IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 981:

  A firm must select from among several methods of financing arrangements when meeting its capital requirements. To acquire additional growth capital while attempting to maximize earnings per share, a firm should normally

  A. Attempt to increase both debt and equate in equal proportions, which preserves a stable capital structure and maintains investor confidence.

  B. Select debt over equity' initially, even though increased debt is accompanied by interest costs and a degree of risk.

  C. Select equity over debt initially, which minimizes risk and avoids interest costs.

  D. Discontinue dividends and use current cash flow, which avoids the cost and risk of increased debt and the dilution of EPS through increased equity.

  Correct Answer: B

• Question 982:

  Prior to the introduction of the euro, 0 and B Company, a U.S. corporation, is in possession of accounts receivable denominated in Deutsche marks. To what type of risk are they exposed?

  A. Liquidity risk.

  B. Liquidity risk.

  C. Exchange-rate risk.

  D. Price risk.

  Correct Answer: C

  Exchange-rate risk is the riskthataforeign currency transaction will be negatively exposed to fluctuations in exchange rates. Because 0 and B Company sells goods to German customers and records accounts 1receh, able denominated in Deutsche marks, 0 and B Company is exposed to exchange-rate risk.

• Question 983:

  When purchasing temporary investments, which one of the following best describes the risk associated with the ability to sell the investment in a short period of time without significant price concessions?

  A. Interest-rate risk.

  B. Purchasing-power risk.

  C. Financial risk.

  D. Liquidity risk.

  Correct Answer: D

  Liquidity risk is the possibility that an asset cannot be sold on short notice for its market value. If an asset must be sold at a high discount, it is said to have a substantial amount of liquidity risk.

• Question 984:

  The risk that securities cannot be sold ate reasonable price on short notice is called

  A. Default risk.

  B. Interest-rate risk.

  C. Purchasing-power risk.

  D. Liquidly risk.

  Correct Answer: D

  An asset is liquid if it can be converted to cash on short notice. Liquidly (marketability) risk is the risk that assets cannot be sold ate reasonable price on short notice. If an asset is not liquid. Investors will require a higher return than for a liquid asset. The difference is the liquidly premium.

• Question 985:

  The type of risk that is not diversifiable and affects the value of a portfolio is

  A. Purchasing-power risk.

  B. Market risk.

  C. Nonmarket risk.

  D. Interest-rate risk.

  Correct Answer: B

  Prices of all stocks, even the value of portfolios, are correlated to some degree with broad swings in the stock market. Market risk is the risk that changes in a stock's price will result from changes in the stock market as a whole. Market risk is commonly referred to as no diversifiable risk.

• Question 986:

  Which of the following are components of interest-rate risk?

  A. Purchasing-power risk and default risk.

  B. Price risk and market risk.

  C. Portfolio risk and reinvestment-rate risk.

  D. Price risk and reinvestment-rate risk.

  Correct Answer: D

  Interest-rate risk is the risk of fluctuations in the value of an asset due to changes in interest rates. One component of interest-rate risk is price risk; for example, the value of bonds declines as interest rates increase. Reinvestment-rate risk is another component of interest-rate risk. If interest rates decline, lower returns will be available for reinvestment of interest and print pal payments received.

• Question 987:

  Catherine and Co. has extra cash at the end of the year and is angling the beltways invest the funds. The company should invest in a project only if the

  A. Expected return on the project exceeds the return on investments of comparable risk.

  B. Return on investments of comparable risk exceeds the expected return on the project.

  C. Expected return on the project is equal to the return on investments of comparable risk.

  D. Return on investments of comparable risk equals the expected return on the project.

  Correct Answer: A

  Investment risk is anal wed in terms of the probability that the actual return on an investment will be lower than the expected return. Comparing a project's expected return with the return on an asset of similar risk helps determine whether the project is worth investing in. If the expected return on a project exceeds the return on an asset of comparable risk, the project should be pursued.

• Question 988:

  Russell1 Inc. is evaluating four independent investment proposals. The expected returns and standard deviations for each of these proposals are presented below.

  

  Which one of the investment proposals has the least relative level of risk?

  A. Investment I.

  B. Investment II.

  C. Investment Ill.

  D. Investment IV.

  Correct Answer: C

• Question 989:

  The expected rate of return for the stock of Cornhusker Enterprises is 20%, with a standard deviation of 1 5%.The expected rate of return for the stock of Mustang Associates is 10%, with a standard deviation of 9%.The riskier stock is

  A. Cornhusker because the return is higher.

  B. Cornhusker because the standard deviation is higher.

  C. Mustang because the standard deviation is higher.

  D. Mustang because the coefficient of variation is higher.

  Correct Answer: D

• Question 990:

  City' Development, Inc. is considering a new investment project which will involve building a large office

  block in Frankfurt-am-Main. The firm's financial analysis department has estimated that the proposed

  investment has the following estimated rate of return distributions. Rate of Return Probability' (5%) 30%

  10% 50%

  20% 20%

  Calculate the expected rate of return.

  A. 5.5%

  B. 7.5%

  C. 10.5%

  D. 117%

  Correct Answer: B