IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 971:

  Business risk excludes such factors as

  A. Financial risk.

  B. Amount of operating leverage.

  C. Demand variability.

  D. Fluctuations in suppliers' prices.

  Correct Answer: A

  Business risk is the risk of fluctuations in earnings before interest and taxes or in operating income when the firm uses no debt. It is the risk inherent in its operations that excludes financial risk, which is the risk to the shareholders from the use of financial leverage. Business risk depends on factors such as demand variability, sales price variability, input price variability, and amount of operating leverage.

• Question 972:

  Which one of the following is a disadvantage of the use of convertible bonds as a form of financing?

  A. Less restrictive covenants in bond indentures would usually be more acceptable to investors in convertible bonds than to investors in nonconvertible bonds.

  B. Convertible bonds defer equity financing until the stock price is higher.

  C. Convertible bonds carry a lower interest rate at issuance than if the bond were not convertible.

  D. The investor may choose motto convert the convertible bonds.

  Correct Answer: D

  A conversion feature permits bondholders to convert their bonds into common stock at some future time if the stock price rises. This provision is sometimes incorporated into a bond contract to entice investors to lend money to the issuer at a lower interest rate. Another purpose of issuing convertible bonds is to obtain equity financing at a time when market prices are unfavorable. Issuing convertible bonds is tantamount to selling the stock at a higher price, assuming that bondholders eventually exercise their option to convert. The disadvantage to the corporation is that stock prices may never reach the conversion price, and bondholders will not convert their bonds into stock. The corporation will then have to make interest and principal payments.

• Question 973:

  Political risk may be reduced by

  A. Entering into a joint venture with another foreign company.

  B. Making foreign operations dependent on the domestic parentfortechnology, markets, and supplies.

  C. Refusing to pay higher wages and higher taxes.

  D. Financing with capital from a foreign country.

  Correct Answer: B

  Political risk is the risk that a foreign government may act in a way that wig II reduce the value of the company's investment. Political risk may be reduced by making foreign operations dependent on the domestic parent for technology, markets, and supplies.

• Question 974:

  A higher degree of operating leverage compared with the industry average implies that the firm

  A. Has higher variable costs.

  B. Has profits that are more sensitive to changes in sales volume.

  C. Is more profitable.

  D. Is less risk.

  Correct Answer: B

  Operating leverage is a measure of the degree to which fixed costs are used in the production process. A company with a higher percentage of fixed costs (higher operating leverage) has greater risk than one in the same industry that relies more heavily on variable costs. The DOL equals the percentage change in net operating income divided by the percentage change in sales. Thus, profits become more sensitive to changes in sales volume as the DOL increases.

• Question 975:

  Business risk is the risk inherent in a firm's operations that excludes financial risk. It depends on all of the following factors except the

  A. Amount of financial leverage.

  B. Sales price variability.

  C. Demand variability.

  D. Input price variability.

  Correct Answer: A

  Business risk is the risk of fluctuations in earnings before interest and taxes or in operating income when the firm uses no debt. It depends on factors such as demand variability, sales price variability, input price variability, and the amount of operating leverage. Financial leverage affects financial risk and is not a factor affecting business risk.

• Question 976:

  A firm's financial risk is a function of how it manages and maintains its debt. Which one of the following sets of ratios characterizes the firm with the greatest amount of financial risk?

  A. High debt-to-equity ratio, high interest-coverage ratio, volatile return on equity.

  B. High debt-to-equity ratio, high interest-coverage ratio, stable return on equity.

  C. Low debt-to-equity ratio, low interest-coverage ratio, volatile return on equity.

  D. High debt-to-equity ratio, low interest-coverage ratio, volatile return on equity.

  Correct Answer: D

  A firm with high risk will have a higher debt-to-equity ratio than a low-risk firm, a lower interest coverage, and a volatile return on equity. A higher debt-to-equity ratio poses a greater risk of insolvency. Debt holders must be paid regardless of whether the firm is profitable. Low interest coverage means that the margin of safety of earnings before interest and taxes is small. A volatile return on equity signifies that earnings are unpredictable. Lack of predictability increases risk.

• Question 977:

  The degree of financial leverage for Carlisle Company is

  A. 24

  B. 178

  C. 1.35

  D. 2.3

  Correct Answer: C

• Question 978:

  The degree of financial leverage of CompanyB, totwo decimal places, is

  A. 1.03

  B. 1.05

  C. 1.12

  D. 1.25

  Correct Answer: B

  The degree of financial leverage for Company B may be calculated as earnings before interest and taxes, divided by EBIT minus interest. EBIT is $200 ($95 NI + $10 interest + $95 tax expense). Thus, the DFL is `LOS [$200?($200-- $10)].

• Question 979:

  If Carlisle Company did not have preferred stock, the degree of total leverage would

  A. Decrease in proportion to a decrease in financial leverage.

  B. Increase in proportion to an increase in financial leverage.

  C. Remain the same.

  D. Decrease but not be proportional to the decrease in financial leverage.

  Correct Answer: A

• Question 980:

  The degree of operating leverage for Carlisle Company is

  A. 24

  B. 178

  C. 1.35

  D. 1.2

  Correct Answer: B