IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 571:

  Hagar Company's bank requires a compensating balance of 20% on a $100,000 loan. If the stated interest on the loan is 7%, what is the effective cost of the loan?

  A. 5.83%

  B. 7.00%

  C. 8.40%

  D. 8.75%

  Correct Answer: D

• Question 572:

  Gatsby, Inc. is going to begin factoring its accounts receivable and has collected information on the following four finance companies: Which company will give Gatsby the highest proceeds from a $100,000 account due in 60 days? Assume a 360-day year.

  

  A. Company A.

  B. Company B

  C. Company C.

  D. Company D.

  Correct Answer: A

  Company A will withhold $6,000 ($100,000 x 6%) as a reserve against returns and allowances and $1,400 ($100,000 x 14%) as a commission. The remaining $92,600 will be reduced by interest at the rate of 15% annually. The interest charge will be $2,315, assuming a 360-day year [($92,600 x 15) x (60-day payment period - 360 days)). The proceeds to be received by Gatsby equal $90,285 ($92,600 - $2,315).

• Question 573:

  The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified the four sources of funds given below.

  1.

  Pay a factor to buy the company's receivables, which average $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at 10% and charge a fee of 2% on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.

  2.

  Borrow $110,000 from a bank at 12% interest. A 9% compensating balance would be required.

  3.

  Issue $110,000 of 6-month commercial paper to net $100,000. (New paper would be issued every 6 months.)

  4.

  Borrow $125,000 from a bank on a discount basis at 20%. No compensating balance would be required. Assume a 360-day year in all of your calculations. Should CyberAge use trade credit and continue paying at the end of the credit period?

  A. Yes, if the cost of alternative short-term financing is less.

  B. Yes, if the firm's weighted-average cost of capital is equal to its weighted-average cost of trade credit.

  C. No, if the cost of alternative long-term financing is greater

  D. Yes, if the cost of alternative short-term financing is greater

  Correct Answer: D

  The company is currently paying an annual rate of 25.2% (see previous question) to obtain trade credit and pay at the end of the credit period. This policy should be continued if trade credit is the only source of financing, or if other sources are available only at a higher rate.

• Question 574:

  The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified the four sources of funds given below.

  1.

  Pay a factor to buy the company's receivables, which average $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at 10% and charge a fee of 2% on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.

  2.

  Borrow $110,000 from a bank at 12% interest A 9% compensating balance would be required.

  3.

  Issue $110,000 of 6-month commercial paper to net $100,000 (New paper would be issued every 6 months.)

  4.

  Borrow $125,000 from a bank on a discount basis at 20%. No compensating balance would be required. Assume a 360-day year in all of your calculations. Assuming a 360-day year and that CyberAge continues paying on the last day of the credit period, the company's weighted-average annual interest rate for trade credit (ignoring the effects of compounding) for these two vendors is

  A. 27.0%

  B. 25.2%

  C. 28.0%

  D. 30.2%

  Correct Answer: B

• Question 575:

  On January 1, Scott Corporation received a $300,000 line of credit at an interest rate of 12% from Main Street Bank and drew down the entire amount on February 1. The line of credit agreement requires that an amount equal to 15% of the loan be deposited into a compensating balance account. What is the effective annual cost of credit for this loan arrangement?

  A. 11.00%

  B. 12.00%

  C. 12.94%

  D. 14.12%

  Correct Answer: D

• Question 576:

  A firm often factors its accounts receivable. Its finance company requires a 6% reserve and charges a 1.4% commission on the amount of the receivables. The remaining amount to be advanced is further reduced by an annual interest charge of 15%. What proceeds (rounded to the nearest dollar) will the firm receive from the finance company at the time a $100,000 account due in 60 days is factored?

  A. $92,600

  B. $96,135

  C. $90,285

  D. $85,000

  Correct Answer: C

  The factor will withhold $6,000 ($100000 x 6%) as a reserve against returns and allowances and $1,400 ($100,000 x 1.4%) as a commission. The remaining $92,600 will be reduced by interest at the rate of 15% annually. The interest charge should be $2,315, assuming a 360-day year [($92,600 x .15) x (60-day payment period ?360 days)]. The proceeds to be received by the seller equal $90,285 ($92,600 - $2,315)

• Question 577:

  The following forms of short-term borrowing are available to a firm: Floating lien Factoring Revolving credit Chattel mortgages Bankers' acceptances Lines of credit Commercial paper

  The forms of short-term borrowing that are unsecured credit are

  A. Floating lien, revolving credit, chattel mortgage, and commercial paper.

  B. Factoring, chattel mortgage, bankers' acceptances, and line of credit.

  C. Floating lien, chattel mortgage, bankers' acceptances, and line of credit.

  D. Revolving credit, bankers' acceptances, line of credit, and commercial paper

  Correct Answer: D

  An unsecured loan is a loan made by a bank based on credit information about the borrower and the ability of the borrower to repay the obligation The loan is not secured by collateral, but is made on the signature of the borrower. Revolving credit, bankers' acceptances, lines of credit, and commercial paper are all unsecured means of borrowing.

• Question 578:

  A company has just borrowed $2 million from a bank. The stated rate of interest is 10%. If the loan is discounted and is repayable in one year, the effective rate on the is approximately

  A. 8.89%

  B. 9.09%

  C. 10.00%

  D. 11.11%

  Correct Answer: D

  If the loan is discounted, the borrower receives the face amount minus the prepaid interest. Thus, the borrower will receive proceeds of $1,800,000 [$2,000,000 - ($2,000,000 x 10%)]. The effective interest rate is 11.11% ($200,000 ?$1,800,000).

• Question 579:

  CyberAge Outlet, a relatively new store, is a cafe that offers customers the opportunity to browse the Internet or play computer games at their tables while they drink coffee. The customer pays a fee based on the amount of time spent signed on to the computer. The store also sells books, tee-shirts, and computer accessories. CyberAge has been pang all of its bills on the last day of the payment period, thus forfeiting all supplier discounts. Shown below are data on CyberAges two major vendors, including average monthly purchases and credit terms.

  

  If Morton fails to take the discount and pays on the 40th day, what effective rate of annual interest is it paying the vendor?

  A. 2%

  B. 24%

  C. 24.49%

  D. 36.73%

  Correct Answer: C

• Question 580:

  CyberAge Outlet, a relatively new store, is a cafe that offers customers the opportunity to browse the Internet or play computer games at their tables while they drink coffee. The customer pays a fee based on the amount of time spent signed on to the computer. The store also sells books, tee-shirts, and computer accessories. CyberAge has been paying all of its bills on the last day of the payment period, thus forfeiting all supplier discounts. Shown below are data on CyberAge's two major vendors, including average monthly purchases and credit terms.

  

  A. 11%

  B. 10%

  C. 12.09%

  D. 9.90%

  Correct Answer: C