IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 551:

  Using a 380-day year, what is the opportunity cost to a buyer of not accepting terms 3/10, net 45?

  A. 55.67%

  B. 31.81%

  C. 22.27%

  D. 101.73%

  Correct Answer: B

  Payments should be made within discount periods if the return is more than the firm's cost of capital. With terms of 3/10, net45; the buyer is earning a 3% savings for paying on the tenth day, or 35 days earlier than would otherwise be required. For example, on a $1,000 invoice, the payment would be only $970. The $30 savings is comparable to interest earned on a $970 loan to the vendor (the payment is not due for another 35 days). The interest rate on this hypothetical loan is 3.09278% ($30 - $970). That return is for a 35-day period. Annualizing the return requires determining the number of 35-day periods in a year. Multiplying the return for 35 days times the periods in a year results in an annual rate of return of about 31.81% [3.09276% x (360 days ?35 days)].

• Question 552:

  Richardson Supply has a $100 invoice with payment terms of 2/10, net 60. Richardson can either take the discount or place the funds in a money market account pang 6% interest. Using a 360-day year, Richardson's cost of not talking the cash discount is

  A. 12.2%.

  B. 8.7%

  C. 6.4%

  D. 6.2%.

  Correct Answer: B

  The company will initially lose $2 by not taking the discount. This amount is partially offset by interest earned on $98 for 50 days of $817. Thus, the net cost is $1.183 ($200 - $817). Since a 360-dayyear has

  7.2 fifty-day periods, the total annualized cost is $8.52 (7.2 x $1.183). The loss rate is about 8.7% ($8.52/$98)

• Question 553:

  A small retail business would most likely finance its merchandise inventory with

  A. Commercial paper

  B. A terminal warehouse receipt loan.

  C. A line of credit.

  D. A chattel mortgage.

  Correct Answer: C

  A small retail store would not have access to major capital markets. In fact, the only options available, outside of owner financing, are bank loans and a line of credit from suppliers. It is this latter alternative that is most often used because it permits the store to finance inventories for 30 to 60 days without incurring interest cost. A line of credit is an arrangement between a bank and a borrower in which the bank commits itself to lend up to a certain maximum amount to the borrower in a given period.

• Question 554:

  Short-term, unsecured promissory notes issued by large firms are known as

  A. Agency securities.

  B. Bankers' acceptances.

  C. Commercial paper.

  D. Repurchase agreements.

  Correct Answer: C

  Commercial paper is the term for the short-term (typically less than 9 months), unsecured, large denomination (often over $100,000) promissory notes issued by large, credit-worthy companies to other companies and institutional investors. In many instances, the maturity date is only a few days after issuance.

• Question 555:

  The prime rate is the

  A. Size of the commitment fee on a commercial bank loan.

  B. Effective coat of a commercial bank loan.

  C. Effective cost of commercial paper

  D. Pate charged on business loans to borrowers with high credit ratings.

  Correct Answer: D

  The prime interest rate is the rate charged by commercial banks to their best (the largest and financially strongest) business customers. It is traditionally the lowest rate charged by banks. However, in recent years, banks have been making loans at still lower rates in response to competition from the commercial paper market.

• Question 556:

  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.

  Correct Answer: C

  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 557:

  Which one of the following statements about trade credit is correct? Trade credit is

  A. Not an important source of financing for small firms.

  B. A source of long-term financing to the seller.

  C. Subject to risk of buyer default.

  D. Usually an inexpensive source of external financing.

  Correct Answer: C

  Trade credit is a spontaneous source of financing because it arises automatically as part of a purchase transaction. The terms of payment are set by the supplier, but trade credit usually requires payment within a short period of time. Trade credit is an important source of credit for all businesses but especially for buyers, such as small businesses, that might not have access to other credit markets. Like all forms of financing, trade credit is subject to the risk of buyer default.

• Question 558:

  A company has daily cash receipts of $150,000. The treasurer of the company has investigated a lockbox service whereby the bank that offers this service will reduce the company's collection time by four days at a monthly fee of $2,500. money market rates average 4% during the year, the additional annual income (loss) from using the lockbox service would be

  A. $6,000

  B. $(6,000)

  C. $12,000

  D. $(12,000)

  Correct Answer: B

  It daily cash receipts are $150,000, and the lockbox service will speed collection by four days, the company will have available an additional $600,000 ($150,000 x 4 days). The result is increased interest revenue of $24,000 ($600,000 x 4% interest rate). However, the $2,500 monthly service charges total $30,000 for the year, which is a $6,000 net loss ($24,000 interest revenue - $30,000 monthly service charges).

• Question 559:

  Hendnx, Inc. is interested in purchasing a $100 U.S. Treasury bill and was presented with the following options:

  

  If Hendrix wishes to buy the Treasury bill at the lowest purchasing price, which option should be chosen, assuming a 360- day year?

  A. Option 1.

  B. Option 2.

  C. Option 3.

  D. Option 4.

  Correct Answer: B

  To determine the amount of interest the lender will earn, the 3.5% discount rate is multiplied by the face amount of the Treasury bill. The interest on this Treasury bill is $3.50 ($100 x 3.5% x 1 year); thus, the purchase price is $96.50 ($100 - $3.5).

• Question 560:

  A manufacturing firm wants to obtain a short-term loan and has approached several lending institutions. All of the potential lenders are offering the same nominal interest rate but the terms of the loans vary. Which of the following combinations of loan terms will be most attractive for the borrowing firm?

  A. Simple interest, no compensating balance.

  B. Discount interest, no compensating balance.

  C. Simple interest, 20% compensating balance required.

  D. Discount interest, 20% compensating balance required.

  Correct Answer: A

  The most desirable set of terms are those that result in the lowest cost of borrowing. Discount interest results in a higher effective borrowing cost than simple interest because the bank deducts interest in advance so the borrower receives less than the face value of the loan. A compensating balance results in a higher effective borrowing cost because the compensating balance is an amount of cash that the firm is unable to use. The cheapest terms, given that all options have the same nominal interest rate, will be simple interest with no compensating balance.