IMANET IMANET-CMA Online Practice Questions and Exam Preparation

IMANET IMANET-CMA Online Questions & Answers

• Question 261:

  Duration hedging involves hedging interest-rate risk by matching the duration of assets with the duration of liabilities. Which of the following is a true statement about duration hedging?

  A. If duration increases, the volatility of the price of a debt instrument decreases.
  B. The goal of duration hedging is to equate the duration of assets with the duration of liabilities.
  C. The firm is immunized against interest-rate risk when the total price change for assets equals the total price change for liabilities.
  D. Duration is higher if the nominal rate on a debt instrument is higher.
  C. The firm is immunized against interest-rate risk when the total price change for assets equals the total price change for liabilities.

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  Explanation

  The goal of duration hedging is not to equate the duration of assets and the duration of liabilities but for the following relationship to apply. (value of assets) x (Duration of assets) = ( value of liabilities) x ( Duration of liabilities) The firm is immunized against interest-rate risk when the total price change for assets equals the total price change for liabilities.

• Question 262:

  The relevance of a particular cost to a decision is determined by

  A. Riskiness of the decision.
  B. Number of decision variables.
  C. Amount of the cost.
  D. Potential effect on the decision.
  D. Potential effect on the decision.

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  Explanation

  Relevance is the capacity of information to make a difference in a decision by helping users of that information to predict the outcomes of events or to confirm or correct prior expectations. Thus, relevant costs are those expected future costs that vary with the action taken. All other costs are constant and therefore have no effect on the decision.

• Question 263:

  Vasil, Inc. conducted a strategy self-assessment of factors contributing to market attractiveness and business strengths as follows:

  

  The factor ratings range from 1 (the lowest) to 5 (the highest). Which one of the following strategies would be the most beneficial for Vasil?

  A. Build selectively on strengths.
  B. Upgrade product line.
  C. Focus on attractive segments.
  D. Avoid investments.
  A. Build selectively on strengths.

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  Explanation

  Vasil can quantify the results of its strategic self-assessment by weighting and summing each rating.

• Question 264:

  American Coat Company estimates that 60,000 special zippers will be used in the manufacture of men's jackets during the next year. Reese Zipper Company has quoted a price of $.60 per zipper. American would prefer to purchase 5,000 units per month, but Reese is unable to guarantee this delivery schedule. To ensure availability of these zippers, American is considering the purchase of all 60,000 units at the beginning of the year. Assuming American can invest cash at 8% 1 the company's opportunity cost of purchasing the 60,000 units at the beginning of the year is

  A. $1,320
  B. $1,440
  C. $2,640
  D. $2,880
  A. $1,320

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  Explanation

• Question 265:

  The term short-selling is the

  A. Selling of a security that was purchased by borrowing money from a broker.
  B. Selling of a security that is not owned by the seller.
  C. Selling of all the shares you own in a company in anticipation that the price will decline dramatically.
  D. Betting that a stock will increase bays certain amount within a given period of time.
  B. Selling of a security that is not owned by the seller.

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  Explanation

  Short-selling is accomplished by borrowing securities from a broker and selling those securities. At a later time, the loan is repaid by buying securities on the open market and returning them to the broker. The seller speculates that the stocks market price will decent.

• Question 266:

  From the view point of the investor, which of the following securities provides the least risk?

  A. Mortgage bond.
  B. Subordinated debenture.
  C. Income bond.
  D. Debentures.
  A. Mortgage bond.

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  Explanation

  A mortgage bond is secured with specific fixed assets, usually real property. Thus, under the rights enumerated in the bond indenture, creditors will be able to receive payments from liquidation of the properly in case of default. In a bankruptcy proceeding, these amounts are paid before any transfers are made to other creditors, including those preferences. Hence, mortgage bonds are less risky than the others listed.

• Question 267:

  Which one of the following management considerations is usually addressed first in strategic planning?

  A. Outsourcing
  B. Overall objectives of the firm
  C. Organizational structure
  D. Recent annual budgets.
  B. Overall objectives of the firm

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  Explanation

  Strategic planning is the process of setting overall organizational objectives and drafting strategic plans. It is a process of long-term planning. Setting ultimate objectives for the firm is a necessary prelude to developing strategies for achieving those objectives. Plans and budgets are then needed to implement those strategies.

• Question 268:

  Structural considerations affecting the threat of substitutes include all of the following except

  A. Relative prices
  B. Brand identity
  C. Cost of switching to substitutes
  D. Customers' inclination to use a substitute
  B. Brand identity

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  Explanation

  Substitutes are types of goods and services that serve the same purpose. All products that can replace a good or service should be considered substitutes. For example, bicycles and cars are substitutes for public transportation. Structural considerations determine the effect substitutes have on one another. However, because substitutes affecting the threat of substitutes.

• Question 269:

  The immediate goal of a theory of constraints (TOC) analysis is to

  A. Maximize the efficiency of the entire production process.
  B. Minimize direct materials cost
  C. Maximize contribution margin through the constraint.
  D. Smooth production flow to eliminate backup in the system.
  C. Maximize contribution margin through the constraint.

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  Explanation

  A basic principle of TOC analysis is that short-term profit maximization requires maximization the contribution margin through the constraint, called the throughput margin or throughput contribution

• Question 270:

  Union Electric Company must clean up the water released from its generating plant. The company's cost of capital is 12 percent for average risk projects, and that rate is normally adjusted up or down by 2 percentage points for high- and low-risk projects. Clean-Up Plan A. which is of average risk, has an initial cost of $10 million, and its operating cost will be $1 million per year for its 10-year life. Plan B, which is a high-risk project, has an initial cost of $5 million, and its annual operating cost over Years 1 to 10 will be $2 million. What is the approximate PV of costs for the better project?

  A. $15,432,000
  B. $15,650,000
  C. $16,300,000
  D. $17,290,000
  B. $15,650,000

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  Explanation

  The cash flows of Plan A are discounted at 12%, the company's cost of capital for average risk projects. Plan B is evaluated with a lower cost of capital that reflects a greater risk of the cash outflow of the project. Thus, the cash flows of Plan

  B are discounted at 10% (12% -- 2%). the company's adjusted cost of capital for high risk projects. The net present value of each plan is the initial cost plus the present value of an annuity for 10 years at the appropriate rate multiplied times

  the annual operating cost. The present value factors are found in the tools section of CMA Test Prep.

  Plan A NPV = $10,000,000 + ($1,000,000 x 5. 650)

  Plan A NPV = $15,650,000

  Plan B NPV = $5,000,000 + ($2,000,000 x 6. 145)

  Plan B NPV = $17,290,000

  Plan A has a lower NPV and thus is the better project.