IMANET IMANET-CMA Online Practice Questions and Exam Preparation

IMANET IMANET-CMA Online Questions & Answers

• Question 401:

  The costs described in situations 2, 3, and 5 are

  A. Sunk costs.
  B. Discretionary costs.
  C. Relevant costs.
  D. Differential costs.
  A. Sunk costs.

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  Explanation

  Joint production costs are irrelevant to deciding whether to sell at split-off or to process further. Similarly, already incurred RandD costs and the costs of obsolete inventory are irrelevant to future decisions. Thus, these are examples of sunk costs. Sunk costs are unavoidable. They are the result of a past irrevocable decision and thus have no relevance to future decisions.

• Question 402:

  According to Philip Kilter, which class of customer produces low profit but is desirable?

  A. Iron.
  B. Gold.
  C. Lead.
  D. Platinum.
  A. Iron.

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  Explanation

  Customer profitability lily analysis determines all revenues and all costs assignable to specific customers. Customers in the iron category produce low profits but are desirable. The firm's marketing investment in these customers is lower than for the platinum and gold categories. However, the firm's objective should be to move them into the gold category. .

• Question 403:

  Sylvan Corporation has the following capital structure. Debenture bonds $1O, 000.000 Preferred equally 110001000 Common equally 39,000000

  The financial leverage of Sylvan Corporation would increase as a result of

  A. Issuing common stock and using the proceeds to retire preferred stock.
  B. Maintaining the same dollar level of cash dividends as the prior year, even though earnings have increased by 7%.
  C. Financing its future investments with a higher percentage of bonds.
  D. Financing its future investments with a higher percentage of equally funds.
  C. Financing its future investments with a higher percentage of bonds.

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  Explanation

  Financial leverage is the use of borrowed money to earn money for the benefit of shareholders. The expectation is that investment earnings will be greater than the interest paid on the borrowed funds. Increasing debt (such as bonds) increases financial leverage.

• Question 404:

  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 month1 but Reese is unable to guarantee this delivery schedule. In order 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%, 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. $1,500
  D. $2,640
  A. $1,320

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  Explanation

  The cost of 60,000 zippers is $36,000 (60,000 x $60). The monthly cost is $3,000 (5,000 x $60). Because the company wants to purchase the items monthly, it will invest at least $3,000 in January. Accordingly, the zippers to be used in January will be purchased at the first of the year even if no special purchase is made. Thus, the incremental advance purchase will be only $33,000, not $36,000. The incremental investment will decline at a constant rate of $3,000 per month, so the amount for February will be $30,000, for March $27,000, etc. Hence, the incremental investment for December will be $0. Accordingly, assuming consumption is uniform, the average incremental investment during the year will be $16,500 ($33,000 + 2) if the onetime purchase is made. Total opportunity cost is therefore $1,320 ($16,500 x 8% cost of capital).

• Question 405:

  Which industry factor does not contribute to competitive rivalry?

  A. Price-cutting, large advertising budgets, and frequent introduction of new products.
  B. A form's growth must come from winning, other firms' customers.
  C. High costs of switching suppliers.
  D. High fixed costs.
  C. High costs of switching suppliers.

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  Explanation

  If it is expensive to switch suppliers, customers will be less motivated to respond competitor advances.

• Question 406:

  The degree of financial leverage for Carlisle Company is

  A. 24
  B. 178
  C. 1.35
  D. 2. 3
  C. 1.35

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  Explanation

• Question 407:

  The type of open that does not have the barong of stock is called a(n)

  A. Covered option,
  B. Unsecured option.
  C. Naked option
  D. Put option.
  C. Naked option

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  Explanation

  A naked or uncovered option is a call option that does not have the backing of stock. Thus, the option writer will have to purchase the underling stock if the call option is exercised.

• Question 408:

  In Michael F. Porter's model of the value creation chain1 the primary activities include

  A. Logistics, operations, marketing and sales, and service.
  B. Procurement, infrastructure, operations, and service.
  C. Procurement, infrastructure, operations, and technology development.
  D. Procurement, infrastructure, human resources, and technology development.
  A. Logistics, operations, marketing and sales, and service.

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  Explanation

  The model consists of primary and supporting activities. The primary activities are inbound logistics, operations, outbound logistics, marketing and sales, and service. Inbound logistics activities involve the firms' capture of materials to be processed. Operations activities are conversion processes. Outbound logistics activities include shipment of products. Marketing and sales activities are the promotion and sale of final products. Service activities provide customer service. The four support activities are infrastructure (e.g., administration, finance, and planning), procurement, human resources, and technology development.

• Question 409:

  Strategy is a broad term that usually means the selection of overall objectives. Strategic analysis ordinarily excludes the

  A. Trends that will affect the entity's markets
  B. Target product mix and production schedule to be maintained
  C. Forms of organizational structure that would best serve the entity
  D. Best ways to invest in research, design, production, distribution, marketing, and administrative activities
  B. Target product mix and production schedule to be maintained

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  Explanation

  Strategic analysis is the process of long-range planning. It includes identifying organizational objectives, evaluating the strengths and weaknesses of the organization, such as market trends, changes the technology, international competition, and social change. The final step is to derive the best strategy for reaching the objectives. Setting the target product mix and production schedule for the current year is not a concern of strategic analysis because it is short-term activity.

• Question 410:

  Gibber Corporation has an opportunity' to sell newly developed product in the United States for a period of five years. The product license would be purchased from New Group Company. Gibber would be responsible for all distribution and product promotion costs. New Group has the option to renew the agreement, with modifications, at the end of the initial five-year term. Gibber has developed the following estimated revenues and costs that would be associated with the new product:

  

  The working capital required to support the new product would be released for investment elsewhere if the product licensing agreement is not renewed. Using the net present value method of analysis and ignoring the effects of income taxes, the net present value of this product agreement, assuming Gibber has a 20% cost of capital, would be

  A. $7,720
  B. $(64,064)
  C. $(72,680)
  D. $(127,320)
  A. $7,720

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  Explanation

  The net present value of a capital project is derived by calculating three amounts and discounting them at the appropriate interest rate: the net initial investment (for which the rate is always 0%), the annual cash inflows, and the termination cash inflows. The net initial investment itself consists of three components: the purchase of new equipment, the increase in working capital, and the proceeds from the disposal of any old equipment. For this project, this amount is $320000 ($120,000 + 200,000 + $0). Since this amount is paid out today, its present value is $320,000, i.e., no discounting is performed. The second element of the project as a whole is the annual cash inflows. This has two components: the cash inflows from operations and the depreciation tax shield arising from the purchase of new equipment. Since the effects of income taxes are not relevant to this problem, only the first of these components requires calculation. The annual net operating revenue is $80,000 ($400,000--$250,000--$70,000). Discounted as an ordinary annuilyfor5 years at 20%, its present value is $239,280 ($80,000 x 2. 991). The third and final element is the cash flows upon termination of the project, consisting of the proceeds from the disposal of the equipment involved in the project (again, the effects of income taxes are ignored for this problem) and the recovery of working capital. For this project, this amount is $220,000 ($20,000 + $200,000). Discounted as a single amount to be received in 5 years at 20%, its present value is $88,440 ($220,000 x 0.402). Gibber's total net present value for this capital project can therefore be calculated as follows: