IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 791:

  When calculating the cost of capital, the cost assigned to retained earnings should be

  A. Zero.

  B. Lower than the cost of external common equity.

  C. Equal to the cost of external common equity.

  D. Higher than the cost of external common equity.

  Correct Answer: B

  Newly issued or external common equity is more costly than retained earnings. The company incurs issuance costs when raising new, outside funds.

• Question 792:

  A preferred stock is sold for $101 per share, has a face value of $100 per share, underwriting fees of $5 per share, and annual dividends of $10 per share If the tax rate is 40%, me cost of funds (capital) for the preferred stocks

  A. 4.2%

  B. 6.2%

  C. 10.0%

  D. 10.4%

  Correct Answer: D

  Because the dividends on preferred stock are not deductible for tax purposes, the effect of income taxes is ignored. Thus, the relevant calculation is to divide the $10 annual dividend by the quantity of funds received at the time the stock is issued. In this case, the funds received equal $96 ($101 selling price -- $5 underwriting fee). Thus, the cost of capital is 10.4% ($10 + $96)

• Question 793:

  The theory underlying the cost of capital is primarily concerned with the cost of

  A. Long-term funds and Old funds.

  B. Short-term funds and new funds

  C. Long-term funds and new funds.

  D. Short-term funds and old funds.

  Correct Answer: C

  The theory underlying the cost of capital is based primarily on the cost of long-term funds and the acquisition of new funds.. The reason is that long-term funds are used to finance long-term investments. For an investment alternative to be viable, the return on the investment must be greater than the cost of the funds used. The objective in short- term borrowing is different. Short-term loans are used to meet working capital needs and not to finance long-term investments.

• Question 794:

  Malony, Inc.'s $1,000 par value preferred stock paid its $100 per share annual divided on April 4 of the current year. The preferred stock's current market price is $960 a share on the date of the dividend distribution. Maloney's marginal tax rate (combined federal and state) is 40%, and the firm plans to maintain its current capital structure relationship. The component cost of preferred stock to Maloney would be closest to

  A. 6%

  B. 6.25%

  C. 10%

  D. 10.4%

  Correct Answer: D

  Dividends on preferred stock are not deductible for tax purposes; therefore, there is no adjustment for tax savings. The annual dividend on preferred stock is $100 when the price of the stock is $960.This results in a cost of about 10.4% ($100 + $960).

• Question 795:

  The following data pertain to the Rees Company for the year just ended:

  

  What was Rees Company's residual income?

  A.$0

  B. $8,000

  C. $20,000

  D. $60,000

  Correct Answer: D

  Residual income is the excess of the return on an investment over a targeted amount equal to an imputed interest charge on invested capital. The first step is to determine the level of income if the invested capital had returned exactly the cost of capital. Invested capital is not given, so it must be calculated. Given capital turnover (sales ?invested capital) of 4, invested capital must be $200,000 ($800,000 sales ?). Thus, the required return is $20,000 (10% imputed rate x $200,000). The residual income is the excess of operating income over $20,000, or $60,000 ($80,000 - $20,000).

• Question 796:

  An inventory management technique designed to minimize inventory investment by having materials arrive at the time they are needed for use is known as

  A. The economic order quantity model (EOQ).

  B. Materials requirements planning (MRP).

  C. First-in first-out (FIFO).

  D. Just-in-time (JIT).

  Correct Answer: D

  A just-in-time (JIT) inventory management system limits the output of each manufacturing operation to the demand of the next operation. Shipment of raw materials from vendors are scheduled to arrive "just in time" to be used in the production process. Inventory storage is considered a nonvalue-adding activity, and raw materials on hand are thus kept to a minimum.

• Question 797:

  The amount of inventory that a company would tend to hold in safely stock would increase as the

  A. Usage rate of inventory per time period.

  B. Cost per unit of inventory.

  C. Current level of inventory.

  D. Cost of placing an order for merchandise.

  Correct Answer: C

  The optimal level of inventory is affected by the factors in the economic order quantitj (EOQ) model and delivery or production lead times. These factors are the annual demand for inventory, the carrying cost, which includes the interest on funds invested in inventory, the usage rate, and the cost of placing an order or making a production run. The current level of inventory has nothing to do with the optimal inventory level.

• Question 798:

  An inventory management technique designed to minimize inventory investment by having materials arrive at the time they are needed for use is known as

  A. The economic order quantity model (EOQ).

  B. Materials requirements planning (MRP).

  C. First-in first-out (FIFO).

  D. Just-in-time (JIT).

  Correct Answer: D

  A just-in-time (JIT) inventory management system limits the output of each manufacturing operation to the demand of the next operation. Shipment of raw materials from vendors are scheduled to arrive "just in time" to be used in the production process. Inventory storage is considered a nonvalue-adding activity, and raw materials on hand are thus kept to a minimum.

• Question 799:

  What s the economic order quantity' for an auto dealer selling 3000 cars perinea rata cost of $700 per order and a carrying cost of $125 per automobile?

  A. 130 cars.

  B. 168 cars

  C. 183 cars.

  D. 336 cars.

  Correct Answer: C

  If a is the variable cost per purchase order, D is the demand in units, and k is the unit carrying cost, the EOQ formula is:

  

• Question 800:

  Best Computers believes that its collection costs could be reduced through modification of collection procedures. This action is expected to result in a lengthening of the average collection period from 30 to 35 days; however, there will be no change in uncollectible accounts, or in total credit sales. Furthermore, the variable cost ratio is 60%, the opportunely cost of a longer collection period is assumed to be negligible, the compass budgeted credit sales for the coming year are $45,000 000, and the required rate of return is 6%. To just changes in collection procedures, the minimum annual reduction of costs (using a 360-day year and ignoring taxes) must be

  A. $375000

  B. $37,500

  C. $125,000

  D. $22,500

  Correct Answer: D

  The cost of carrying receivables equals average receivables times the variable cost ratio times the cost of money. Given sales of $45,000,000, regardless of which collection procedures are applied, the average daily sales must be $125,000 ($45,000,000 + 360 days). The increase in the average receivables balance is therefore $625,000 (5 days x $125,000). Given an additional $625,000 of receivables, the compass additional required investment in receivables is $375,000 ($625,000 x 60% variable cost ratio), and the incremental pretax cost of this investment is $22,500 (6% x $375,000). Accordingly, the collection costs must be reduced by a pretax minimum of $22,500 to offset the cost of the increased investment in receivables.