IMANET IMANET-CMA Online Practice Questions and Exam Preparation

IMANET IMANET-CMA Online Questions & Answers

• Question 561:

  The breakeven point in units increases when unit costs

  A. Increase and sales price remains unchanged.
  B. Decrease and sales price remains unchanged.
  C. Remain unchanged and sales price increases.
  D. Decrease and sales price increases.
  A. Increase and sales price remains unchanged.

  ---

  Explanation

  The breakeven point in units is calculated by dividing the fixed costs by the contribution margin per unit. If selling price is constant and costs increase, the unit contribution margin will decline, resulting in an increase of the breakeven point.

• Question 562:

  A firm wishing to become global must consider how many national markets to enter. A firm should enter fewer4 national markets when

  A. Communication adaptation costs are low
  B. The product need not be adapted
  C. Entry costs are low
  D. The first countries chosen are heavily populated and have high incomes
  D. The first countries chosen are heavily populated and have high incomes

  ---

  Explanation

  According to Ayal and Zif, the following are factors indicating that few national markets should be entered:

  (1)

  entry costs are high:

  (2)

  market control costs are high,

  (3)

  product adaptation costs are high;

  (4)

  communication adaptation costs are high;

  (5)

  the first countries selected have large populations, high incomes, and high income growth, and

  (6)

  a dominant firm can erect high entry barriers.

• Question 563:

  Calamity Cauliflower Corporation is considering undertaking a capital project, The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project ts expected to generate $100,000 of annual income for 10 years. At the end of that time, the new equipment, which will be depreciated on a straight-line basis, is expected to have a salvage value of $10,000. The existing equipment that would be sold to make room for the project has a histoncal cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-line basis. A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. Calamity Cauliflowers expected additional depreciation tax shield for the first year of the project is?

  A. $13,000
  B. $6,000
  C. $5,200
  D. $2,000
  C. $5,200

  ---

  Explanation

  The new equipment has a depreciable base of $150,000 ($160,000 historical cost- $10,000 estimated salvage value), and has an estimated 1 0-year useful life, so annual depreciation expense is expected to be `$15,000. The old equipment has a depreciable base of $4,000 ($12,000 book value -- $8,000 salvage value) being depreciated on a straight-line basis over the remaining useful life o12 years results in $2,000 depreciation expense for the next 2 years. The depreciation tax shield for the first year is thus the difference in the two depreciation expense amounts times the tax rate [($15,000-$2,000) x .40 = $5,200].

• Question 564:

  Management of a firm does not want to violate a working capital restriction contained in its bond indenture. If the firm's current ratio falls below 2. 0 to 1, technically it will have defaulted. The firm's current ratio is now 2. 2 to 1. If current liabilities are $200 million, the maximum new commercial paper that can be issued to finance inventory expansion is

  A. $20 million.
  B. $40 million.
  C. $240 million.
  D. $180 million.
  B. $40 million.

  ---

  Explanation

• Question 565:

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

  A. Agency securities.
  B. Bankers' acceptances.
  C. Commercial paper.
  D. Repurchase agreements.
  C. Commercial paper.

  ---

  Explanation

  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 566:

  Sensitivity analysis is used in capital budgeting to

  A. Estimate a project's internal rate of return.
  B. Determine the amount that a variable can change without generating unacceptable results.
  C. Simulate probabilistic customer reactions to a new product.
  D. Identify the required market share to make a new product viable and produce acceptable results.
  B. Determine the amount that a variable can change without generating unacceptable results.

  ---

  Explanation

  After a problem has been formulated into any mathematical model, it may be subjected to sensitivity analysis, which is a trial-and-error method used to determine the sensitivity of the estimates used. For example, forecasts of many calculated NPVs under various assumptions may be compared to determine how sensitive the NPV is to changing conditions. Changing the assumptions about a certain variable or group of variables may drastically alter the NPV, suggesting that the risk of the investment may be excessive.

• Question 567:

  The ABC Company manufactures components for use in producing one of its finished products. When 12,000 units are produced, the full cost per unit is $35, separated as follows: Direct materials $ 5 Direct labor 15 Variable overhead 10 Fixed overhead 5 The XYZ Company has offered to sell 12,000 components to ABC for $37 each. If ABC accepts the offer, some of the facilities currently being used to manufacture the components can be rented as warehouse space for $40,000. However, $3 of the fixed overhead currently applied to each component would have to be covered by ABC's other products. What is the differential cost to the ABC Company of purchasing the components from the XYZ Company?

  A. $8000
  B. $20,000
  C. $24,000
  D. $44,000
  B. $20,000

  ---

  Explanation

• Question 568:

  The internal rate of return for a project can be determined

  A. If the internal rate of return is greater than the firm's cost of capital.
  B. Only if the project cash flows are constant.
  C. By finding the discount rate that yields a net present value of zero for the project.
  D. By subtracting the firm's cost of capital from the project's profitability index.
  C. By finding the discount rate that yields a net present value of zero for the project.

  ---

  Explanation

  The IRR is a capital budgeting technique that calculates the interest rate that yields a net present value equal to $0. It is the interest rate that will discount the future cash flows to an amount equal to the initial cost of the project. Thus, the higher the PR, the more favorable the ranking of the project.

• Question 569:

  When a company analyzes credit applicants and increases the quality of the accounts rejected, the company is attempting to A. Maximize sales.

  B. Increase bad-debt losses.

  C. Increase the average collection period.

  D. Maximize profits.

  Correct Answer. D
  D

  ---

  Explanation

  Increasing the quality of the accounts rejected means that fewer sales will be made. The company is therefore not trying to maximize its sales or increase its bad debt losses. The objective is to reduce bad debt losses and thereby maximize profits.

• Question 570:

  What return on equity do investors seem to expect for a firm with a $50 share price, an expected dividend of $5. 50, of 9, and a constant growth rate of 4. 5%?

  A. 15. 05%
  B. 15. 50%
  C. 15. 95%
  D. 16. 72%
  B. 15. 50%

  ---

  Explanation

  Dividing the $5. 50 dividend by the $50 share price produces an 11% dividend yield. Adding the 11% yield to the 4. 5% growth rate produces a total return of 15. 5%.