IMANET IMANET Certifications CMA Questions & Answers

• Question 621:

  Which one of the following events will most hake result in a higher pence-earnings ratio for a compacts common shares'?

  A. Investors4 required rate of return on the common shares fans.

  B. The rate of growth in dividends is expected to deckle

  C. The concord is expected to enter a recession,

  D. The addend yield increases when the dividend per share remains unchanged.

  Correct Answer: A

  A decrees in investors' required rate of return will cause share prices to go up. which with result in a higher P/E ratio

• Question 622:

  If a call option is "out-of-the-money"

  A. It is not worth exercising.

  B. The value of the underlying asset is less than the exercise price.

  C. The option no longer exists

  D. It is not worth exercising, and the value of the underlying asset is less than the exercise pence

  Correct Answer: D

  When the value of the asset underlying a call option is less man the exercise pence of me the option is out-of the-money, witch means it is not worth exercising.

• Question 623:

  In calculating the total value of a bond, how much does the $1,000 to be received upon a bond's maturity in 4 years add to the bond's price if the discount rate is 6%?

  A. $208.00

  B. $747.00

  C. $763.00

  D. $792.00

  Correct Answer: D

  The 6% present value factor for four years is .792. Multiplying that times $1,000 results value of $792.00.

• Question 624:

  What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond 1 year later for $1 .037.19?

  A. 5%

  B. 5.08%

  C. 6.64%

  D. 7%

  Correct Answer: A

  The investor would have a loss of $17.28 on the sale ($1,054.47-- $1 .037.19). The $17.28 loss would partial offset the $70 of interest income, reusing in a net return of $52.72 ($70-- $17.28). Dividing the $52.72 by the $1,054.47 original investment results in a 5% return.

• Question 625:

  What is the pence of a 10-year, 10% coupon bond with a $1 .000 face value if investors require a 12% return? Assume annual coupon payments.

  A. $565.00

  B. $322.00

  C. $604.50

  D. $887.00

  Correct Answer: B

  The pence of the bond is equal to the sum of present value of the face value of the bond and the present value of the interest payments. Thus, the price is $887.00 [($1 .000 x .322 PV factor) + ($100 x 5.65 PV factor)].

• Question 626:

  What is the duration of a 9%, 5-year Treasury bond that has a yield of 8%?

  A. 3.27

  B. 4.26

  C. 0.69

  D. 0.98

  Correct Answer: B

• Question 627:

  If a firm uses external financing as a plug item, has a new capital budget of $1 million, a net income of $750,000, and a plowback ratio of 40%. how much should be raised in external funds?

  A. $300,000

  B. $450,000

  C. $550,000

  D. $700,000

  Correct Answer: D

  Mumping the 40% plowback ratio times the $750,000 of income produces $300,000 of funds for arrestment. Subtracting the $300,000 from the $1 million needed results in $700,000 to be obtained from external sources.

• Question 628:

  What happens to the NPV of a 1-year project if fixed costs are increased from $200 to $300, the firm is profitable, has a 35% tax rate and employs a 12% cost of capital?

  A. NPV decreases by $100.

  B. NPV decreases by $89.29.

  C. NPV decreases by $65.

  D. NPV decreases by $58 .05%

  Correct Answer: D

  The $100 increase in costs is tax deductible. Therefore, the after-tax effect is only $65. Discounting the $65 decline at 12% (PV factor = .893) results in a decline in NPV of $58.05.

• Question 629:

  An annual payment in perpetuity of $1,000 per year beginning immediate is said to offer a 12% interest rate. What is its present value?

  A. $8,33333

  B. $9,33333

  C. $10,000

  D. $12,000

  Correct Answer: B

  At 12%. the factor for the present value of an annuity approaches 8.33333. That assumes the first payment is one year away, Since the first payment is today, 1.00 must be added to the above (actor, resulting in 9.33333.Muttipting 933333 times $1,000 results in a present value of $9,333 33.

• Question 630:

  Falcon AG, a German heavy machinery manufacturer, is planning to expand its manifesting base in the US. and has been offered a special loan of $25 million by the state of Georgia. The loan is for a term of 5 years and carries an interest of 4% to be paid annually Falcons normal borrowing rate for 5-year borrowing is 6%. What is the value of this special loan to Falcon?

  A. $4.212 million.

  B. $2113 million.

  C. $6325 million,

  D. $20.788 million.

  Correct Answer: B

  The value of the special loan can be calculated by computing the NPV of the loan using Falcon's normal borrowing rate of 6% for 5 periods. NPV equals $25 million minus PV of interest payments minus PV of principal. Thus, the NPV is $2.1 13 million ($25 million --[($25 million x .04 annual interest) x4.212 PV of an annuity for Syrsat6%]-- ($25 millionx747PVof$1 in5yrs. at6%]}.