IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 581:

  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.

  

  The amount Morton Company must borrow to pay the supplier within the discount period and cover the

  compensating balance is

  A. $60,000%

  B. $650,934

  C. $64,615

  D. $58.800

  Correct Answer: C

• Question 582:

  Commercial paper

  A. Has a maturity date greater than 1 year.

  B. Is usually sold only through investment banking dealers.

  C. Ordinarily does not have an active secondary market

  D. Has an interest rate lower than Treasury bills.

  Correct Answer: C

• Question 583:

  A company enters into an agreement with a firm that will factor the company's accounts receivable. The factor agrees to buy the company's receivables, which average $100,000 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 an annual rate of 10% and charge a fee of 2% on all receivables purchased. The controller of the company estimates that the company would save $18,000 in collection expenses over the year. Fees and interest are not deducted in advance. Assuming a 360-day year, what is the annual cost of financing?

  A. 10.0%

  B. 12.0%

  C. 14.0%

  D. 17.5%

  Correct Answer: D

  In an average month, the company will receive $80,000 at the time the receivables are sent to the factor. Over a year's time, the interest on this average advance of $80,000 would be $8,000 at 10% interest. In addition, the factor will charge a 2% factor fee, or $24,000 ($100,000 x .02 x 12) over the course of a year. However, this $24,000 fee is offset by the $18,000 savings in collection expenses, producing a net outlay of only $6,000. Adding the $6,000 to the $8,000 of interest produces an annual net cost of $14,000. Dividing the $14,000 cost by the $80,000 of advanced funds results in a cost of 17.5%.

• Question 584:

  If a firm purchases raw materials from its supplier on a 2/10, net 40, cash discount basis, the equivalent annual interest rate (using a 360-day year) of forgoing the cash discount and making payment on the 40th day is

  A. 2%

  B. 18.36%

  C. 24.49%

  D. 36.72%

  Correct Answer: C

• Question 585:

  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. The cost of Alternative 4. to Frame Supply Company is

  A. 20.0%

  B. 25.0%

  C. 40.0%

  D. 50.0%

  Correct Answer: B

• Question 586:

  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 $125000 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. The cost of Alternative 3. to Frame Supply Company is

  A. 9.1%

  B. 10.0%

  C. 18.2%

  D. 20.0%

  Correct Answer: D

  By issuing commercial paper, the company will receive $100,000 and repay $110,000 every six months. Thus, for the use of $100,000 in funds, the company pays $10,000 in interest each six-month period, or a total of $20,000 per year. The annual percentage rate is therefore 20% ($20,000 ?$100000).

• Question 587:

  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 receivable, which average $125,000 per month and have an average collection period of 30 days. The factor will advance u to 80% of the face value of receivables at 10% and charge a fee of 2%.

  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. The cost of Alternative 2. to Frame Supply Company is

  A. 9.0%

  B. 12.0%

  C. 13.2%

  D. 21.0%

  Correct Answer: C

  Even though the company will borrow $110,000, it will have use of only $100,100 because a 9% compensating balance, or $9,900, must be maintained at all times. Consequently, the effective annual interest rate is 13.2% [($110,000 x 12%) ?$100,100].

• Question 588:

  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 $110000 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. The cost of Alternative 1. to Frame Supply Company is

  A. 10.0%

  B. 12.0%

  C. 132%

  D. 16.0%

  Correct Answer: D

  The factor will advance $100,000 ($125,000 x 80%). This amount is the average balance outstanding throughout the year. Thus, annual interest will be $10,000 ($100,000 x 10%). In addition, the company will pay an annual fee of $30,000 ($125,000 per month x 2% x 12 months), so the total annual net cost is $16,000 ($10,000 ?$30,000 - $24,000 savings). Hence, the annual cost is 16% ($16,000 ?$100,000 loan).

• Question 589:

  Which of the following responses is not an advantage to a corporation that uses the commercial paper market for short-term financing?

  A. This market provides more funds at lower rates than other methods provide

  B. The borrower avoids the expense of maintaining a compensating balance with a commercial bank.

  C. There are no restrictions as to the type of corporation that can enter into this market.

  D. This market provides a broad distribution for borrowing.

  Correct Answer: C

  Commercial paper is a short-term, unsecured note payable issued in large denominations by major companies with excellent credit ratings. Maturities usually do not exceed 270 days. Commercial paper is a lower cost source of funds than bank loans, and no compensating balance are required. Commercial paper provides a broad and efficient distribution of debt, and costly financing arrangements are avoided. The market is not open to all companies because only major corporations with high credit ratings can participate.

• Question 590:

  Assuming a 360-day year, the current price of a $100 U.S. Treasury bill due in 180 days on a 6% discount basis is

  A. $97.00

  B. $94.00

  C. $100.00

  D. $93.00

  Correct Answer: A

  The 6% discount rate is multiplied times the face amount of the Treasury bill to determine the amount of interest the lender will earn. The interest on this Treasury bill is $3 ($100 x 6% x 5 year), thus the purchase price is $97 ($100--$3).