IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 641:

  Essex Corporation is evaluating a lease that takes effect on March 1. The company must make eight equal payments, with the first payment due on March 1. The concept most relevant to the evaluation of the lease is the

  A. Present value of an annuity due.

  B. Present value of an ordinary annuity

  C. Future value of an annuity due.

  D. Future value of an ordinary annuity.

  Correct Answer: A

  An annuity is a series of cash flows or other economic benefits occurring at fixed intervals, ordinarily as a result of an investment, Present value is the value at a specified time of an amount or amounts to be paid or received later, discounted at some interest rate. In an annuity due, the payments occur at the beginning, rather than at the end, of the periods. Thus, the present value of an annuity due includes the initial payment at its undiscounted amount. Evaluation of an investment decision. e.g.. a lease, that involves multi-period cash payments (an annuity) requires an adjustment for the time value of money. Because of the interest factor, a dollar today is worth more than a dollar in the future. Consequently, comparison of different investments requires restating their future benefits and costs in terms of present values. This lease should therefore be evaluated using the present value of an annuity due.

• Question 642:

  A company has purchased a $1000. 7%, 5-year bond at par that pays interest annually. The discount tractors for he present value $1at 7% for five periods are as follows

  

  For purposes of duration hedging, the duration of the bond is

  A. 39years.

  B. 5O0years

  C. 439years.

  D. 3.8lyears

  Correct Answer: C

• Question 643:

  The Dawson Corporation projects the following for the year

  

  If Dawson Corporation's common stock is expected to trade at a price-earnings ratio of eight, the market price per share (to the nearest dollar) would be

  A. $104

  B. $56

  C. $72

  D. $68

  Correct Answer: B

  Net income is $18,000,000 [($35,000,000 EBIT -- $5,000,000 interest) x (1.0-- .4 tax rate)], and EPS is $7 [($18,000,000 NI -- $4,000,000 preferred dividends) 2,000,000 common shares]. Consequently, the market price is $56 ($7 EPS x 8 P-E ratio).

• Question 644:

  The equity section of Smith Corporation's Statement of Financial Position is presented below.

  

  The book value per share of Smith Corporation's common stock is

  A. $18.50

  B. $5.00

  C. $14.00

  D. $100

  Correct Answer: A

  The book value per common share equals the net assets (equity) attributable to common shareholders divided by the common shares outstanding, or $18.50 [($10,000,000 common stock + $18,000,000 additional paid-in capital + $9,000,000 RE) ?($10,000,000 ?$5 par)]

• Question 645:

  Presented below are partial year-end financial statement data for companies A and B.

  

  If Company A has 60 common shares outstanding, then it has a book value per share, to the nearest cent, of

  A. $1.67

  B. $2.50

  C. $4.17

  D. $5.00

  Correct Answer: C

  The book value per share for Company A equals the sum of common stock and retained earnings, divided by the number of shares, or $4.17 [($100 + $150) ?60].

• Question 646:

  A company has 100,000 outstanding common shares with a market value of $20 per share. Dividends of $2 per share were paid in the current year and the company has a dividend payout ratio of 40%. The price to earnings ratio of the company is

  A. 2.5

  B. 4

  C. 10

  D. 50

  Correct Answer: B

  The P-E ratio equals the share price divided by EPS. If the dividends per share equaled $2 and the dividend-payout ratio was 40%, EPS must have been $5 ($2 ?4). Accordingly, the P-E ratio is 4 ($20 share price ?$5 EPS).

• Question 647:

  Alberto Corp. has common and preferred shares outstanding with the following characteristics:

  

  Alberto Corp. has earnings per share of

  A. $2.67

  B. $3.33

  C. $4.00

  D. $5.00

  Correct Answer: C

  EPS equals the income available for distribution to common shareholders divided by the number of common shares outstanding, or $4.00 [($250,000 NI - $50,000 preferred dividends) ?50,000 common shares]

• Question 648:

  All else being equal, a company with a higher dividend-payout ratio will have a debt-to-assets ratio and a current ratio. ListA ListB

  A. Higher Higher

  B. Higher Lower

  C. Lower Higher

  D. Lower Lower

  Correct Answer: B

  A company with a higher dividend payout ratio is distributing more of its earnings as dividends to common shareholders. It will have less Cash and less total assets than a comparable firm with a lower payout ratio. The debt-to-assets ratio will be higher because total assets are lower, and the current ratio will be lower because cash is lower.

• Question 649:

  In calculating diluted earnings per share when a company has convertible bonds outstanding, the number of common shares outstanding must be to adjust for the conversion feature of the bonds, and the net income must be by the amount of interest expense on the bonds, net of tax List A List B

  A. Increased Increased

  B. Increased . Decreased

  C. Decreased Increased

  D. Decreased Decreased

  Correct Answer: A

  The weighted-average number of shares outstanding must be increased to reflect the shares into which the bonds could be converted. Also, the effect of the bond interest on net income must be eliminated. In this way, earnings per share is calculated as if the bonds had been converted into common shares as of the start of the year.

• Question 650:

  Everything else being equal, a highly leveraged firm will have earnings per share. ListA ListB

  A. More Lower

  B. More Less volatile

  C. Less Less volatile

  D. Less Higher

  Correct Answer: C

  Earnings per share is less volatile in less highly leveraged firms. Lower fixed costs result in less variable earnings when sales fluctuate.