assume Marsalls can sell allot its production.

  A. 100,000 CD-ROM's and 150,000 DVD'[s
  B. 120.000 CD-ROM's 140,000 DVD.
  C. 150.000 CD-ROMS and 125.000 DVD
  D. 200,000 CD-ROm's a dn 100,000 DVD
  D. 200,000 CD-ROm's a dn 100,000 DVD

• Question 4:

  Abex Employment Agency has requested an increase in the firm's line of credit, and the bank is reviewing Abex's sales and collections history Although the firm's sales have increased the bank is concerned about the credit quality of the firm's customers Based on the following information calculate the average collection period for the firm Use a 365-day year in your calculations.

  

  A. 80 days
  B. 88 days
  C. 99 days
  D. 101 days
  A. 80 days

• Question 5:

  Each of the following describes a limitation of financial statement analysis except

  A. financial statement analysis is based on historical costs rattier man current costs which can lead to distortions in measurement
  B. financial statements may include significant estimated items which may distort results
  C. it Is difficult to compare one company with another even within the same industry due to differences in accounting principles used.
  D. financial statement analysis can use more than one measure to examine the interrelationships among data
  D. financial statement analysis can use more than one measure to examine the interrelationships among data

• Question 6:

  Explain me concept of relevant cost in the season-making process and discuss whatever the 200, 000 course development coil is relevant to OLi's price decisions in future years

  Essay

  Online Learning Inc. lOLI) is a privately-held company based in the IUC that specializes in providing online courses in English as a Second Language (ESL). OLI is trying to set up a new sales office in a foreign country. It needs a business license to operate in that country. The license normally lakes six months to obtain. An official of that country said that he could expedite the process for a fee of 300.

  OLI estimates the new sales office can bring 300,000 incremental profit annually OLI has just launched a new online 40-houi course to help adult ESL learners master basic business English. The price of the new course is 500 per student, the variable cost is 300 per student, and the total fixed cost of the new course is 300.000 per year OLI spent 200.000 to develop the new course before launching it. There are many online course providers in the marketplace, and each has its own feature However, OLI's highly qualified staff and good reputation have enabled it to charge a premium price compared to its major competitors. Recent market research indicates that if OLI raises the price of its new business English course by 10V the student enrollment would decrease by 5V A regional airlines company in Asia has approached OLI and offered to enroll 1.000 of its employees in the new course if OLI would agree to a special price of 350 per employee If OLI accepts this offer, an additional 10,000 onetime cost would be required to temporally expand its capacity to accommodate the new students.

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  Explanation

  Relevant costs are those future costs and revenues that will change as a direct result of a specific decision. They are avoidable and differ between alternatives, making them critical inputs in managerial decision-making. Irrelevant costs, on

  the other hand, include sunk costs or costs that will not be altered by the decision at hand, and therefore should be excluded from the analysis.

  In OLI’s case, the company invested $200,000 to develop its new business English course. This expenditure has already been incurred and cannot be recovered regardless of what pricing strategy OLI adopts in the future. Since the $200,000 is a sunk cost, it is not relevant to future pricing decisions. Including it in pricing would distort decision-making by suggesting that the company must recover past expenses through future sales, even though these past costs cannot be changed.

  What matters for pricing going forward are the variable costs of $300 per student, the annual fixed operating cost of $300,000, and the strategic positioning of the course in the competitive market. OLI should set its price based on demand elasticity, competitor pricing, and contribution margins that cover relevant costs and provide a suitable return, while ignoring the sunk development cost.

  Conclusion

  The $200,000 course development cost is irrelevant to OLI’s future pricing decisions. Effective decision-making should focus only on costs and revenues that will be affected by the chosen action.

• Question 7:

  Explain the impact of a sales price adjustment on AMI's operating income if AMI' s operating leverage is higher than that of other companies in its market.

  Essay

  Food Depot Ltd, (FDL) is a privately-held company that provides catering services to airlines and operates several restaurant chains including fast food, casual dining, and fine dining restaurants, FDL has been profitable in recent years and has a very strong cash position. FDL's newest division. Food_TO-Go is an online meal ordering and delivery platform acquired by FDL two year ago.

  In 20X7, sales for the entire company were $1 billion, with 50% of the business coming from the Airline Catering division. FDL is the country `s leading airline catering services provider and control 60% of the market share. However, the outlook of the airline catering industry is gloomy. The compound annual growth rate of the industry for the past five years was only 0.5% as airline networks have increasingly dropped catering on short domestic flights.

  The Food-To-division only contribution 5% of FDL's total sales in 20X7 and is far behind in competing for marketing for market share of the online meal ordering and delivery industry, it is estimated that Food-To-Go's sales were only 20% of the industry leader's sales. However, the outlook for the online meal ordering and delivery services industry is bright. The compound annual growth rate of the industry since it started three years ago was 50%. It is estimated the rapid growth of the industry will continue in the foreseeable future.

  Susan Willey, the head of Food-To-Go, does not agree that the Airline Catering division is the best-performing division in the company. Wiley argues that ber division bad the highest ROI in 20X7, and it deserves more capital finding. FDL's requested rate of return is 12%. The selected financial data for the Airline Catering division and Food-To-Go division in 20X7 are as follow (in $ millions)

  

  Airline Catering Sales: $500 Operating income: $300 Net book value of assets (average for the year): $2,000

  Food-To-Go Sales: $50 Operating income: $5 Net book value of assets (average for the year): $10

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  Explanation

  If AMI’s operating leverage is higher than that of other firms, then a change in sales has a magnified effect on its operating income. Operating leverage arises because of high fixed costs relative to variable costs. When sales increase, contribution margin covers fixed costs quickly, and additional sales translate almost entirely into operating profit, producing a larger percentage increase in income compared to competitors. However, the reverse is also true: if sales decline, the high fixed cost base means operating income will fall more sharply than in firms with lower leverage. Therefore, in AMI’s case, any sales price adjustment will have a disproportionate impact on operating income. A modest price rise could significantly boost operating profit, but a small fall in sales volume from a price increase might also sharply reduce income. This makes AMI’s earnings more volatile and sensitive to pricing strategy than those of rivals with lower leverage.

• Question 8:

  Which one or the following costs Is a variable product cost?

  A. Office rent in a temporary staffing company
  B. Plant manager s salary for a computer chip manufacturer
  C. Payroll taxes based on the hourly wages of plant personnel
  D. Promotional materials distributed to raise brand awareness
  C. Payroll taxes based on the hourly wages of plant personnel

• Question 9:

  Which one of the following moral philosophies states that the morality of an action is inherent and not based on the consequences of the action?

  A. Utilitarianism
  B. Deontology
  C. Teleology
  D. Relativism
  B. Deontology

• Question 10:

  A risk with a high frequency of occurrence but with a low impact, is best managed by which one of the following risk response strategies?

  A. Risk avoidance
  B. Risk acceptance
  C. Risk transfer
  D. Risk reduction
  D. Risk reduction