IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 541:

  When a company offers credit terms of 3/10, net 30, the annual interest cost based on a 360-day year is

  A. 36.7%

  B. 24.5%

  C. 37.1%

  D. 55.6%

  Correct Answer: D

• Question 542:

  With respect to the use of commercial paper by an industrial firm, which one of the following statements is most likely to be true?

  A. The commercial paper is issued through a bank.

  B. The commercial paper has a maturity of 60-270 days

  C. The commercial paper is secured by the issuer's assets.

  D. The commercial paper issuer is a small company

  Correct Answer: B

  Most commercial paper has a maturity of between 60 and 270 days.

• Question 543:

  The Flesher Corporation was recently quoted terms on a commercial bank loan of 6% discounted interest with a 22% compensating balance. The term of the loan is 1 year. The effective cost of borrowing is (rounded to the nearest hundredth)

  A. 6.00%

  B. 6.38%

  C. 7.69%

  D. 8.33%

  Correct Answer: D

  Assuming a $1000 loan, the interest at 6% tor 1 year is $60. Hence, the proceeds of the loan with discounted (paid-in-advance) interest are $940 ($1,000 --$60). Also, 22% of the note, or $220, cannot be used by the borrower because of the compensating balance requirement. Consequently, only $720 is available for use. Paying $60 interest for the use of $720 results in an effective cost of borrowing of 8 33% ($60 - $720)

• Question 544:

  Elan Corporation is considering borrowing $100,000 from a bank for 1 year at a stated interest rate of 9%. What is the effective interest rate to Elan if this borrowing is in the form of a discounted note?

  A. 8.10%

  B. 9.00%

  C. 9.81%

  D. 9.89%

  Correct Answer: D

  Applying the 9% interest rate to a $100,000 loan results in interest expense of $9,000. If the loan is processed in the form of a discounted note, the interest will be deducted from the proceeds of the loan. Thus, the $9,000 of interest will be deducted from the $100,000 note, resulting in loan proceeds of $91,000. The borrower is paying $9,000 for a loan of $91,000, resulting in an effective interest rate of 9.89%.

• Question 545:

  The Dixon Corporation has an outstanding 1-year bank loan of $300,000 at a stated interest rate of 8% In addition, Dixon is required to maintain a 20% compensating balance in its checking account. Assuming the company would normally maintain a zero balance in its checking account, the effective interest rate on the loan is

  A. 6.4%

  B. 8.0%

  C. 20%

  D. 10.0%

  Correct Answer:

  The requirement to maintain a compensating balance of 20% of the $300,000 loan means that the borrower has effective use of only 80% of the loan, or $240,000. The 8% interest rate applied to a $300,000 loan requires an annual interest expenditure of $24,000. In turn, paying $24,000 for the use of $240,000 indicates an effective interest rate of 10%.

• Question 546:

  Which one of the following statements concerning cash discounts is correct?

  A. The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.

  B. With trade terms of 2/15, net 60, if the discount is not taken, the buyer receives 45 days of free credit.

  C. The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30.

  D. The cost of not taking a cash discount is generally higher than the cost of a bank loan.

  Correct Answer: D

  Payments should be made within the discount periods if the cost of not taking discounts exceeds the firm's cost of capital. For example, failing to take a discount when terms are 2/10, net 30 means that the firm is paying an effective annual interest rate exceeding 36%. Thus, the cost of not taking a discount is usually higher than the cost of a bank loan.

• Question 547:

  If a firm borrows $590,000 at 10% and is required to maintain $50,000 as a minimum compensating balance at the bank, what is the effective interest rate on the loan?

  A. 10.0%

  B. 11.1%

  C. 9.1%

  D. 12.2%

  Correct Answer: B

  At 10%, the interest on a $500,000 loan is $50,000 per year. However, the $500,000 loan is effectively reduced to $450,000 of usable funds by the compensating balance requirement. Thus, the borrower pays $50,000 of interest for a $450,000 loan, an effective rate of 11.1% ($50,000 - $450,000).

• Question 548:

  If a retailer's terms of trade are 3/10, net 45 with a particular supplier, what is the cost on an annual basis of not taking the discount? Assume a 360-day year.

  A. 24.00%

  B. 37.11%

  C. 36.00%

  D. 31.81%

  Correct Answer: D

• Question 549:

  A firm that often factors its accounts receivable has an agreement with its finance company that requires the firm to maintain a 6% reserve and charges 1% commission on the amount of receivables. The net proceeds would be further reduced by an annual interest charge of 10% on the monies advanced. Assuming a 360-day year, what amount of cash (rounded to the nearest dollar) will the firm receive from the finance company at the time a $100,000 account that is due in 90 days is turned over to the finance company?

  A. $93,000

  B. $90,000

  C. $83,700

  D. $90,675

  Correct Answer: D

• Question 550:

  A company obtained a short-term bank loan of $500,000 at an annual interest rate of 8%. As a condition of the loan, the company is required to maintain a compensating balance of $100,000 in its checking account. The checking account earns interest at an annual rate of 3%. Ordinarily, the company maintains a balance of $50,000 in its account for transaction purposes. What is the effective interest rate of the loan?

  A. 7.77%

  B. 8.22%

  C. 9.25%

  D. 8.56%

  Correct Answer: D

  Of the $500,000 borrowed, the debtor has the use of only $450,000. The compensating balance provision requires a minimum balance that is $50,000 greater than the balance that the company usually maintains. At 8% on a $500,000 loan, the annual interest expense is $40,000. However, this amount is reduced by the interest earned on the extra $50,000 in the checking account. At 3%, the extra $50,000 earns $1,500 per year. Thus, the net expense is $38,500. The effective interest rate is 8.56% ($38500 ?$450,000)