IMANET IMANET-CMA Online Practice Questions and Exam Preparation

IMANET IMANET-CMA Online Questions & Answers

• Question 121:

  Barker, Inc. has no capital rationing constraint and is analyzing many independent investment alternatives. Barker should accept all investment proposals

  A. If debt financing is available for them.
  B. That have positive cash flows.
  C. That provide returns greater than the before-tax cost of debt.
  D. That have a positive net present value.
  D. That have a positive net present value.

  ---

  Explanation

  A company should accept any investment proposal, unless some are mutually exclusive, that has a positive net present value or an internal rate of return greater than the company's desired rate of return.

• Question 122:

  Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of radar equipment. The unit cost to manufacture 1 unit of KJ37 is presented below.

  

  Material handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Leland's annual manufacturing overhead budget is one-third variable and two-thirds fixed. Scott Supply, one of Leland's reliable vendors, has offered to supply Part Number KJ37 at a unit price of $15,000. Assume Leland Manufacturing is able to rent all idle capacity for $25,000 per month. If Leland decides to purchase the 10 units from Scott Supply, Leland's monthly cost for KJ37 would

  A. Increase $48,000.
  B. Increase $23,000.
  C. Decrease $7,000.
  D. Change by some amount other than those given.
  B. Increase $23,000.

  ---

  Explanation

  Purchasing would increase unit cost by $4,800 ($26,000 cost to purchase--$21,200 cost to manufacture), an increase of $48,000 per month (10 units x $4,800). However, the $25,000 of rental income would reduce the increase in net costs to $23J00 per month.

• Question 123:

  Condensed monthly operating income data for Korbin, Inc for May follows:

  

  Additional information regarding Korbin's operations follows:

  One-fourth of each store's direct fixed costs would continue if either store is closed. ?Korbin allocates common fixed costs to each store on the basis of sales dollars.

  Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.

  The operating results for May are representative of all months. Korbin is considering a promotional campaign at the Suburban Store that would not affect the Urban Store. Increasing annual promotional expense at the Suburban Store by

  $60,000 in order to increase this store's sales by 10% would result in a monthly increase (decrease) in Korbin's operating income during the year (rounded) of

  A. $(5000)
  B. $(1400)
  C. $487
  D. $7,000
  B. $(1400)

  ---

  Explanation

  The $60,000 advertising campaign will increase direct fixed costs by $5,000 per month ($60,000 / 12). Sales and contribution margin will also increase by 10%. Hence, the contribution margin for the Suburban Sore will increase by $3,600 ($36,000 x 10%), and income will decline by $1,400 ($5,000-$3,600).

• Question 124:

  A market analyst has estimated the equity beta of Modern Homes. Inc to be 1.4 This beta implies that the company's

  A. Systematic risk is lower than that of the market portfolio
  B. Systematic risk is higher than that of the, market portfolio
  C. Unsystematic risk is higher than that of the market portfolio.
  D. Total risk is higher than that of the market portfolio.
  B. Systematic risk is higher than that of the, market portfolio

  ---

  Explanation

  Systematic risk, also called market risk and undiversifiable risk, is the risk of the stock market as a whole. Some conditions in the national economy affect all businesses, which is why equity prices so often move together. The effect of an individual security on the volatility of a portfolio is measured by its sensitivity to movements by the overall market. This sensitivity is stated in term of a stock's beta coefficient. An average-risk stock has a beta of 1.0 because its return are perfectly positively correlated with those on the market portfolio.

• Question 125:

  Which of the changes in leverage would apply to a company that substantially increases its investment in fixed assets as a proportion of total assets and replaces some of its long- term debt with equity?

  

  A. Increase Decrease
  B. Decrease Increase
  C. Increase Increase
  D. Decrease Decrease
  B. Decrease Increase

  ---

  Explanation

  Leverage is the amount of the fixed cost of capital, principally debt, in a firm's capital structure relative to its operating income It is also defined as the ratio of debt to total assets or debt to capital. Leverage, by definition, creates financial risk, which relates directly to the question of the cost of capital The more leverage, the higher the financial risk, and the higher the cost of debt capital. An increase in the equity component of the capital structure, however, decreases financial leverage Operating leverage is based on the degree that fixed costs are used in the production process. A company with a high percentage of fixed costs is riskier than a firm in the same industry that relies more on variable costs to produce. When fixed assets increase, operating leverage also increases

• Question 126:

  Which of the following are components of interest-rate risk?

  A. Purchasing-power risk and default risk.
  B. Price risk and market risk.
  C. Portfolio risk and reinvestment-rate risk.
  D. Price risk and reinvestment-rate risk.
  D. Price risk and reinvestment-rate risk.

  ---

  Explanation

  Interest-rate risk is the risk of fluctuations in the value of an asset due to changes in interest rates. One component of interest-rate risk is price risk; for example, the value of bonds declines as interest rates increase. Reinvestment-rate risk is another component of interest-rate risk. If interest rates decline, lower returns will be available for reinvestment of interest and print pal payments received.

• Question 127:

  In which product-mix pricing strategy is it appropriate for the seller to accept any price that exceeds the storage and delivery costs for the product?

  A. By-product pricing.
  B. Optional-product pricing.
  C. Captive-product pricing.
  D. Product-bundle pricing.
  A. By-product pricing.

  ---

  Explanation

  A by-product is a product of relatively minor importance generated during the production of one or more other products. Its production entails no additional costs. Any amount received above the storage and delivery costs for a by-product allows the seller to reduce the main product's price to make it more competitive.

• Question 128:

  Which of the following is not a reason firms should emphasize customer retention?

  A. Increasing the retention rate increases profits exponentially.
  B. Customer retention is far less costly than customer attraction.
  C. The longer the customer relationship, the more profitable it is.
  D. Long-time customers of firms are more costly than new customers.
  D. Long-time customers of firms are more costly than new customers.

  ---

  Explanation

  The firm should emphasize customer retention because the customer base is an important intangible asset. Among the reasons for greater retention are that loss of some customers is unavoidable, customer retention is far less costly than customer attraction, increasing the retention rate increases profits exponentially, and the longer the customer relationship, the more profitable it is.

• Question 129:

  Debentures are

  A. Income bonds that require interest payments only when earnings permit.
  B. Subordinated debt and rank behind convertible bonds.
  C. Bonds secured by the full faith and credit of the issuing firm
  D. A form of lease financing similar to equipment trust certificates
  C. Bonds secured by the full faith and credit of the issuing firm

  ---

  Explanation

  Debentures are unsecured bonds. Although no assets are mortgaged as security for the bonds, debentures are secured by the full faith and credit of the issuing firm. Debentures are a general obligation of the borrower. Only, companies with the best credit ratings can issue debentures because only the company's credit rating and reputation secure the bonds.

• Question 130:

  A PERT network has only two activities on its critical path. These activities have standard deviations of 6 and 8, respectively. The standard deviation of the project completion time is

  A. 7
  B. 10
  C. 14
  D. 48
  B. 10

  ---

  Explanation

  The mean time forth critical path is simply the sum of the means of the activity times. However, the standard deviation equals the square root of the sum of the variances (squares of the standard deviations) of the times for activities on the critical path. The standard deviation of the project completion time (time for the critical path) is therefore the square root of 100 (62 + 82), or 10.