IMANET IMANET-CMA Online Practice Questions and Exam Preparation

IMANET IMANET-CMA Online Questions & Answers

• Question 161:

  A manufacturing arrangement characterized by low or no setup times and the ability to switch quickly from producing one product to another is called a

  A. Just-in-time manufacturing system.
  B. Computer-integrated manufacturing system.
  C. Flexible manufacturing system.
  D. Robot.
  C. Flexible manufacturing system.

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  Explanation

  An example of the use of automation and advanced technologies in the manufacturing field is flexible manufacturing, which is the capacity of computer-controlled machinery to perform many different programmed functions. By eliminating machine setup time, strengthening control, and automating handling processes, flexible manufacturing permits the efficient production of small numbers of different products by the same machines. A company can therefore more accurately match output with consumer tastes and avoid long production runs of identical goods.

• Question 162:

  In general, it is more expensive for a company to finance with equity capital than with debt capital because

  A. Long-term bonds have a maturity date and must therefore be repaid in the future
  B. Investors are exposed to greater risk with equity capital.
  C. Equity capital is in greater demand than debt capital
  D. Dividends fluctuate to a greater extent than interest rates
  B. Investors are exposed to greater risk with equity capital.

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  Explanation

  Providers of equity capital are exposed to more risk than are lenders because the firm is not obligated to pay them a return. Also, in case of liquidation, creditors are paid before equity investors. Thus, equity financing is more expensive than debt because equity investors require a higher return to compensate for the greater risk assumed

• Question 163:

  When a firm finances each asset with a financial instrument of the same approximate maturity as the life of the assets, it is applying

  A. Working capital management
  B. Return maximization
  C. Financial leverage
  D. A hedging approach
  D. A hedging approach

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  Explanation

  Maturity matching, or equalizing the life of an asset and the debt instrument used to finance that asset, is a hedging approach. The basic concept is that the company has the entire life of the asset to recover the amount invested before having to pay the lender.

• Question 164:

  The following data were collected from the records of the shipping department of a company:

  

  The cost of shipping supplies is most likely to be a

  A. Variable cost.
  B. Fixed cost.
  C. Step cost.
  D. Semi-fixed cost.
  A. Variable cost.

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  Explanation

  Variable costs are constant per unit but fluctuate in total with activity or volume (the rate of use of capacity). The cost per unit for shipping supplies is relatively constant at about $5, so this cost is variable.

• Question 165:

  All of the following are alternative marketable securities suitable for investment except

  A. U.S.Treasurjbills.
  B. Eurodollars.
  C. Commercial paper.
  D. Convertible bonds.
  D. Convertible bonds.

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  Explanation

  Marketable securities are near-cash items used primarily for short-term investment. Examples include U.S. Treasury bills, Eurodollars, commercial paper, money- market mutual funds with portfolios of short-term securities, bankers' acceptances, floating rate preferred stock1 and negotiable CDs of U.S. banks. A convertible bond is not a short4erm investment because its maturity date is usually more than one year in the future and its price can be influenced substantially by changes in interest rates or by changes in the investee's stock price.

• Question 166:

  Capital Invest, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year:

  

  Which project(s) should Capital Invest, Inc. undertake during the upcoming year if it has only $300,000 of capital funds available?

  A. Project 1. B. Projects 2, 3, and 4.
  C. Projects 3 and 4.
  D. Project 3.
  D. Project 3.

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  Explanation

  Given that $300,000 is available and that each project costs $200,000 or more, only one project can be undertaken. Because Project 3 has a positive NPV and the highest profitability index, it is the best investment. The high profitability index means that the company will achieve the highest NPV per dollar of investment with Project 3. The profitability index facilitates comparison of different-sized investments.

• Question 167:

  The prime lending rate of commercial banks is an announced rate and is often understated from the viewpoint of even the most credit-worthy firms. Which one of the following requirements always results in a higher effective interest rate?

  A. A floating rate for the loan period
  B. A covenant that restricts the issuance of any new unsecured bonds during the existence of the loan.
  C. The imposition of a compensating balance with an absolute minimum that cannot be met by current transaction balances.
  D. The absence of a charge for any unused portion in the line of credit.
  C. The imposition of a compensating balance with an absolute minimum that cannot be met by current transaction balances.

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  Explanation

  When a firm borrows money from the bank, it is often required to keep a certain percentage of the funds in the bank at all times. These compensating balances effectively increase the rate of interest on the money borrowed from the bank.

• Question 168:

  What s the weighted average cost of capital for a firm with equal amounts of debt and equity financing, a 15% before-tax company cost of equity capital, a 35% tax rate, and a 12% coupon rate on its debt that is selling at par value?

  A. 8.775%
  B. 9.60%
  C. 11.40% D 13. 50%
  C. 11.40% D 13. 50%

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  Explanation

  The 12% debt coupon rate is reduced by the 35% tax shield, resulting in a cost of debt of 78% [12% x (1 -- .35)1 The average of the 15% equity capital and 7. 8% debt is 11.4%

• Question 169:

  An increase in sales resulting from an increased cash discount for prompt payment would be expected to cause

  A. An increase in the operating cycle.
  B. An increase in the average collection period.
  C. A decrease in the cash conversion cycle.
  D. A decrease in purchase discounts taken.
  C. A decrease in the cash conversion cycle.

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  Explanation

  If the cause of increased sales is an increase in the cash discount, it can be inferred that the additional customers would pay during the discount period. Thus, cash would be collected more quickly than previously , and the cash conversion cycle would be shortened.

• Question 170:

  Speech Co.'s budgeted sales and budgeted cost of sales for the coming year are $212,000,000 and $132,500,000, respectively. Short-term interest rates are expected to average 5%. If Speech could increase inventory turnover from its current 8.0 times permeate 10.0 times per year, its expected cost savings in the current year would be

  A. $165,625
  B. $0
  C. $3,312,500
  D. $828,125
  A. $165,625

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  Explanation

  If cost of sales is $132,500,000, and the inventory turnover rate is 8.0 times per year, the average inventory is $16,562,500 ($132,500,000 ?8). If the turnover increases to 10.0 times annually, the average inventory will decline to $13,250,000 ($132,500,000 ?10), a decrease of $3,312,500. At a 5% rate, reducing working capital by $3,312,500 will save the company $165,625 ($3,312,500 x .05).