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CMALS/OIR Part 2 Full Online Practice Test v3.0

Question 1 of 100 (2C1-LS07) Flag for Review

Which of the following statements accurately describes the cost behavior of variable costs in response to
changes in business activity levels?

Variable costs on a total and per unit basis both change with increases or decreases in activity.
Variable costs per unit change with increases or decreases in activity.
Variable costs on a total and per unit basis both remain constant within the relevant range of
activity.
Variable costs on a per unit basis remain constant.

Feedback
The correct answer is: Variable costs on a per unit basis remain constant.
Cost behavior patterns refer to how fixed and variable costs react to changes in business
activity levels. For variable costs, the unit cost remains constant while the total cost changes
with increases or decreases in activity.

Question 2 of 100 (2B5-LS53) Flag for Review

A manufacturer with seasonal sales would be most likely to obtain which one of the following types of
loans from a commercial bank to finance the need for a fixed amount of additional capital during the
busy season?
*Source: Retired ICMA CMA Exam Questions

Insurance company term loan.

Transaction loan.

Unsecured short-term term loan.

Installment loan.

Feedback
That’s incorrect. A manufacturer with seasonal sales would be most likely to obtain an
unsecured short-term term loan from a commercial bank to finance the need for a fixed
amount of additional capital during the busy season.

Question 3 of 100 (2A2-CQ09) Flag for Review

Maydale Inc.’s financial statements show the following information.

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Maydale’s accounts receivable turnover ratio is

10.00.

9.00.
11.25.
0.10.

Feedback
The correct answer is: 10.00.

The accounts receivable turnover per year is calculated as follows:

Accounts receivable turnover per year = (Net credit sales for year) / (average accounts
receivable balance for the year)

Average accounts receivable balance for the year = (beginning balance + ending balance) / 2
Average accounts receivable balance for the year = ($320,000 + $400,000) / 2 = $720,000 / 2 =
$360,000

Turnover per year = $3,600,000 / $360,000 = 10 times

Question 4 of 100 (2B4-LS07) Flag for Review

Which of the following statements differentiates debt capital from equity capital?
Debt capital is a function of stock issues; equity capital is a function of receivables, inventories,
and payables.
Debt capital is a function of receivables, inventories, and payables; equity capital is a function of
stock issues.
Debt capital is derived from retained earnings; equity capital is derived from the issuance of
notes, bonds, or loans.
Debt capital is derived from the issuance of interest-bearing instruments; equity capital is
derived from permanent investments by shareholders.

Feedback
The correct answer is: Debt capital is derived from the issuance of interest-bearing
instruments; equity capital is derived from permanent investments by shareholders.
Corporations derive capital from essentially two sources: lenders and shareholders. Debt
capital is derived from the issuance of interest-bearing instruments such as notes, bonds, or
loans. Equity capital is derived from permanent investments by shareholders, either as paid-in
capital or as retained earnings.

Question 5 of 100 (2A3-LS13) Flag for Review

In analyzing Return on Equity, which of the following ways does the DuPont Model enhance the analysis
of the Return on Equity calculation?

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It measures operational efficiency, asset use efficiency, and financial leverage

It does not enhance the analysis of ROE calculations

It measures how well the organization manages its assets at various levels of activity
It measures operational leverage, asset use efficiency, and financial efficiency

Feedback

The correct answer is: It measures operational efficiency, asset use efficiency and financial
leverage

The Dupont Model formula for measuring Return on Equity is: ROE = (Net Profit/Sales)*
(Sales/Assets)*(Assets/Equity), whereas (Net Profit/Sales) measures operating efficiency,
(Sales/Assets) measures asset use efficiency, and (Assets/Equity) measures financial
leverage. The amounts used for Assets and Equity are typically assumed to be the average of
the beginning and end of year values.

Question 6 of 100 (2A4-LS12) Flag for Review

All of the following are forms of off-balance sheet financing except:

Factoring accounts receivable.

Completing a horizontal merger.

Creating a special purpose entity.

Forming a joint venture.

Feedback

The correct answer is: Completing a horizontal merger

The four common techniques used by companies to engage in off-balance sheet financing
are; factoring of receivables, creating a special purpose entity, operating leases and joint
ventures.

Question 7 of 100 (2B2-AT01) Flag for Review

Stanley Company uses the Capital Asset Pricing Model (CAPM) to estimate the rate of return demanded
by the market on its common stock. If the beta coefficient is 1.75 for Stanley, the risk-free rate of return in
the stock market is 4.6%, and the current rate of return for the market as measured by an appropriate
index is 7%, what is the market’s required rate of return on Stanley’s common stock?

12.25%
8.05%

8.80%

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11.20%

Feedback
The correct answer is: 8.80%.

Using the CAPM formula, the required rate of return on a common stock is calculated as
follows:

Ke = Rf + Β(Km - Rf)

Where:
Ke = required rate of return
Rf = risk-free rate (such as the return on U.S. T-bill or T-bonds)
Β= beta coefficient for the company
Km = return on a market portfolio

Therefore, required rate of return on Stanley’s common stock is:

Ke = 4.6% + 1.75(7% - 4.6%)
Ke = 4.6% + (1.75)(2.4%)
Ke = 4.6% + 4.2% = 8.8%

Question 8 of 100 (2C2-AT20) Flag for Review

Kator Co. is a manufacturer of industrial components. One of their products that is used as a sub-
component in auto manufacturing is KB-96. This product has the following financial structure per unit.

Kator Co. has received a one-time special order for 1,000 KB-96 parts. Assuming Kator has excess
capacity, the minimum price that is acceptable for this one-time special order is in excess of

$90.

$50.

$47.
$77.

Feedback
The correct answer is: $50.00.

Kator should accept the special order if its price is greater than its opportunity cost per unit.
The opportunity cost per unit consists of avoidable variable and avoidable fixed costs per unit
and the unit cost of any lost opportunities. Since there is excess capacity, there are no
avoidable fixed costs nor are there any lost opportunities.

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The only relevant costs are the avoidable variable costs of $50.

Avoidable variable costs = $20 direct materials + $15 direct labor + $12 variable manufacturing
overhead + $3 shipping and handling = $50.

Question 9 of 100 (2B3-LS09) Flag for Review

Which of the following statements about an option is not correct?

The owner of a put option has the right to sell the underlying asset at a fixed price.
The owner of a call option has the right to buy the underlying asset from the seller.
The seller (writer) of an option contract receives an up-front premium from the owner of the
option contract.
The buyer of an option contract receives an up-front premium from the seller of the option
contract.

Feedback
The correct answer is: The buyer of an option contract receives an up-front premium from the
seller of the option contract.
By definition, a premium is the initial purchase price of an option and it is usually stated on a
per unit basis. The writer (seller) of an option contract receives an up-front premium from the
buyer (owner) of the option contract. This premium obligates the writer to fulfill the contract
(sell or buy the underlying asset) if the buyer chooses to exercise the option.

Question 10 of 100 (2B6-LS01) Flag for Review

An investor is considering investing in companies in a particular industry. During research of different
companies within this industry, the investor begins to contact their investor relations departments. Upon
contacting the investor relations department of XYZ Company, they inform the investor that they are
going to be purchasing a competitor, providing them with a near monopoly within the industry. The
investor takes this information and purchases stock in XYZ Company, no abnormal gains result. This is
an example of what form of market efficiency?

Semi-strong form

Strong form

Weak form
Semi-weak form

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Question 11 of 100 (2E1-LS01) Flag for Review

IMA's Statement of Management Accounting "Values and Ethics: From Inception to Practice" identifies
that ongoing training should include all of the following except:

How ethics affects specific jobs and processes.

Requiring each employee to sign the code of conduct.

What action is taken when an ethical issue is identified.

Penalties when noncompliance with the code of ethics is proven.

Feedback

The correct answer is: Requiring each employee to sign the code of conduct.

The SMA specifies that ongoing training should include the following expectations:

z General employee behavior and personal conduct.

z How ethics are built into work management methods.
z How ethics affects specific jobs, processes, activities, and relationships.
z How the organization monitors compliance with code.
z What routes are open to employees who have compliance issues.
z What action is taken when a complaint or issue is identified.
z The actions and penalties once noncompliance is proven.

Question 12 of 100 (2A4-LS01) Flag for Review

Which of the following are elements of earnings quality?

I. Management's discretion in choosing from among accepted accounting principles

II. Management compensation in relation to net earnings
III. The degree to which assets are maintained
IV. The effect of cyclical and other economic forces on the stability of earnings

I and III only

I, III, and IV only

I, II, III, and IV

II and IV only

Feedback
The correct answer is: I, III, and IV only
The basic factors of earnings quality are management and accountants' discretion in
choosing accounting principles, the degree to which maintenance of assets has been
provided for, and the effect of cyclical and other economic forces on the stability of earnings.

Question 13 of 100 (2B3-AT03) Flag for Review

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Debentures are

bonds backed by the full faith and credit of the issuing firm.

subordinated debt and rank behind convertible bonds.

income bonds that require interest payments only when earnings permit.
mortgage bonds secured by a lien on specific assets of the firm.

Feedback
The correct answer is: bonds backed by the full faith and credit of the issuing firm.

Debentures are unsecured bonds. They are backed by the full faith and credit of the issuing
firm.

Question 14 of 100 (2D5-LS04) Flag for Review

Which type of real option would a firm be most likely to choose if there is a high probability that
competitors can enter a market and capture profitable future cash flows?

Adapt

Abandon
Expand
Postpone

Feedback
The correct answer is: Adapt
The ability of a firm to vary output or production methods in response to demand allows the
firm to swap or exchange its output mix as demand changes. Given the myriad tumultuous
and competitive market situations, companies often build flexibility into their manufacturing
operations so they can respond quickly to any changes and produce the most valuable set of
outputs.

Question 15 of 100 (2D1-AT08) Flag for Review

Mobile Home Manufacturing Inc. is evaluating a proposed acquisition of a new machine at a purchase
price of $380,000 and installation charges that will amount to $20,000. A $15,000 increase in working
capital will be required. The machine will have a useful life of four years after which it can be sold for
$50,000. The estimated annual incremental operating revenues and cash operating expenses are
$750,000 and $500,000, respectively, for each of the four years. Mobile Home's tax rate is 40% and the
cost of capital is 12%. Mobile Home uses straight-line depreciation for both financial reporting and
income tax purposes.
If Mobile Home accepts the project, the initial investment will be

$415,000.

$350,000.
$385,000.

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$365,000.

Feedback
The correct answer is: $415,000.

Initial investment will include the purchase price, installation cost, and increase in working
capital. Thus, initial investment = $380,000 + $20,000 + $15,000 = $415,000.

Question 16 of 100 (2D2-AT18) Flag for Review

Which one of the following statements about the payback method of investment analysis is correct? The
payback method

uses discounted cash flow techniques.

considers cash flows after the payback has been reached.

does not consider the time value of money.

generally leads to the same decision as other methods for long-term projects.

Feedback
The correct answer is: does not consider the time value of money.

The payback method merely looks at the length of time it takes to recover the initial
investment. It does not consider the life of the project nor does it consider the time value of
money.

Question 17 of 100 (2C3-LS23) Flag for Review

A monopoly firm will maximize its profit if it produces where the marginal revenue is $3.50. Given this
condition, where should the firm set its price to maximize its profit?

Above $3.50.

Below $3.50.
There is insufficient information to set the price.
At $3.50.

Feedback
The correct answer is: Above $3.50.
A monopoly firm will maximize its profit at the point where the MR = MC. However, since the
demand curve (which determines its pricing strategy) lies above the MR curve for a monopoly
firm, it will set its price above its MR (of $3.50).

Question 18 of 100 (2D4-CQ07) Flag for Review

Lewis Services is evaluating six investment opportunities (projects). The following table reflects each
project’s net present value (NPV) and the respective initial investments required. All of these projects are

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independent.

Lewis has an investment constraint of $100,000. Which combination of projects would represent the
optimal investment that should be recommended to Lewis Services’ management?
*Source: Retired ICMA CMA Exam Questions

R, S, U and W.

T and U.
R, V and W.
R, S and V.

Feedback
That’s incorrect. R, S, U, and W represent a total investment of $90,000, within the $100,000
constraint, and allows for a higher NPV ($28,000) than any other combination. The NPV for
combination R,V and W is 18,000; for R,S, and V it is 25,000; and for T and U it is 23,000. All
four combinations satisfy the investment constraint.

Question 19 of 100 (2C2-CQ16) Flag for Review

Aril Industries is a multi-product company that currently manufactures 30,000 units of Part 730 each
month for use in production. The facilities now being used to produce Part 730 have fixed monthly
overhead costs of $150,000, and a theoretical capacity to produce 60,000 units per month. If Aril were to
buy Part 730 from an outside supplier, the facilities would be idle and 40% of fixed costs would continue
to be incurred. There are no alternative uses for the facilities. The variable production costs of Part 730
are $11 per unit. Fixed overhead is allocated based on planned production levels.

If Aril Industries continues to use 30,000 units of Part 730 each month, it would realize a net benefit by
purchasing Part 730 from an outside supplier only if the supplier’s unit price is less than

$14.00.

$12.00.
$12.50.
$13.00.

Feedback

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The correct answer is: $14.00.

The appropriate purchase price would occur when the price for 30,000 units is equal to the
variable manufacturing costs plus the avoidable fixed costs.

(P)(units) = (variable manufacturing costs) + (avoidable fixed costs)

Where P = purchase price

Units = 30,000
Variable manufacturing costs = ($11)(30,000 units) = $330,000
Avoidable fixed costs = (0.6)($150,000) = $90,000

(P)(30,000) = ($330,000) + ($90,000)

30,000 P = $420,000
P = $14.00

Question 20 of 100 (2D3-LS12) Flag for Review

Despite its shortcomings, the traditional payback period continues to be a popular method to evaluate
investments because, in part, it
*Source: Retired ICMA CMA Exam Questions

furnishes information about an investment’s lifetime performance.

ignores the time value of money.

provides some insight into the risk associated with a project.

focuses on income rather than cash flow.

Feedback
That’s correct! Provides some insight into the risk associated with a project. The payback
method in capital budgeting determines the number of years needed to recoup the net initial
investment in a capital budgeting project.

Question 21 of 100 (2A1-CQ03) Flag for Review

Which of the following financial statement changes would best represent the impact of incurring and
paying interest on a note payable for the period

Effect on Equity Section of the Balance Sheet: No effect

Statement of Cash Flows Direct Method: Outflow from Operating Activities
Effect on Equity Section of the Balance Sheet: Decrease
Statement of Cash Flows Direct Method: Outflow from Operating Activities
Effect on Equity Section of the Balance Sheet: No effect
Statement of Cash Flows Direct Method: Outflow from Financing Activities

Effect on Equity Section of the Balance Sheet: Decrease

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Statement of Cash Flows Direct Method: Outflow from Financing Activities

Feedback
The correct answer is: Decrease and Outflow from operating activities.
Interest incurred during the reporting period on a note payable is considered an “interest
expense” on the income statement which reduces net income, and in turn, decreases the
equity section of the balance sheet. Interest expense paid is considered an operating activity
as it is used to pay for the day-to-day operating activities of the organization. Therefore, for
statement of cash flow purposes, interest expense paid would be classified as an outflow
from operating activities.

Question 22 of 100 (2B8-AT12) Flag for Review

Suppose a company has three foreign subsidiaries: Subsidiary A is located in a country with a 40
percent corporate tax rate, Subsidiary B is located in a country with a 30 percent corporate tax rate, and
Subsidiary C is located in a country with a 35 percent corporate tax rate. If allowed by relevant laws, how
would the company improve its combined after-tax earnings using transfer pricing?

Changes in transfer pricing policy have no impact on combined after-tax earnings.

Reduce the price that Subsidiary B charges to Subsidiary C.
Increase the price that Subsidiary A charges to Subsidiary B.

Reduce the price that Subsidiary A charges to Subsidiary B.

Feedback
The correct answer is: Reduce the price that Subsidiary A charges to Subsidiary B.

Since the tax rate in the country Subsidiary A operates in is 40% and is higher than the tax
rate in the country Subsidiary B operates in (30%), the transfer price should be set so as to be
taxed in the country that Subsidiary B operates in. Therefore, the transfer price should be set
low (reduced). The price is a taxable revenue in the country Subsidiary A operates in; it is a
deductible expense in the country Subsidiary B operates in.

Question 23 of 100 (2A2-AT30) Flag for Review

Windsor Company had 720,000 shares of common stock outstanding on December 31, Year 1. An
additional 240,000 shares of common stock were issued on April 1, Year 2, and 360,000 more on July 1,
Year 2. On October 1, Year 2, Windsor issued 5,000, $1,000 face value, 7 percent convertible bonds.
Each bond is convertible into 30 shares of common stock. The bonds were not considered common
stock equivalents at the time of their issuance, and no bonds were converted into common stock in Year
2. If no other equity transactions will occur, the number of shares to be used in computing primary
earnings per share and fully diluted earnings per share (assuming dilution will occur), respectively, for
the year ending December 31, Year 2, is

1,000,000 and 1,080,000.

1,117,500 and 1,117,500.

1,080,000 and 1,117,500.

1,000,000 and 1,117,500.

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Feedback
The correct answer is: 1,080,000 and 1,117,500.

The weighted average number of common stock shares outstanding (W) for primary (basic)
earnings per share (EPS) is calculated as follows:
W = (20,000 shares for 3 months) + (720,000 + 240,000 shares for 3 months) + (960,000 +
360,000 for 6 months)
W = (3/12)(720,000) + (3/12)(960,000) + (6/12)(1,320,000)
W = 180,000 + 240,000 + 660,000
W = 1,080,000 shares

When calculating the weighted average number of common stock shares outstanding (W) for
fully diluted EPS, conversions of convertible securities and/or exercises of options or
warrants are assumed to have occurred at the earliest possible date.

For Windsor, the conversion of 5,000 bonds into 30 shares of common stock each (a total of
150,000 additional shares) is assumed to have occurred on October 1, Year 1. This results in
an additional 150,000 shares for 3 months or an additional weighted average number of
shares of (3/12)(150,000 shares) = 37,500 shares.

Therefore, the W = 1,080,000 shares + 37,500 shares = 1,117,500 shares.

1,080,000 shares will be used to calculate primary EPS and 1,117,500 shares will be used to
calculate fully diluted EPS.

Question 24 of 100 (2B8-LS14) Flag for Review

Company A has divisions in country X, a high tax country, and country Y, a low tax country. It
manufactures computer chips for radios in country X and sells them at cost to its division in country Y.
The division in country Y then sells the radios at wholesale and retail prices. Which of the following is
true?
This practice is called transfer pricing, and it was outlawed by the General Agreement on Tariffs
and Trade (GATT).
This practice is called direct foreign investment, and it was outlawed by the General Agreement
on Tariffs and Trade (GATT).
This practice is called direct foreign investment, and it is used by companies to manage their
effective worldwide tax rate.
This practice is called transfer pricing, and it is used by companies to manage their effective
worldwide tax rate.

Feedback
The correct answer is: This practice is called transfer pricing, and it is used by companies to
manage their effective worldwide tax rate.
This is an example of the practice of transfer pricing, used by companies to manage their
effective worldwide tax rate by attempting to maximize profits in the country with the lowest
tax rates. Although not outlawed by GATT, it is part of the Organization of Economic
Cooperation and Development Treaty, which requires transfers to be priced at arms-length
transactions, that is, prices that would be set by unrelated parties.

Question 25 of 100 (2A3-LS07) Flag for Review

Which of the following is true regarding stability and trend of earnings?

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Stability and trend of earnings are not important considerations in the analysis of revenues.
Stability and trend of earnings cannot be measured without a ten-year company history.
Stability and trend of earnings are primary considerations in calculating cost of sales.
Stability and trend of earnings are influenced by elasticity of demand for products or services as
well as dependence on a single industry.

Feedback
The correct answer is: Stability and trend of earnings are influenced by elasticity of demand
for products or services as well as dependence on a single industry.
Revenue trends and stability are important considerations for the quality of earnings and are
influenced by a number of factors, including elasticity of demand, ability of the business to
anticipate demand trends, the degree of customer concentration and dependence on a single
industry, the degree of dependence on relatively few leading sales associates, and the degree
of geographical diversification of markets.

Question 26 of 100 (2A2-CQ33) Flag for Review

Selected information regarding Dyle Corporation’s outstanding equity is shown below.

Dyle’s dividend yield on common stock is

16.88%.
16.66%.

11.11%.

20.00%

Feedback
The correct answer is: 11.11%.

The dividend yield on common stock is calculated as follows:

Dividend yield on common stock = (annual dividend per common share) / (market price of
common stock)

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Dividend per common share = (total common stock dividend) / (number of common stock
shares outstanding)
Dividend per common share = ($700,000) / (350,000 shares) = $2

Dividend yield = $2 /$18 = 0.1111, or 11.11%

Question 27 of 100 (2D1-LS12) Flag for Review

Which one of the following items is least likely to directly impact an equipment replacement capital
expenditure decision?
*Source: Retired ICMA CMA Exam Questions

The depreciation rate that will be used for tax purposes on the new asset.
The sales value of the asset that is being replaced.
The amount of additional accounts receivable that will be generated from increased production
and sales.
The net present value of the equipment that is being replaced.

Feedback
That’s incorrect. The net present value of the equipment that is being replaced is a sunk cost
and would not be considered in the decision to replace the equipment.

Question 28 of 100 (2B6-CQ02) Flag for Review

Kalamazoo Inc. has issued 25,000 shares of its authorized 50,000 shares of common stock. There are
5,000 shares of common stock that have been repurchased and are classified as treasury stock.
Kalamazoo has 10,000 shares of preferred stock. If a $0.60 per share dividend has been authorized on
its common stock, what will be the total common stock dividend payment?

$21,000
$30,000

$12,000

$15,000

Feedback
The correct answer is: $12,000.

The dividend paid would be $0.60 per share, multiplied by the number of shares outstanding.
The number of outstanding shares is calculated by taking the number of issued shares and
subtracting the number of share that were repurchased and held in treasury.

Number of shares = # shares issued – # shares of treasury stock

Number of shares = 25,000 – 5,000 = 20,000

Dividend: ($0.60 per share)(20,000 shares) = $12,000

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Question 29 of 100 (2C4-LS20) Flag for Review

Direct benefits of Enterprise Risk Management include all of the following except:

Improved firm stability

Stronger internal controls

Improved reaction time to risk

Increased shareholder value

Feedback

The correct answer is: Stronger internal controls

Stronger internal controls, more effective corporate governance, and implementation of ERM
can lead to improved stability, reaction time, and increased shareholder value. Stronger
internal controls would not be a direct benefit or ERM.

Question 30 of 100 (2B2-AT02) Flag for Review

The beta of Wheeling Inc. common stock is greater than 1. This means that

The Wheeling stock has the same risk as other stocks with the same credit rating.

Returns for the Wheeling stock vary more widely than market returns.

The Wheeling stock and the market portfolio have the same systematic risk.
The unsystematic risk for the Wheeling stock varies more widely than market returns.

Feedback
The correct answer is: Returns for the Wheeling stock vary more widely than market returns.

The beta for a common stock is the ratio of the variability in its returns to the variability in the
overall stock market. A common stock with a beta of 1 tracks the market. A common stock
with a beta greater than 1 has returns that are more variable than the overall stock market. A
common stock with a beta less than 1 has returns that are less variable than the overall stock
market. Therefore, the returns for the stock of Wheeling, Inc. will vary more widely than
market returns.

Question 31 of 100 (2A1-LS01) Flag for Review

Which of the following statements is true regarding common-size statements?

All of the other three answers are correct.

Common-size statements indexed over two years for two companies, with both showing a 10%

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increase in profits, show that both companies would make equally attractive investments.
Horizontal common-size statements can be made only for companies with at least ten years of
operational data.
Common-size statements can be used to compare companies of different sizes.

Feedback
The correct answer is: Common-size statements can be used to compare companies of
different sizes.
Common-size statements showing a 10% increase in profits for two companies do not alone
indicate that both are equally attractive investments. One of the companies may have shown
an increase in profits from $10 to $11, while the other may have shown an increase in profits
from $1,000,000 to $1,100,000. Horizontal common-size statements do not require ten years of
data.

Question 32 of 100 (2D1-LS09) Flag for Review

All of the following incremental cash flows would be examined during the project termination phase of a
capital investment project for new equipment except

increase or decrease in net working capital.

net increase or decrease in taxes related to the asset disposal.

additional capitalized expenditures.

salvage value of any sold or disposed assets.

Feedback
The correct answer is: additional capitalized expenditures.
Additional capitalized expenditures (e.g., shipping and installation charges) would be
examined during project initiation. The other activities are cash flows specifically associated
with project termination.

Question 33 of 100 (2C1-AT06) Flag for Review

Romashka, Inc. plans on introducing a new product. The marketing manager forecasts a unit selling
price of $500. The variable cost per unit is estimated to be $100 per unit. In addition, there is a total of
$110,000 fixed indirect manufacturing cost and $150,000 in fixed operating costs associated with these
units.

What quantity will the company have to sell to break even?

220 units.
275 units.
520 units.

650 units.

Feedback
The correct answer is: 650 units.

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Breakeven point = Fixed Costs / Contribution Margin per unit = ($260,000) / ($500 - $100) = 650
units

Question 34 of 100 (2B6-LS07) Flag for Review

The residual theory of dividends argues that dividends
*Source: Retired ICMA CMA Exam Questions

are necessary to maintain the market price of the common stock.

are irrelevant.

can be paid if there is income remaining after funding all attractive investment opportunities.

can be foregone unless there is an excess demand for cash dividends.

Feedback
That’s incorrect. The residual theory of dividends argues that dividends can be paid if there is
income remaining after funding all attractive investment opportunities.

Question 35 of 100 (2A3-LS14) Flag for Review

An investor is deciding whether to invest in either of two companies (Company A and Company B) within
the same industry. Both companies have a 15% profit margin and total assets of $15,000,000. Which of
the following is true when measuring these companies based on their Return on Assets?

Both are equally profitable, therefore they are equally attractive

The company with the higher sales per year will be more attractive

Each company is equally attractive as their assets are equal

The company with the lower sales per year will be more attractive

Feedback

The correct answer is: The company with the higher sales per year will be more attractive.

Given the calculation for Return on Assets of ROA = Net Income / Average Total Assets, and
the profit margin % and asset value given is the same for both companies, the company with
the higher sales per year will generate a higher amount of net income dollars resulting in the
higher ROA.

Question 36 of 100 (2C4-AT02) Flag for Review

All of the following are valid reasons for expansion of international business by U.S. multinational
corporations, except to

secure new sources for raw materials.

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find additional areas where their products can be successfully marketed.

minimize their costs of production.

protect their domestic market from competition from foreign manufacturers.

Feedback
The correct answer is: protect their domestic market from competition from foreign
manufacturers.

Protecting the domestic market from foreign competition is not a valid reason for expansion
overseas; all the other options are valid.

Question 37 of 100 (2D2-AT01) Flag for Review

In order to increase production capacity, Gunning Industries is considering replacing an existing
production machine with a new technologically improved machine effective January 1. The following
information is being considered by Gunning Industries.

z The new machine would be purchased for $160,000 in cash. Shipping, installation, and testing
would cost an additional $30,000.
z The new machine is expected to increase annual sales by 20,000 units at a sales price of $40 per
unit. Incremental operating costs are comprised of $30 per unit in variable costs and total fixed
costs of $40,000 per year.
z The investment in the new machine will require an immediate increase in working capital of
$35,000.
z Gunning uses straight-line depreciation for financial reporting and tax reporting purposes. The new
machine has an estimated useful life of five years and zero salvage value.
z Gunning is subject to a 40 percent corporate income tax rate.

Gunning uses the net present value method to analyze investments and will employ the following factors
and rates.

The acquisition of the new production machine by Gunning Industries will contribute a discounted net-of-
tax contribution margin of

$454,920.

$277,501.
$303,280.
$421,559.

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Feedback
The correct answer is: $454,920.

The annual contribution margin from the project is calculated as follows:

Annual contribution margin = (unit price – unit variable cost)(units sold)

Annual contribution margin = ($40 -$30)(20,000 units) = $10(20,000 units) = $200,000

The tax on the contribution margin is calculated as follows:

Tax on the contribution margin = (tax rate)(annual contribution margin)

Tax on the contribution margin = (0.40)($200,000) = $80,000

Of the $200,000 contribution margin amount, $80,000 is taxed and the remaining $120,000 is
remaining after taxes are paid.

Therefore, the after-tax contribution margin would be equal to $120,000 per year for five years.
The discounted after-tax contribution margin is calculated as follows:
Discounted after-tax contribution margin for Gunning = (after-tax contribution margin for five
years)(factor for present value of an ordinary annuity of $1, at 10%, for 5 periods)
Discounted after-tax contribution margin for Gunning = ($120,000)(3.791) = $454,920

Question 38 of 100 (2B5-CQ10) Flag for Review

Locar Corporation had net sales last year of $18,600,000 (of which 20% were installment sales). It also
had an average accounts receivable balance of $1,380,000. Credit terms are 2/10, net 30. Based on a
365-day year, Locar’s average collection period last year was

33.4 days.
27.3 days.
26.2 days.

27.1 days.

Feedback
The correct answer is: 27.1 days

The average collection period is calculated as follows:

Average collection period = (365 days) / (accounts receivable turnover)

Accounts receivable turnover is calculated as follows:

Accounts receivable turnover = (net sales) / (average accounts receivable)
Accounts receivable turnover = ($18,600,000) / ($1,380,000) = 13.48 times per year

Average collection period = (365 days) / 13.48 = 27.1 days

Question 39 of 100 (2D1-LS10) Flag for Review

Which of the following is a primary difference between a cash outflow related to the development of a
new product and the expenditure made for the bulk purchase of raw materials for existing products?

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Contribution to working capital

Potential profitability

The number of accounting periods

Effect of inflation

Feedback
The correct answer is: The number of accounting periods
Development of a new product exemplifies a capital investment; the bulk purchase of raw
materials is a current investment. A capital budgeting project spans more than one
accounting period whereas current investments can be written often in the same period in
which the expenses occur.

Question 40 of 100 (2B8-AT09) Flag for Review

An appreciation of the U.S. dollar against the Japanese yen would

make travel in Japan more expensive for U.S. citizens.

increase the cost of buying supplies for U.S. firms.

make U.S. goods more expensive to Japanese consumers.

increase the translated earnings of U.S. subsidiaries domiciled in Japan.

Feedback
The correct answer is: make U.S. goods more expensive to Japanese consumers.

An appreciation of the US$ against the Japanese¥ means that it would take more Japanese¥
to purchase US products, thus making it more expensive.

Question 41 of 100 (2A3-LS09) Flag for Review

In the last fiscal year, LMO Company had net sales of $7,000,000, a gross profit margin of 40%, and a
net profit margin of 10%. What is its cost of goods sold?

$6,300,000
$700,000

$4,200,000

$2,800,000

Feedback
The correct answer is: $4,200,000

Calculate Gross Profit by rearranging the following formula:

Gross Profit Margin = Gross Profit / Net Sales

Gross Profit = (Gross Profit Margin)(Net Sales)

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Gross Profit = (40%)($7,000,000) = $2,800,000

Calculate Cost of Goods Sold by rearranging the following formula:

Gross Profit = Sales – Cost of Goods Sold

Cost of Goods Sold = Sales – Gross Profit
Cost of Goods Sold = $7,000,000 - $2,800,000 = $4,200,000

Question 42 of 100 (2B3-LS43) Flag for Review

Dorsy Manufacturing plans to issue mortgage bonds subject to an indenture. Which of the following
restrictions or requirements are likely to be contained in the indenture?

I. Receiving the trustee’s permission prior to selling the property.

II. Maintain the property in good operating condition.
III. Insuring plant and equipment at certain minimum levels.
IV. Including a negative pledge clause.
*Source: Retired ICMA CMA Exam Questions

II and III only.

I, III, and IV only.

I, II, III and IV.

I and IV only.

Feedback
That’s correct! I, II, III and IV. Protective covenants set limits (restrictions) on certain actions
the company might be taking during the term of the agreement. They are a particularly
important feature in a bond indenture.

Question 43 of 100 (2C2-AT21) Flag for Review

Kator Co. is a manufacturer of industrial components. One of their products that is used as a sub-
component in auto manufacturing is KB-96. This product has the following financial structure per unit.

Kator Co. has received a one-time special order for 1,000 KB-96 parts. Assume that Kator is operating at
full capacity and the next best alternative use of their capacity on existing equipment is LB-64 that would
produce a contribution of $10,000. The minimum price that is acceptable, using the original data, for this
one-time special order is in excess of

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$60.

$100.
$87.
$57.

Feedback
The correct answer is: $60.00.

Kator should accept the special order if its price is greater than its opportunity cost per unit.
The opportunity cost per unit consists of avoidable variable and avoidable fixed costs per unit
and the unit cost of any lost opportunities.

Avoidable variable costs per unit = $20 direct materials + $15 direct labor + $12 variable
manufacturing overhead + $3 shipping and handling = $50.

There are no avoidable fixed costs.

The opportunity cost per unit is $10 ($10,000/1,000).

This represents the cost of the next best alternative use of their capacity, or the cost of the
opportunity forgone.

Therefore, the minimum acceptable price is $60 ($50 variable costs + $10 opportunity cost).

Question 44 of 100 (2A3-CQ01) Flag for Review

For the year just ended, Beechwood Corporation had income from operations of $198,000 and net
income of $96,000. Additional financial information is given below.

Beechwood has no other equity issues outstanding. Beechwood’s return on shareholders’ equity for the
year just ended is

39.5%.
19.9%.

19.2%.

32.0%.

Feedback
The correct answer is: 19.2%.

Return on shareholders’ equity is calculated as follows:

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Return on shareholders’ equity = (net income – preferred stock dividends) / (the average
shareholders’ equity)

Shareholders’ equity = common stock + reserve for bond retirement + retained earnings

Average shareholders’ equity = (beginning balance + ending balance) / 2

Average shareholders’ equity = ($300,000 + $12,000 + $155,000 + $300,000 + $28,000 +
$206,000) / 2
Average shareholders’ equity = ($1,001,000) / 2 = $500,500

Since there are no preferred stock dividends, return on shareholders’ equity = $96,000 /
$500,500 = 0.192, or 19.2%.

Question 45 of 100 (2C3-LS10) Flag for Review

A perfectly inelastic demand means that

demand will not change due to a change in price.

a decrease in price will result in a substantial increase in demand.

an increase in price will result in a decrease in demand.
consumers will decrease demand when prices rise but not increase demand when prices fall.

Feedback
The correct answer is: demand will not change due to a change in price.
A perfectly inelastic demand means that demand does not change when prices change.
Necessary items such as insulin have perfectly inelastic demands.

Question 46 of 100 (2B1-LS01) Flag for Review

An investor bought a stock exactly one year ago for $40; it paid a $1.50 dividend during the year. The
stock is currently selling for $45 per share. What is the one-year holding period return (rate of return) on
this stock?

16.25%

11.11%
12.50%
14.44%

Feedback
The correct answer is: 16.25%
Substituting the appropriate values into the holding period return (rate of return) formula, the
answer is:

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Question 47 of 100 (2A3-LS06) Flag for Review

Which of the following rules have accountants adopted regarding the recognition of revenues?

I. Revenues must be realized by a cash transfer.

II. Risk of ownership must have been effectively passed to the buyer.
III. Business transactions should be at arm's length with independent parties.
IV. Revenue can be measured or estimated with substantial accuracy.

II, III, and IV

I, II, and IV only

II and III only
I and II only

Feedback
The correct answer is: II, III, and IV
Revenues need not have been received in cash form, as they can also result from an increase
in receivables or other assets. Transactions must be essentially completed at an arm's length
between independent parties, with risk of ownership passed to the buyer, and revenue must
be measured or estimated with reasonable accuracy.

Question 48 of 100 (2A2-LS54) Flag for Review

When reviewing a credit application, the credit manager should be most concerned with the applicant’s
*Source: Retired ICMA CMA Exam Questions

working capital and current ratio.

price-earnings ratio and current ratio.

profit margin and return on assets.
working capital and return on equity.

Feedback
That’s incorrect. Liquidity measures, such as net working capital and the current ratio, help
determine ability to pay expenses on a timely basis. Therefore, the credit manager should be
most concerned with these measures in comparison to the others listed in the problem. Profit
margin, price-earnings ratio, and return on equity are profitability measures.

Question 49 of 100 (2D3-LS01) Flag for Review

A company wants to replace its old stand-alone systems with a retail point-of-sale system. The costs of
the new system include $30,000 for new hardware and software, $20,000 for systems training, and
estimated costs of $5,000 for learning curves and $5,000 for lost sales during transition. The per year
benefits of the new system include increased customer knowledge (~$10,000), better fraud prevention
(~$20,000), and improved customer service and retention (~$10,000). How many years will it take this

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project to repay its investment?

The project will never repay itself and should not be done.
0.67 years
1 year

1.5 years

Feedback
The correct answer is: 1.5 years
The total estimated costs of $60,000 divided by the total annual benefits of $40,000 equals a
cost-benefit ratio of 1.5. Since the benefits occur each year, they will net an additional $40,000
in benefits the second year, paying back the project halfway through the year.

Question 50 of 100 (2D4-LS08) Flag for Review

Which of the following methods is best suited to comparing the net present values for two capital
investment projects when the cash flows vary?

Sensitivity analysis

Capital asset pricing model

Certainty equivalent approach
Computer simulation

Feedback
The correct answer is: Sensitivity analysis
Sensitivity analysis as it pertains to capital investments is a "what-if" study evaluating how
the net present value (NPV), the internal rate of return (IRR), and other indicators of
profitability of a project change if the discount rate, labor costs, materials costs, sales, or
some other factor varies from one case to another. The purpose is to assess how sensitive
the NPV, the IRR, or another specified profitability measure is to a change.

Question 51 of 100 (2C2-AT06) Flag for Review

A company's approach to a make-buy decision

should utilize activity-based costing.

should utilize absorption (full) costing.
depends on whether the company is operating at or below breakeven.

involves an analysis of avoidable costs.

Feedback
The correct answer is: involves an analysis of avoidable costs.

The relevant make costs in a make-versus-buy decision are the opportunity costs to
manufacture a product and the costs of purchasing. The opportunity cost to manufacture a

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product consists of avoidable variable and avoidable fixed costs and the cost of any lost
opportunities.

Question 52 of 100 (2C1-AT16) Flag for Review

Barnes Corporation manufactures skateboards and is in the process of preparing next year's budget.
The pro forma income statement for the current year is presented below.

The breakeven point (rounded to the nearest dollar) for Barnes Corporation for the current year is

$636,364.

$181,818.
$658,537.
$729,730.

Feedback
The correct answer is: $636,364.

The breakeven point in dollars is calculated by dividing the Fixed Costs by the corporation’s
Contribution Margin Ratio.

Fixed Costs = Fixed Overhead + Fixed selling and G&A expenses = $100,000 + $250,000 =
$350,000

Contribution Margin Ratio = Contribution Margin / Sales = $825,000/$1,500,000 = 0.55

Contribution Margin = Sales – all Variable costs = $1,500,000 – $675,000 = $825,000

Total variable costs are calculated as follows:
Total variable costs = $250,000 (direct materials) + $150,000 (direct labor) + $ 75,000 (var.
overhead) + $200,000 (selling and G&A variable cost) = $675,000

The dollar breakeven point, therefore, = $350,000 / 0.55 = $636,363.63 or $636,364 rounded to
the nearest dollar.

Question 53 of 100 (2B4-CQ04) Flag for Review

An accountant for Stability Inc. must calculate the weighted average cost of capital of the corporation
using the following information.

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What is the weighted average cost of capital of Stability?

17.00%
10.36%

13.40%

11.50%

Feedback
The correct answer is: 13.40%.

The weighted average cost capital (WACC) is calculated as follows:

WACC = (weight of long-term debt)(after-tax cost of long-term debt) + (weight of common

stock)(cost of common stock) + (weight of retained earnings)(cost of retained earnings)

The total of long-term debt, common stock, and retained earnings = $10,000,000 + $10,000,000
+ $5,000,000 = $25,000,000. From this information, the weight of long-term debt, common
stock, and retained earnings can be determined as follows:

Weight for long-term debt = ($10,000,000) / ($25,000,000) = 0.4

Weight for common stock = ($10,000,000) / ($25,000,000) = 0.4
Weight for retained earnings = ($5,000,000 / $25,000,000) = 0.2

WACC = (0.4)(0.08) + (0.4)(0.18) + (0.2)(0.15) = 0.134, or 13.4%

Question 54 of 100 (2C2-AT19) Flag for Review

Randall Corporation is a table manufacturing company that has the following cost structure for producing
table tops.

Recently, Randall Corporation received an offer from Blurr Corporation to supply the table tops to
Randall. Randall is considering buying the table tops from Blurr instead of manufacturing them internally.

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Assume that Randall Corporation was operating at full capacity. If Randall had any additional capacity,
they could manufacture chairs, which have costs per unit as follows:

Using the above data, reconsider the offer that Randall received from Blurr Corporation to supply the
table tops to Randall instead of Randall manufacturing them internally.

What is the maximum price from Blurr that Randall would be willing to accept?

$68.00
$67.00

$65.00

$60.00

Feedback
The correct answer is: $65.00.

Randall should accept the offer from Blurr if the purchase price per unit is less than the
manufacturing cost per unit.
The manufacturing cost per unit is the opportunity cost per unit consisting of avoidable
variable and avoidable fixed costs per unit and the unit cost of any lost opportunities. There is
nothing stated in the problem relating to avoidable fixed costs.

Opportunity cost per unit = lost contribution margin on the chair production foregone = Price
– unit variable costs = $100 - $38 (direct materials) - $22 (direct labor) - $19.50 (variable
manufacturing overhead) - $2.50 (variable administrative costs) = $18

Cost of manufacturing table tops = $47 in variable costs ($23 direct materials + $12 direct
labor + $10 variable manufacturing overhead + $2 variable administrative costs) + $18
opportunity cost per unit = $65 per unit

Question 55 of 100 (2D2-CQ38) Flag for Review

Logan Enterprises is at a critical decision point and must decide whether to go out of business or
continue to operate for five more years. Logan has a labor contract with five years remaining which calls
for $1.5 million in severance pay if Logan’s plant shuts down. The firm also has a contract to supply
150,000 units per year, at a price of $100 each, to Dill Inc. for the next five years. Dill is Logan’s only
remaining customer. Logan must pay Dill $500,000 immediately if it defaults on the contract. The plant
has a net book value of $600,000, and appraisers estimate the facility would sell for $750,000 today but
would have no market value if operated for another five years. Logan’s fixed costs are $4 million per
year, and variable costs are $75 per unit. Logan’s appropriate discount rate is 12%. Ignoring taxes, the
optimal decision is to

keep operating to avoid the severance pay of $1,500,000.

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shut down since the breakeven point is 160,000 units while annual sales are 150,000 units.
shut down because the annual cash flow is negative $250,000 per year.

keep operating since the incremental net present value is approximately $350,000.

Feedback
The correct answer is: keep operating since the incremental net present value is
approximately $350,000.

The net present value (NPV) of shutting down the plant is calculated as follows:

NPV of shutting down plant = (cash flow from sale of plant) – (cash flow related to severance
pay) – (contract default fee)
NPV of shutting down plant = ($750,000) – ($1,500,000) – ($500,000) = -$1,250,000

The cash flow per year from operating is calculated as follows:

Annual cash flow from operating = (revenue) – (variable costs) – (fixed costs)

Revenue = (units)(sales price per unit

Revenue = (150,000 units)($100) = $15,000,000

Variable costs = (units)(variable cost per unit)

Variable costs = (150,000)($75) = $11,250,000

Annual cash flow from operating = $15,000,000 – $11,250,000 – $4,000,000

Annual cash flow from operating = $(250,000)

NPV of operating cash flows = (-$250,000)(3.605 PV annuity i=12, n=5)

NPV of operating cash flows = -$901,250, which is $348,750 (or approximately $350,000) less
than shutting down.

Question 56 of 100 (2A2-LS55) Flag for Review

The acid test ratio shows the ability of a company to pay its current liabilities without having to
*Source: Retired ICMA CMA Exam Questions

liquidate its inventory.

collect its receivables.

borrow additional funds.
reduce its cash balance.

Feedback
That’s correct! Liquidate its inventory. The acid test ratio is calculated as current assets less
inventories and prepayments divided by total current liabilities. The acid test ratio shows the
ability of a company to pay its current liabilities without having to liquidate its inventory.

Question 57 of 100 (2A2-CQ42)

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Flag for Review

Interstate Motors has decided to make an additional investment in its operating assets which are
financed by debt. Assuming all other factors remain constant, this increase in investment will have which
one of the following effects?
*Source: Retired ICMA CMA Exam Questions

Decrease Decrease Decrease

Increase No Change Decrease
No Change Increase Decrease

No Change Decrease Decrease

Feedback
That’s incorrect. A purchase of assets would have no effect on operating income margin
(operating income divided by sales). It would decrease both operating asset turnover (sales
divided by average total assts) and return on operating assets (operating income divided by
average total assets) by increasing assets.

Question 58 of 100 (2A1-LS10) Flag for Review

Dividends paid to company shareholders would be shown on the statement of cash flows as
*Source: Retired ICMA CMA Exam Questions

operating cash outflows.

cash flows from financing activities.

cash flows from investing activities.

operating cash inflows.

Feedback
That’s incorrect. Dividends paid to company shareholders would be shown on the statement
of cash flows as cash flows from financing activities. Financing activities include all long-term
debt and shareholders’ equity transactions.

Question 59 of 100 (2D3-CQ05) Flag for Review

Smithco is considering the acquisition of scanning equipment to mechanize its procurement process.
The equipment will require extensive testing and debugging, as well as user training prior to its
operational use. Projected after-tax cash flows are shown below.

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Management anticipates the equipment will be sold at the beginning of year 6 for $50,000 when its book
value is zero. Smithco’s internal hurdle and effective tax rates are 14% and 40%, respectively. The
project’s payback period will be

3.0 years.
3.5 years.
2.3 years.

4.0 years.

Feedback
The correct answer is: 4.0 years.

The payback is the length of time that it takes to recover the initial investment or, in this case,
the investments.

The cumulative cash flow after 4 years is calculated as follows:

Cumulative cash flow after 4 years = (-$550,000 -$500,000 + $450,000 + $350,000 + $250,000) =
0

Because the cash outflows are recovered by the fourth year, the payback is therefore four
years.

Question 60 of 100 (2C3-AT06) Flag for Review

The cost-plus pricing approach is generally in what formula?

Unit cost x (1 + markup % on unit cost) = selling price.

Unit cost / selling price = markup percentage.

Cost base + gross margin = selling price.
answer5
Variable cost + fixed cost + contribution margin - selling price.

Feedback
The correct answer is: Unit cost x (1 + Markup % on unit cost) = Selling price.

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Cost-plus pricing involves setting the price of a product so as to earn a set markup
percentage on sales. The cost-plus pricing approach is expressed using the following
formula:

(Unit Cost) x (1 + Markup % on unit cost) = Selling Price.

Question 61 of 100 (2C2-LS19) Flag for Review

The manufacturing labor cost projections for two different investment proposals are $145,000 and
$175,000. These projections are based on the past manufacturing labor rate of $12 per hour and total
past manufacturing labor costs of $168,000 (140 hours x 100 workers x $12) for a similar project. In
evaluating the proposals, the past labor costs are examples of

irrelevant costs.

decremental costs.
relevant costs.
incremental costs.

Feedback
The correct answer is: irrelevant costs.
Even though the past labor costs may play a role in preparing the labor cost projections, they
are irrelevant costs. The past historical costs are helpful in making informed judgments, but
they are irrelevant to the decision.

Question 62 of 100 (2A2-AT44) Flag for Review

The Dawson Corporation projects the following for the year.

If Dawson Corporation's common stock is expected to trade at a price/earnings ratio of eight, the market
price per share (to the nearest dollar) would be

$72.

$56.

$68.
$125.

Feedback
The correct answer is: $56.

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The price/earnings (P/E) ratio for a stock is the ratio of its market price to the corporation’s
EPS (earnings per share). The P/E ratio is given here, but it is necessary to determine the
stock price using the other available information.

The stock price, then, is $56, which is the EPS of $7, multiplied by the P/E of 8.
The earnings per share of $7 is calculated by taking the $14,000,000 in earnings to common
shareholders and dividing it by 2,000,000 common shares outstanding.
The earnings to common shareholders (E to CS) is calculated as follows:
EBIT = earnings before interest and taxes

E to CS = [(EBIT – Interest)(1 – Tax Rate)] – (Preferred Stock Dividend)

E to CS = [($35,000,000 – $5,000,000)(1 - 0.4)] –($ 4,000,000)
= [$30,000,000(0.6)] –($ 4,000,000)
= $18,000,000 – $4,000,000 = $14,000,000

Question 63 of 100 (2A2-CQ07) Flag for Review

Dedham Corporation has decided to include certain financial ratios in its year-end annual report to
shareholders. Selected information relating to its most recent fiscal year is provided below.

Dedham’s quick (acid-test) ratio at year end is

2.00 to 1.
1.925 to 1.
1.80 to 1.

1.05 to 1.

Feedback
The correct answer is: 1.05 to 1.

The quick ratio, or acid test ratio, is defined as follows:

Quick ratio = (current assets – inventories – prepayments) / (current liabilities)

Current assets = (cash + receivables + pre-paid expenses + inventory + available-for-sale

securities at fair value)
Current Assets = $10,000 + $20,000 + $8,000 + $30,000 + 12,000 = $80,000

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Current liabilities = (accounts payable + 90 day notes payable)

Current liabilities = $15,000 + $25,000 = $40,000

Quick Ratio = (Current assets – Inventory – Prepayments) / Current Liabilities

Quick Ratio = ($80,000 - $30,000 - $8,000) / $40,000
Quick Ratio = $42,000/$40,000 = 1.05 or 1.05 to 1

Question 64 of 100 (2B1-LS13) Flag for Review

Using the capital asset pricing model (CAPM), if a Treasury bond rate is 6%, the beta of the firm's stock
is 0.8, and the expected rate of return for the market is 9%, then the cost of equity capital is

6.8%.

8.4%.

12.0%.
9.0%.

Feedback
The correct answer is: 8.4%.
The formula for applying the capital asset pricing model (CAPM) to estimate the cost of
common equity is:

Where:

z ks = cost of equity capital

z Rf = riskless rate
z β = stock's beta estimate
z km = estimate of the return on the market as a whole or on an average stock value

Question 65 of 100 (2A2-LS60) Flag for Review

Which one of the following statements concerning the effects of leverage on earnings before interest and
taxes (EBIT) and earnings per share (EPS) is correct?
*Source: Retired ICMA CMA Exam Questions

Financial leverage affects both EPS and EBIT, while operating leverage only effects EBIT.
A decrease in the financial leverage of a firm will increase the beta value of the firm.
For a firm using debt financing, a decrease in EBIT will result in a proportionally larger decrease
in EPS.

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If Firm A has a higher degree of operating leverage than Firm B, and Firm A offsets this by using
less financial leverage, then both firms will have the same variability in EBIT.

Feedback
That’s incorrect. Debt financing creates financial leverage (the percent change in EPS given a
percent change in EBIT) which is always greater than one. Therefore, a change in EBIT causes
a proportionally larger change in EPS.

Question 66 of 100 (2D6-LS04) Flag for Review

Which of the following are stages in the real options process?

I. Expand
II. Abandon
III. Reintegrate
IV. Postpone
V. Adapt

I, II, IV, and V

I, II, III, IV, and V

I, IV, and V
I, II, and III

Feedback

The correct answer is: I, II, IV, and V

Once a project is under way, real options (or managerial options) allow management to make
changes that will affect subsequent cash flows and/or the life of the investment. Real options
include the following stages: Expand, which involves making follow-on investments if the
immediate investment project succeeds; Abandon, which allows the flexibility to terminate a
project early; Postpone, which involves waiting and learning more before investing further;
and Adapt, which is based on the ability of a firm to vary output or production methods in
response to demand, allowing the firm to swap or exchange the output mix as demand
changes.

Question 67 of 100 (2B4-AT06) Flag for Review

Williams Inc. is interested in measuring its overall cost of capital and has gathered the following data.
Under the terms described below, the company can sell unlimited amounts of all instruments.

z Williams can raise cash by selling $1,000, 8 percent, 20-year bonds with annual interest
payments. In selling the issue, an average premium of $30 per bond would be received, and the
firm must pay floatation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8
percent.
z Williams can sell 8 percent preferred stock at par value, $105 per share. The cost of issuing and
selling the preferred stock is expected to be $5 per share.
z Williams' common stock is currently selling for $100 per share. The firm expects to pay cash

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dividends of $7 per share next year, and the dividends are expected to remain constant. The stock
will have to be underpriced by $3 per share, and floatation costs are expected to amount to $5 per
share.
z Williams expects to have available $100,000 of retained earnings in the coming year; once these
retained earnings are exhausted, the firm will use new common stock as the form of common
stock equity financing.
z Williams preferred capital structure is

The cost of funds from the sale of common stock for Williams Inc. is

7.0 percent.
8.1 percent.

7.6 percent.

7.4 percent.

Feedback
The correct answer is: 7.6 percent.

Using the constant dividend growth model (Gordon’s model), the cost of the sale of common
stock (Ke) is calculated by taking the next dividend payment and dividing it by the net price
(price less discount, less flotation costs) plus the constant dividend growth rate. There is no
dividend growth rate for Williams.

For Williams, Ke= $7/($100-$3-$5) = $7/$92 = .076, or 7.6%.

Question 68 of 100 (2A3-AT04) Flag for Review

When comparing a firm's financial ratios to that of its industry, you discover that the firm has a stronger
(than industry) gross profit margin and weaker (net) profit margin. Which of the following management
action steps would likely improve the current situation?

Managers examine marketing and administrative costs in an attempt to find possible cuts.

Managers freeze production asset purchases in an attempt to reduce factory depreciation costs.
Managers examine direct labor methods in an attempt to reduce direct labor costs.
Managers contact new suppliers in an attempt to reduce direct material costs.

Feedback
The correct answer is: Managers examine marketing and administrative costs in an attempt to
find possible cuts.

Gross profit margin (gross profit percentage) = (net sales – cost of goods sold) / (net sales) x
100 = (gross profit) / (net sales) x 100.
Net profit margin = (net profit) / (net sales) x 100.
Net profit = gross profit – marketing and administrative expenses (costs) + non-sales
revenues + gains – non-operating expenses – losses – taxes.

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A strong gross profit margin, coupled with a weak profit margin, indicates that the items
below gross profit in the income statement are out of line with the industry. The primary item
below gross profit is marketing and administrative costs. Non-sales revenues, gains, non-
operating expense, and losses are normally small compared to marketing and administrative
costs.

Question 69 of 100 (2D5-CQ04) Flag for Review

Susan Hines has developed an estimate of the earnings per share for her firm for the next year using the
following parameters.

Sales $20 million

Cost of goods sold 70% of sales
General & administrative expenses $300,000
Selling expense $100,000 plus 10% of sales
Debt outstanding $5 million @ 8% interest rate
Effective tax rate 35%
Common shares outstanding 2 million
She is now interested in the sensitivity of earnings per share to sales forecast changes. A 10% sales
increase would increase earnings per share by
*Source: Retired ICMA CMA Exam Questions

10.4 cents per share.

20.0 cents per share.
7.0 cents per share.

13.0 cents per share.

Feedback
No feedback available

Question 70 of 100 (2B1-LS15) Flag for Review

According to the capital asset pricing model (CAPM), the expected return of a portfolio varies

based on the number of securities in the portfolio.

in direct proportion to beta in a competitive environment.

based on investor attitudes toward risk.

in direct proportion to the prime interest rate.

Feedback
The correct answer is: in direct proportion to beta in a competitive environment.
The capital asset pricing model (CAPM) implies that the risk premium varies in direct
proportion to beta in a competitive market. The expected risk premium for each investment in
a portfolio should increase in proportion to its beta. This means that all investments in a
portfolio should plot along an upward sloping line, known as the security market line (SML).

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Question 71 of 100 (2C2-LS34) Flag for Review

Johnson waits two hours in line to buy a ticket to an NCAA Final Four Tournament. The opportunity cost
of buying the $200 ticket is
*Source: Retired ICMA CMA Exam Questions

the value of the $200 to the ticket agent.

Johnson’s best alternative use of the two hours it took to wait in line.
Johnson’s best alternative use of the $200.

Johnson’s best alternative use of both the $200 and the two hours spent in line.

Feedback
That’s incorrect. The opportunity cost of buying the $200 ticket is Johnson’s best alternative
use of both the $200 and the two hours spent in line.

Question 72 of 100 (2C1-CQ18) Flag for Review

Starlight Theater stages a number of summer musicals at its theater in northern Ohio. Preliminary
planning has just begun for the upcoming season, and Starlight has developed the following estimated
data.

Starlight will also incur $565,000 of common fixed operating charges (administrative overhead, facility
costs, and advertising) for the entire season, and is subject to a 30% income tax rate.

If Starlight’s schedule of musicals is held, as planned, how many patrons would have to attend for
Starlight to break even during the summer season?

79,939

79,302
81,344
77,918

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Feedback
The correct answer is: 79,939.

The computation of the breakeven requires an assumption regarding the mix of patrons. The
logical assumption regarding the mix would be based upon the projected average attendance
per performance, multiplied by the number of performances.

With these assumptions, the sales mix based on revenue would be:
Mr. Wonderful = (3,500)($12) = $42,000
That’s Life = (3,000)($20) = $60,000
All that Jazz = (4,000)($12) = $48,000
Total = $150,000

Based on the above, the assumed mix would be:

Mr. Wonderful = $42,000 / $150,000 = 28%
That’s Life = $60,000 / $150,000 = 40%
All that Jazz = $48,000 / $150,000 = 32%

The breakeven would occur when total contribution margin is equal to fixed costs.
Total fixed costs = $165,000 + $249,000 + $316,000 + $565,000 = $1,295,000
Contribution margin = (price per unit – variable cost per unit)(number of patrons)

Let x = total patrons.

Contribution margin, Mr. Wonderful = ($18 – $3)(0.28)x
Contribution margin, That’s Life = ($15 – $1)(0.40)x
Contribution Margin, All that Jazz = ($20)(0.32)x

Add the contribution margins from all three productions to get total contribution margin:
Total contribution margin = $15(0.28)x + $14(0.4)x + $20(0.32)x
Total contribution margin = $4.2x + $5.6x + $6.4x = $16.2x

Now set the total contribution margin equal to the total fixed costs of $1,295,900
$16.2x = $1,295,000
x = 79,938.27, which must be rounded up to 79,939 patrons

Question 73 of 100 (2B2-AT03) Flag for Review

If three stocks are in a portfolio, the expected return on the portfolio is the

weighted average of the expected returns multiplied by the beta of each security.
sum of the expected returns multiplied by the variance of each security.
sum of the expected returns multiplied by the standard deviation of each security.

weighted average of the expected returns of the three securities.

Feedback
The correct answer is: weighted average of the expected returns of the three securities.

The expected return on a portfolio is equal to the weighted average of the expected returns of
the securities in the portfolio. This is also the average return for the portfolio.

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Question 74 of 100 (2D2-AT09) Flag for Review

The method that recognizes the time value of money by discounting the after-tax cash flows over the life
of a project using the company's minimum desired rate of return is the

internal rate of return method.

unadjusted return on investment method.
accounting rate of return method.

net present value method.

Feedback
The correct answer is: net present value method.

This is the definition of the net present value (NPV) method. The net present value (NPV) of a
project is the present value (PV) of the project’s cash flows calculated at the appropriate
discount rate, less the project’s initial investment (I).

Question 75 of 100 (2C2-LS02) Flag for Review

ABC Company has fixed costs of $300,000 per month. Total output per month is 150,000 units. Minimum
pay for production line workers is $5.85 per hour, and total variable costs are currently $275,000 per
month. If variable costs increase to $350,000 per month and production output increases to 250,000 per
month, what are the average fixed costs before and after the increase in production?

$2 per unit before and $1.20 per unit after the increase in production

$2 per unit before and after the increase in production

$1.83 per unit before and $1.40 per unit after the increase in production
$3.83 per unit before and $2.60 per unit after the increase in production

Feedback
The correct answer is: $2 per unit before and $1.20 per unit after the increase in production
Average fixed production is calculated by dividing fixed costs by total output. Before the
increase in production, average fixed costs per unit are $2 ($300,000 fixed costs ÷ 150,000
units). After the increase, average fixed costs per unit are $1.20 ($300,000 fixed costs ÷
250,000 units).

Question 76 of 100 (2C3-LS04) Flag for Review

Which of the following pricing methods adds a minimally accepted return on investment to a base
amount?

Value-based pricing
Break-even pricing

Cost-plus pricing

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Skimming pricing

Feedback
The correct answer is: Cost-plus pricing
By definition, cost-plus pricing uses an accurate analysis of costs per unit as a basis for
calculating the selling price for a product or service. A margin representing a minimally
accepted return on investment (e.g., 10 percent to 30 percent) is added on to cost to set the
price.

Question 77 of 100 (2A4-LS33) Flag for Review

“Economic costs” often differ from costs shown in a firm’s financial statements. For a corporation, a
major difference would arise due to
*Source: Retired ICMA CMA Exam Questions

salary and wage costs.

interest costs.
state and local tax costs.

opportunity costs.

Feedback
That’s correct! Opportunity costs. The economic cost of a decision depends on both the cost
of the alternative chosen and the benefit that the best alternative would have provided if
chosen. Economic cost differs from accounting cost because it includes opportunity cost.

Question 78 of 100 (2D5-CQ03) Flag for Review

Consider the following scenario regarding the certainty equivalent approach to selecting projects:

z Annual net cash inflows over the life of a five-year investment are $18,000, $14,400, $12,600,
$10,800, and $9,000
z Certainty equivalent factors are estimated to be 95%, 90%, 80%, 75% and 50%
z The total initial investment for the project is $43,000
z The risk-free rate of return is 4%

Is the project acceptable?

Yes, as there is a positive net present value of $5,024

Yes, as there is a positive net present value of $48,024

No, as there is a negative net present value of $5,024
No, as there is a negative net present value of $48,024

Feedback

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The correct answer is: Yes, as there is a positive net present value of $5,024

The certainty equivalent approach to selecting projects attempts to separate the timing of
cash flows from their risk. The expected cash flow is converted into an amount that has a
higher probability of actually materializing. Therefore, the expected cash flows must be
restated into the cash flows most likely occur, then utilize the discount factor, or risk-free rate,
to calculate whether the project will have a positive net present value. In this case:

Therefore, the project is acceptable as there is a positive net present value of $5,024.

Question 79 of 100 (2A2-LS29) Flag for Review

Assume that you examine the following selected ratios for JoJo. Inc.

Which of the following statements best describes an analysis of JoJo's ratios?

JoJo has more debt than the industry average. While improvement is seen when compared to
prior years, JoJo should decrease debt usage further.
JoJo has excessive debt and manages that debt poorly; therefore, managers should attempt to
reduce debt usage.

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JoJo has more debt than the industry; however, the times interest earned ratio indicates that
JoJo is capable of managing its debt.
JoJo has improved in debt management; however, further reduction of debt is needed.

Feedback
The correct answer is: JoJo has more debt than the industry; however, the times interest
earned ratio indicates that JoJo is capable of managing its debt.
Note that JoJo's debt ratio is indicating less reliance on debt but that it has more debt than
the industry. The times interest earned ratio, however, is indicating that JoJo can pay its
interest payment 17 times over (compared to only 15 in industry). The combination of these
two factors indicates that JoJo is managing its debt well, even though the firm does have a
little more debt than industry average.

Question 80 of 100 (2A2-LS20) Flag for Review

A company has $500,000 in current assets and $1,500,000 in fixed assets. Its paid-in capital is $100,000
and retained earnings are $1,400,000. Forty percent of the debt is considered to be current. What is its
long-term debt-to-equity capital ratio?

0.53
5

0.2

0.21

Feedback
The correct answer is: 0.2
The long-term debt-to-equity capital ratio is calculated by dividing long-term debt by
shareholders' equity. The company's total shareholders' equity is $1,500,000 ($100,000 paid-in
capital + $1,400,000 retained earnings). Its debt is $500,000 (assets - equity = $2 million -
$1,500,000). If current debt is 40% of debt, then long-term debt is 60% of $500,000, or $300,000.
Therefore, its long-term debt-to-equity capital ratio is 0.2 ($300,000/$1,500,000).

Question 81 of 100 (2C3-LS08) Flag for Review

In the product life cycle classifications (PLC) of industry evolution, shakeout occurs

between growth and maturity.

after maturity.
between embryonic and growth.
after decline.

Feedback
The correct answer is: between growth and maturity.
The progression of PLC classifications is: embryonic, growth, shakeout, maturity, and
decline. Shakeout occurs when the level of customer sophistication increases due to
exposure and first-hand use of a new product. Suppliers and customers concentrate around

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market leaders, forcing marginal players to drop out of the market.

Question 82 of 100 (2B7-CQ01) Flag for Review

Company ABC is considering merging with Company XYZ. After analyzing both companies, it is
determined that the incremental after-tax free cash flow resulting from the merger is estimated to be
$3,500,000 and is expected to last for 20 years. Assuming a required rate of return of 12% for the
acquiring company, using the discounted cash flow method, what is the maximum amount Company
ABC should offer to purchase Company XYZ for?

$26,141,500

$26,236,000
$26,757,500
$33,761,000

Feedback

The correct answer is: $26,141,500.

Using the discounted cash flow method of valuation, the present value of the merger benefits
would be the $3,500,000 after-tax free cash flow multiplied by the Present Value of Annuity
Factor of 7.469, which equals $26,141,500. The price offered by the buyer should be less than
or equal to $26,141,500.

Question 83 of 100 (2D4-LS13) Flag for Review

In evaluating independent capital investment projects, the best reason for a firm to accept such projects
is a(n)
*Source: Retired ICMA CMA Exam Questions

initial investment greater than the present value of cash inflows.

accounting rate of return greater than zero.

profitability index greater that one.

internal rate of return greater than the accounting rate of return.

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Question 84 of 100 (2C1-AT21) Flag for Review

The breakeven point in units increases when unit costs

decrease and sales price remain unchanged.

decrease and sales price increases.
remain unchanged and sales price increases.

increase and sales price remain unchanged.

Feedback
The correct answer is: increase and sales price remain unchanged.

Unit costs can increase by either an increase in unit variable costs or an increase in the level
of fixed costs.

Increased unit variable costs decrease the unit contribution margin (price less unit variable
costs) which raises the breakeven in units (BE = (Fixed Costs)/(Unit Contribution Margin)).

An increase in the level of fixed costs moves the intersection of the revenue line (Price x
Volume) and the total cost line (Fixed Costs + (Unit Variable Costs x Volume) to a higher
volume level.
The intersection of the revenue and total cost lines is the breakeven point. The graph shows
the change in fixed cost base.

Question 85 of 100 (2D4-AT09) Flag for Review

When ranking two mutually exclusive investments with different initial amounts, management should

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give first priority to the project

that has the greater profitability index.

whose cash flows vary the least.

that generates cash flows for the longer period of time.
whose net after-tax flows equal the initial investment.

Feedback
The correct answer is: that has the greater profitability index.

The profitability index (PI) is calculated by taking the project’s present value (PV) and dividing
it by its initial investment (I), or taking the project’s net present value (NPV) and dividing it by
I. If a project’s PI > 1 using PV or if a project’s PI > 0 using NPV, then the project is acceptable.

The PI calculation gives the relative profitability of a project without regard to project size. The
higher the PI, the more profitable the project. The PI, therefore, is used to rank projects. One
would select the project with the higher PI.

Question 86 of 100 (2C1-LS18) Flag for Review

The ratio of fixed costs to the unit contribution margin determines

operating income.

break-even point.

profit margin.
sales revenues.

Feedback
The correct answer is: break-even point.
The contribution margin method is based on the following equation:

Where:

z USP = unit selling price

z Q = quantity sold
z UVC = unit variable costs
z FC = fixed costs
z OI = operating income
z UCM = unit contribution margin (USP - UVC)

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At break-even, the operating income is zero.

Question 87 of 100 (2C1-LS06) Flag for Review

Which of the following statements accurately describes the cost behavior of fixed costs in response to
changes in business activity levels?

Total fixed costs remain constant within the relevant range of activity.

Fixed costs on a total and per unit basis both change with increases or decreases in activity.
Total fixed costs change with increases or decreases in activity.
Fixed costs on a total and per unit basis both remain constant within the relevant range of
activity.

Feedback
The correct answer is: Total fixed costs remain constant within the relevant range of activity.
Cost behavior patterns refer to how fixed and variable costs react to changes in business
activity levels. For fixed costs, the total costs remain constant within the relevant range of
activity while the unit cost increases or decreases with changes in activity.

Question 88 of 100 (2B7-CQ02) Flag for Review

Company ABC is considering acquiring Company XYZ in a stock-for-stock exchange. Financial data for
the two companies are as follows:

ABC Company XYZ Company Combined

Sales (millions) $1,050 $ 113 $1,163
Net income (millions) $53 $14.5 $67.5
Common shares outstanding (millions) 10.5 6.0 ?
Earnings per share (EPS) $9 $4 ?
Common stock price per share $88 $30 $88

Using the comparative P/E ratio method, what would be the maximum combined common shares
outstanding required to maintain an Earnings Per Share of $8.75 in the new combined organization?

7,714,286

6,875,286
16,500,426
5,253,875

Feedback

The correct answer is: 7,714,286

The combined EPS target is determined to be $8.75 per share. To achieve the $8.75 targeted

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earnings per share, the combined number of common shares outstanding would have to be
no more than 7,714,286 ($67.5 million combined net income divided by the required $8.75 EPS
= 7,714,286 shares).

Question 89 of 100 (2C3-LS12) Flag for Review

The graph below shows

a perfectly inelastic demand.

a perfectly elastic demand.

a relatively elastic demand.

a relatively inelastic demand.

Feedback
The correct answer is: a perfectly elastic demand.
A perfectly elastic demand means that a small decrease in price will result in a substantially
increased demand or a small increase in price will result in demand falling to zero. A line of
perfect elasticity is horizontal. Perfectly elastic demand happens only in a purely competitive
market.

Question 90 of 100 (2B3-LS28) Flag for Review

Which of the following statements describes a put option that is out-of-the-money?

The owner can exercise the option at any time before maturity.
The strike price exceeds the price of the underlying asset.

The price of the underlying asset exceeds the strike price.

The owner of the contract decides not to sell the underlying asset.

Feedback
The correct answer is: The price of the underlying asset exceeds the strike price.
Different payoffs are possible with options. A put option is referred to as out-of-the-money if

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the price of the underlying asset exceeds the strike price.

Question 91 of 100 (2C3-CQ02) Flag for Review

An economist determined the following market data for a commodity.

Based on this information, which one of the following statements is correct?

In the short-term, there would be excess supply at a price of $40.

In the long-run, if producers’ costs per unit decline, then a reasonable market clearing price
could be $65.
In the short-term, there would be excess demand at a price of $70.
In the long-run, if producers’ costs per unit increase, then a reasonable market clearing price
could be $70.

Feedback
The correct answer is: In the long-run, if producers’ costs per unit increase, then a reasonable
market clearing price could be $70.

As producers’ costs increase, the supply curve will shift to the left. Given a set demand curve,
the market clearing price that occurs when supply equals demand will rise above the original
$50.

Question 92 of 100 (2B1-LS20) Flag for Review

If Dexter Industries has a beta value of 1.0, then its
*Source: Retired ICMA CMA Exam Questions

volatility is low.
price is relatively stable.
return should equal the risk-free rate.

expected return should approximate the overall market.

Feedback
That’s incorrect. Beta (B) is a measure of the movement of the price of a particular stock

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compared with the movement of the market as a whole during the same period. Therefore, a
beta of 1 would imply the expected return should approximate the overall market.

Question 93 of 100 (2D6-AT03) Flag for Review

The Mammoth Mutual Fund uses the Constant Dividend Growth Valuation model to help it decide which
stocks to buy. Company A and Company B both pay dividends of $10 a share. Company A’s dividend is
expected to grow by 5% while Company B’s dividend is expected to grow by 8%. Which of the following
conditions is necessary for Mammoth to buy Company A rather than Company B?

Company A’s beta is lower, so its required rate of return is 4% lower than Company B’s.

Company A’s stock price is currently higher than the price suggested by the model.
Company B’s stock is always a better buy, because of it higher growth rate.
Company B’s beta is lower, so its required rate of return is 3% lower than Company A’s.

Feedback
The correct answer is: Company A’s beta is lower, so its required rate of return is 4% lower
than Company B’s.

Using the CAPM (capital asset pricing model), the required rate of return on a common stock
is the risk-free rate of return plus the difference between the market rate of return and the risk-
free rate of return times the stock’s beta. Since Company A has a lower beta than Company B,
its required rate of return would be lower than B’s.

Using the Constant Dividend Growth Model, one could deduce that the rate of return on
Company B’s stock is higher than Company A’s return, because its dividend growth rate is
higher.

Question 94 of 100 (2C1-LS22) Flag for Review

An analyst gathers the following data about a financial calculator produced and sold by a company

z Unit selling price = $60

z Quantity sold = 100,000
z Unit variable costs = $35
z Fixed costs = $200,000

What is the contribution margin per unit and total contribution margin?

Contribution margin per unit is $23 and total contribution margin is $2,300,000.

Contribution margin per unit is $25 and total contribution margin is $2,500,000.

Contribution margin per unit is $23 and total contribution margin is $2,500,000.
Contribution margin per unit is $25 and total contribution margin is $2,300,000.

Feedback
The correct answer is: Contribution margin per unit is $25 and total contribution margin is

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$2,500,000.
The contribution margin per unit is the unit selling price less the unit variable costs. The total
contribution margin is the contribution margin per unit times the quantity of units sold. Thus,
the contribution margin per unit is $60 - $35 = $25; and the total contribution margin is $25 x
100,000 = $2,500,000.

Question 95 of 100 (2E1-CQ02) Flag for Review

Julie is the Senior Management Accountant for Hazelton Manufacturing; a multi-national

telecommunications company. In an effort to expand operations overseas, Hazelton encourages senior
management to offer payment to foreign officials to win business. These payments are classified as
normal commission expenses by the accounting department. Julie recently questioned whether these
payments should be classified as commission expense since they appear to be bribes to foreign officials.
When Julie discussed the situation with the Chief Financial Officer, he stated these payments were not
illegal and were expected within these foreign countries.

When all employees are hired, they are required to sign the company code of conduct. In addition, the
company provides annual ethics training to all employees and each employee is evaluated based on
compliance with operational goals and ethical expectations. The company provides an anonymous
whistleblower hotline for employees to report concerns to management. Julie believes that the company
she works for has an ethical organizational culture.

Identify a requirement of Section 406 of the Sarbanes-Oxley Act relevant in the Hazelton Manufacturing
case.

The Act forbids an American company to pay bribes to foreign government officials.

The Act requires senior financial officers to follow a code of ethics.

The Act requires a company to provide a whistleblowing hotline to report ethics concerns.
The Act requires employee training for maintaining an ethical organizational culture.

Feedback

The correct answer is: The Act requires senior financial officers to follow a code of ethics.

The Sarbanes-Oxley Act, Section 406 requires companies to adopt (or explain why they have
not adopted) a code of ethics for senior financial officers.

Question 96 of 100 (2C3-LS14) Flag for Review

The graph below shows

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a perfectly inelastic demand.

a perfectly elastic demand.
a relatively elastic demand.

a relatively inelastic demand.

Feedback
The correct answer is: a relatively inelastic demand.
A relatively inelastic demand means that a percentage change in price will result in a smaller
percentage change in quantity demanded. It is shown by a steep demand curve, which is not
quite perfectly vertical.

Question 97 of 100 (2B5-LS19) Flag for Review

What is the effective annual interest rate on a $2 million loan with an interest rate of 7%, a commitment
fee of ½ %, and a compensating balance of 8%?

8.15%

8.00%
8.50%
7.00%

Feedback
The correct answer is: 8.15%
The formula for effective annual rate of interest is:

Where:

z EI = effective rate of interest

z PR = principal interest charge (%)
z CB = compensating balance (%)
z CF = commitment fee (%)

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Question 98 of 100 (2B5-LS49) Flag for Review

Which one of the following is not explicitly considered in the standard calculation of Economic Order
Quantity (EOQ)?
*Source: Retired ICMA CMA Exam Questions

Carrying costs.

Quantity discounts.

Fixed ordering costs.

Level of sales.

Feedback
That’s correct! Quantity discounts. Level of sales fixed ordering costs, and carrying costs are
all factors in the EOQ formula. The formula for EOQ = Square root of 2FD/ C, where F =
marginal cost per order, D = total inventory units demanded, C= carrying (carrying or holding)
cost per inventory unit. Quantity discounts are not included.

Question 99 of 100 (2A2-CQ35) Flag for Review

Mayson Company reported net income of $350,000 for last year. The company had 100,000 shares of
$10 par value common stock outstanding and 5,000 shares of common stock in treasury during the year.
Mayson declared and paid $1 per share dividends on common stock. The market price per common
share at the end of last year was $30. The company’s dividend yield for the year was

28.57%.

3.33%.

11.11%
30.03%.

Feedback
The correct answer is: 3.33%.

The dividend yield on common stock is calculated as follows:

Dividend yield on common stock = (annual dividend per common share) / (market price of
common stock)

Therefore, the dividend yield = $1 / $30 = 0.0333, or 3.33%

Question 100 of 100 (2E1-AT02) Flag for Review

Which of the following actions will most likely result in a successful foreign business venture in Islamic

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countries?

Have property in an Islamic nation.

Adhere to Islamic beliefs.

Behave in a manner that is consistent with Islamic ethics.

Employ Islamic people.

Feedback
The correct answer is: Behave in a manner that is consistent with Islamic ethics.

Successful operation by a company operating in a foreign country is a function of how well

the company adapts to the host country’s culture. Successful adaptation includes behaving in
a manner that is consistent with host country’s ethics.

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