IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 651:

  A company had 150,000 shares outstanding on January 1. On March 1,75,000 additional shares were issued through a stock dividend. Then on November 1, the company issued 60,000 shares for cash. The number of shares to be used in the denominator of the EPS calculation for the year is

  A. 222,500 shares.

  B. 225,000 shares.

  C. 235,000 shares.

  D. 285,000 shares

  Correct Answer: C

  The weighted-average of shares outstanding during the year is used in the EPS denominator. Shares issued in a stock dividend are assumed to have been outstanding as of the beginning of the earliest accounting period presented. Thus, the 75,000 shares issued on March 1 are deemed to have been outstanding on January 1. The EPS denominator equals 235,000 shares {[150,000 x (12 months ?12 months)] + [75,000 x (12 months ?12 months)) + [60,000 x (2 months ?12 months)]}

• Question 652:

  XYZ Corp has 1000 shares outstanding and retained earnings of $25,000. Theoretically! what would you expect to happen to the price of their stock, currently Selling for $50 per Share! if a 20% stock dividend is declared?

  A. Price should increase to $60 per share

  B. Price should decrease to $40 per share.

  C. Price should decrease to $41.67 per share

  D. Nothing, price should remain at $50.

  Correct Answer: C

  The total market capitalization of 1,000 shares is $50,000. That should remain about the same following the issuance of the 200 shares of stock dividend. Thus, dividing $50,000 by 1,200 shares equals $41.67 per share.

• Question 653:

  Which of the following is correct for a firm with $100000 in net earnings, 10,000 shares, and a 30% payout ratio?

  A. Retained earnings will increase by $30,000.

  B. Each share will receive a $0.30 dividend.

  C. $30,000 will be spent on new investment.

  D. The dividend per share will equal $3.00.

  Correct Answer: D

  Earnings per share is and10 ($100,000 ?10,000 shares). Of the $10,30% or $3 is paid out as dividend.

• Question 654:

  On August 15, 19XX, National Corporation announced a 1-for-10 reverse split, the event to occur on September 6, subject to shareholder approval. The stock's closing price on August 14 was $1.375. If nothing changes, at what price would you expect the stock to sell after the stock split is made effective on September 6?

  A. $13.75

  B. $10.00

  C. $2.75

  D. $1.38

  Correct Answer: A

  A reverse stock split, like a regular stock split, should not change market capitalization. Thus, if there are 1/10 as many shares outstanding as previously, they should be worth 10 times as much. Thus, the price after the reverse split would be $13.75 (10 x $1375).

• Question 655:

  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%

  Correct Answer: B

  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%.

• Question 656:

  Arch, Inc. has 200,000 shares of common stock outstanding. Net income for the recently ended fiscal year was $500,000, and the Stock has a price- earnings ratio of eight. The board of directors has just declared a three-for-two stock split. For an investor who owns 100 shares of stock before the split, the approximate value (rounded to the nearest dollar) of the investment in Arch stock immediately after the split is

  A. $250

  B. $1,333

  C. $2,000

  D. $3,000

  Correct Answer: C

  EPS equals $250 ($500,000 NI ?200,000 pre-split shares). Thus, 100 shares had a value of $2,000 (100 shares x $250 EPS x 8 P-E ratio) before the split. This value is unchanged by the stock split. Although the stockholder has more shares, the total value of the investment is the same.

• Question 657:

  When a company desires to increase the market value per share of common stock, the company will implement

  A. The sale of treasury stock.

  B. A reverse stock split.

  C. The sale of preferred stock.

  D. A stock split.

  Correct Answer: B

  A reverse stock split decreases the number of shares outstanding, thereby increasing the market price per share. A reverse stock split may be desirable when a stock is selling at such a low price that management is concerned that investors will avoid the stock because it has an undesirable image.

• Question 658:

  A 10% stock dividend most likely

  A. Increases the size of the firm.

  B. Increases shareholders' wealth.

  C. Decreases future earnings per share.

  D. Decreases net income.

  Correct Answer: C

  A stock dividend is a transfer of equity from retained earnings to paid-in capital. The debit is to retained earnings, and the credits are to common stock and additional paid-in capital. Additional shares are outstanding following the stock dividend, but every shareholder maintains the same percentage of ownership. In effect, a stock dividend divides the pie (the corporation) into more pieces, but the pie is still the same size. Hence, a corporation will have a lower EPS and a lower bookvalue per share following a stock dividend, but every shareholder will be just as well off as previously. A stock dividend has no effect except on the composition of the shareholders' equity section of the balance sheet.

• Question 659:

  Brady Corporation has 6,000 shares of 5% cumulative, $100 par value preferred stock outstanding and 200,000 shares of common stock outstanding. Brady's board of directors last declared dividends for the year ended May31, Year 1, and there were no dividends in arrears. For the year ended May31, Year 3, Brady had net income of $1,750,000. The board of directors is declaring a dividend for common shareholders equivalent to 20% of net income. The total amount of dividends to be paid by Brady at May 31, Year 3, is

  A. $350.000

  B. $380.000

  C. $206.000

  D. $410.000

  Correct Answer: D

  If a company has cumulative preferred stock, all preferred dividends for the current and any unpaid prior years must be paid before any dividends can be paid on common stock. The total preferred dividends that must be paid equal $60,000 (6,000 shares x $100 par x 5% x 2 years), and the common dividend is $350,000 ($1,750,000 x 20%), for a total of $410,000.

• Question 660:

  A stock dividend

  A. Increases the debt-to-equity ratio of a firm.

  B. Decreases future earnings per share.

  C. Decreases the size of the firm.

  D. Increases shareholders wealth

  Correct Answer: B

  A stock dividend is a transfer of equity from retained earnings to paid-in capital. The debit is to retained earnings and the credits are to common stock and additional paid-in capital. Additional shares are outstanding following the stock dividend, but every shareholder maintains the same percentage of ownership In effect, a stock dividend divides the pie (the corporation) into more pieces, but the pie is still the same size. Hence, a corporation will have a lower EPS and a lower bookvalue per share following a stock dividend, but every shareholder will be just as well off as previously. A stock dividend has no effect except on the composition of the shareholders' equity section of the balance sheet.