IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 691:

  In capital markets, the primary market is concerned with the provision of new funds for capital investments through

  A. New issues of bond and stock securities.

  B. Exchanges of existing bond and stock securities.

  C. The sale of forward or future commodities contracts

  D. New issues of bond and stock securities and exchanges of existing bond and stock securities

  Correct Answer: A

  The primary market is the market for new stocks and bonds In this market, wherein investment money flows directly to the issuer, securities are initially sold by investment bankers who purchase them from issuers and sell them through an underwriting group. Later transactions occur on securities exchanges or other markets.

• Question 692:

  A firm is planning to issue a callable bond with an 8% coupon rate and 10 years to maturity. A straight bond with a similar rate is priced at $1,000. If the value of the issuer's call option is estimated to be $50, what is the value of the callable bond?

  A. $1,000

  B. $950

  C. $1,050

  D. $900

  Correct Answer: B

  A callable bond is not as valuable to an investor as a straight bond. Thus, the $50 call option is subtracted from the $1,000 value of a straight bond to arrive at a $950 value for the callable bond.

• Question 693:

  In general, it is more expensive for a company to finance with equity capital than with debt capital because

  A. Long-term bonds have a maturity date and must therefore be repaid in the future

  B. Investors are exposed to greater risk with equity capital.

  C. Equity capital is in greater demand than debt capital

  D. Dividends fluctuate to a greater extent than interest rates

  Correct Answer: B

  Providers of equity capital are exposed to more risk than are lenders because the firm is not obligated to pay them a return. Also, in case of liquidation, creditors are paid before equity investors. Thus, equity financing is more expensive than debt because equity investors require a higher return to compensate for the greater risk assumed

• Question 694:

  If Brewer Corporations bonds ere currently yielding 8% in the marketplace, why is the firms cost of debt lower'?

  A. Market interest rates have increased.

  B. Additional debt can be issued more cheaply then the original debt.

  C. There should be no difference; cost of debt is the same as the bonds' market yield.

  D. Interest is deductible for tax purposes.

  Correct Answer: D

  Because interest is deductible for tax purposes, the actual cost of debt capital is the net effect of the interest payment and the offsetting tax deduction. The actual cost of debt equals the interest rate times (1 -- the marginal tax rate). Thus, if a firm with an 8% market rate is in a 40% tax bracket, the net cost of the debt capital is 4.8%.

• Question 695:

  Okra, Inc. has been experiencing sales difficulties over the last two years. Management has identified the problem: poor customer service and lack of internal coordination among the marketing department, the production department, and the finance department. In making a decision to solve the problem, management took the following logical steps (not necessarily in this order):

  1.

  Concluded that extensive training would improve performance and efficiency of all the involved departments; replacing the head of the marketing department will increase profitability only; and investing in information technology will improve customer satisfaction but will not solve communication problems.

  2.

  Identified three possible ways to solve the problem: extensive personnel training in the involved departments; replacing the head of the marketing department or investing in IT.

  3.

  Agreed upon key performance indicators, such as customer satisfaction, customer retention, and product and customer profitability to assess the effectiveness of the proposed solution.

  4.

  Decided to conduct extensive training for marketing department personnel and limited communication training for production and finance departments. What is the correct sequence of these logical decision-making steps?

  A. 1,2,3,4.

  B. 2,1,3,4.

  C. 3,1,2,4.

  D. 2,3,1,4.

  Correct Answer: D

  The correct sequence of steps in a rational decision making process are as follows, keyed to the steps in Okra's process: defining the problem, obtaining information, identifying alternative courses of action, making predictions about the future costs, choosing and justifying an alternative, implementing the decision, and evaluating performance to provide feedback.

• Question 696:

  Stroll, Inc. is in the process of making an investment decision. It has identified the following alternative investment opportunities: real estate, stocks, bonds, or mutual funds. After determination of the investment alternatives, Stroll will go through all of the following logical steps of the decision analysis model, except:

  A. Obtaining information about the investment alternatives.

  B. Evaluating the investment alternatives.

  C. Selecting an alternative which best fits the investment criteria.

  D. Defining the problem of high unused cash balance.

  Correct Answer: D

  The parameters of what to do with high unused cash balances are set forth as a result of the investment choice that is eventually made. It is not an appropriate factor in the decision whether to undertake an investment to begin with.

• Question 697:

  Evaluating performance and giving feedback is the final step in the decision-making process. This step involves

  I. Proper delegation of authority.

  II.

  Placement of the solution in a feasible framework. Ill. Effective communication of the decision.

  A.

  l only.

  B.

  l and II.

  C.

  II only.

  D.

  l,ll,and lll.

  Correct Answer: D

  The step of evaluating performance and giving feedback is vital to improve future execution of the prior steps or even the decision model itself. The proper delegation of authority is made to the individual responsible for implementing the action to be taken. Performance measurement is then provided for. This process puts the solution into a feasible framework, which assures it will be carried out. Finally, decisions cannot be fully imolemented until they are effectively communicated.

• Question 698:

  When a decision maker is faced with a decision and the probabilities of various outcomes are known, the situation is said to be decision making

  A. Under risk.

  B. Under uncertainly.

  C. Under certainly.

  D. Through satisfying.

  Correct Answer: A

  Decision making under risk entails consideration of multiple possible future states of nature for each choice. The decision is under risk if a probability distribution for these states can be estimated. Thus, the states of nature will be mutually exclusive, and the sum of their probabilities will equal 1.0. Riskincreases asthevariabililyof outcomes become greater. In practice, however, the terms risk and uncertainly are often treated as synonyms.

• Question 699:

  The operations research approach to evaluating solutions includes all of the following except

  A. Testing of a mathematical model.

  B. Formulating a mathematical model.

  C. Constructing a quantitative model.

  D. Recognizing the complete system in which the problem operates.

  Correct Answer: C

  Operations research is an overall approach that applies a variedly of scientific and mathematical techniques. It involves the following: recognition of the complete system, including interrelationships, in which the problem operates; formulation of a mathematical model; testing of the model; and implementation of the optimal solution as produced by the model. Simulation requires the construction of a quantitative model.

• Question 700:

  Which method of indenting alternative courses of action is primarily designed to optimize performance of an activity at 2 minimum cost?

  A. Disunion approach.

  B. Value analysis.

  C. Brainstorming.

  D. Attribute listing.

  Correct Answer: B

  Value analysis is a methodical approach primarily designed to optimize performance of an activity at a minimum cost. Emphasis is on the cost-benefit criterion.