Part 2 : Mock Examination Set 1

Question 1 - CIA 1193 IV.48 - Ratios: Liquidity, Leverage, Coverage and Activity

A company is considering the early retirement of its 10%, 10-year bonds payable. Before retiring the bonds, the
company's capital structure was
Current liabilities $125,000
Long-term liabilities: Notes payable (due in 5 years) 200,000
Bonds payable 300,000
Premium on bonds payable 25,000
Owner's equity: Common stock ($5 par value) 150,000
Paid-in capital in excess of par 50,000
Retained earnings 450,000

If the bonds can be retired at 103.5%, the

A. Return on owner's equity will decrease.

B. Asset turnover ratio will decrease.
C. Financial leverage will decrease.
D. Debt-equity ratio will increase.

Question 2 - ICMA 10.P2.086 - Ratios: Profitability, Market and Profitability Analysis

The dividend yield ratio is calculated by which one of the following methods?

A. Dividends per share divided by market price per share.

B. Earnings per share divided by dividends per share.
C. Dividends per share divided by earnings per share
D. Market price per share divided by dividends per share.

Question 3 - ICMA 13.P2.007 - Ratios: Profitability, Market and Profitability Analysis

Mayson Ltd. reported net income of £3,500,000 for last year. The company had 100,000 shares of common stock
outstanding with a par value of £1 and 5,000 shares of common stock in treasury during the year. Mayson declared
and paid dividends of £1 per share on its common stock. The market price per common share at the end of last year
was £30, while the book value per common share was £10. The company’s dividend yield for the year was

A. 2.71%
B. 3.33%
C. 5.00%
D. 10.00%

Question 4 - ICMA 10.P2.057 - Ratios: Liquidity, Leverage, Coverage and Activity

Makay 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.
Cash $ 10,000
Accounts receivable (end of year) 20,000
Accounts receivable (beginning of year) 24,000
Inventory (end of year) 30,000

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 Part 2 : Mock Examination Set 1

Inventory (beginning of year) 26,000

Notes payable (due in 90 days) 25,000
Bonds payable (due in 10 years) 35,000
Net credit sales for year 220,000
Cost of goods sold 140,000

Makay's average inventory turnover for the year was

A. 5.4 times.
B. 4.7 times.
C. 5.0 times.
D. 7.9 times.

Question 5 - ICMA 10.P2.061 - Ratios: Liquidity, Leverage, Coverage and Activity

The following financial information is given for Anjuli Corporation (in millions of dollars).
Prior Year Current Year
Sales $10 $11
Cost of goods sold 6 7
Current Assets:
Cash 2 3
Accounts receivable 3 4
Inventory 4 5

Between the prior year and the current year, did the days sales in inventory and days sales in receivables for Anjuli
increase or decrease? Assume a 365-day year.

A. Days sales in inventory decreased; days sales in receivables increased.

B. Days sales in inventory decreased; days sales in receivables decreased.
C. Days sales in inventory increased; days sales in receivables increased.
D. Days sales in inventory increased; days sales in receivables decreased.

Question 6 - CMA 695 2.3 - Ratios: Liquidity, Leverage, Coverage and Activity

CPZ Enterprises had the following account information.

Accounts receivable $200,000
Accounts payable 80,000
Bonds payable, due in ten years 10,000
Cash 100,000
Interest payable, due in three months 10,000
Inventory 400,000
Land 250,000
Notes payable, due in six months 50,000
Prepaid expenses 40,000

The company has an operating cycle of five months.

What will happen to the current and quick ratios if CPZ Enterprises uses cash to pay 50 percent of the accounts
payable?

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A. The current ratio will decrease and the quick ratio will increase.
B. Both ratios will decrease.
C. The current ratio will increase and the quick ratio will decrease.
D. Both ratios will increase.

Question 7 - CMA 688 4.6 - Ratios: Profitability, Market and Profitability Analysis

The data presented below shows actual figures for selected accounts of McKeon Company for the fiscal year ended
May 31, 20X0, and selected budget figures for the 20X1 fiscal year. McKeon's controller is in the process of reviewing
the 20X1 budget and calculating some key ratios based on the budget. McKeon Company monitors yield or return
ratios using the average financial position of the company. (Round all calculations to three decimal places if necessary.)
May 31, May 31,
20X1 20X0
Current assets $210,000 $180,000
Noncurrent assets 275,000 255,000
Current liabilities 78,000 85,000
Long-term debt 75,000 30,000
Common stock ($30 par value) 300,000 300,000
Retained earnings 32,000 20,000

20X1 Operations
Sales* $350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in 20X1 60,000
Administrative expense 67,000
*All sales are credit sales.

Composition of Current Assets

May 31, May 31,
20X1 20X0
Cash $ 20,000 $ 10,000
Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Other 20,000 20,000
$210,000 $180,000

The 20X1 return on assets for McKeon Company is

A. 0.261
B. 0.166
C. 0.148
D. 0.156

Question 8 - CIA 593 P4 Q41 - Special Issues

The financial statements of a foreign subsidiary are to be measured by use of the subsidiary's functional currency. The
functional currency of an entity is defined as the currency of the

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 Part 2 : Mock Examination Set 1

A. primary economic environment in which the entity operates.

B. United States.
C. geographic location in which the entity's headquarters are located.
D. parent company.

Question 9 - CIA 1194 IV.16 - Ratios: Profitability, Market and Profitability Analysis

A company has a 50% gross margin, general and administrative expenses of $50, interest expense of $20, and net
income of $10 for the year just ended. If the corporate tax rate is 50%, the level of sales revenue for the year just
ended was

A. $150
B. $180
C. $135
D. $90

Question 10 - CIA 1188 P4 Q45 - Special Issues

A change from one generally accepted accounting principle to another generally accepted accounting principle should
be accounted for in comparative reports by

A. a cumulative adjustment to carrying amounts of assets and liabilities as of the beginning of the first period
presented, an offsetting adjustment to the opening balance of retained earnings of the same period, and by adjusting
prior periods' statements presented for the effects of the change in each period.
B. a line item below extraordinary items on the current income statement.
C. pro forma amounts for key figures shown supplementary on the income statement for all periods presented.
D. only a footnote disclosure in the current period.

Question 11 - ICMA 10.P2.071 - Ratios: Profitability, Market and Profitability Analysis

The following information concerning Arnold Company's common stock was included in the company's financial reports
for the last two years.
Year 2 Year 1
Market price per share on December 31 $60 $50
Par value per share 10 10
Earnings per share 3 3
Dividends per share 1 1
Book value per share on December 31 36 34

Based on the price-earnings information, investors would most likely consider Arnold's common stock to

A. show a positive trend in growth opportunities in Year 2 compared to Year 1.

B. show a decline in growth opportunities in Year 2 compared to Year 1.
C. be overvalued at the end of Year 2.
D. indicate inferior investment decisions by management in Year 2.

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 Part 2 : Mock Examination Set 1

Question 12 - ICMA 13.P2.005 - Ratios: Profitability, Market and Profitability Analysis

Transnational 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 of the following effects?
Operating Total Asset Return on
Profit Margin Turnover Assets
I.Increase No ChangeIncrease
II.No Change Decrease Decrease
III.No Change Increase Decrease
IV.Decrease Decrease Decrease

A. III.
B. I.
C. II.
D. IV.

Question 13 - CMA 1289 P4 Q13 - Ratios: Liquidity, Leverage, Coverage and Activity

Excerpts from the statement of financial position for Landau Corporation as of September 30 of the current year are
presented as follows.
Cash $ 950,000
Accounts receivable (net) 1,675,000
Inventories 2,806,000
Total current assets $5,431,000
Accounts payable $1,004,000
Accrued liabilities 785,000
Total current liabilities $1,789,000

The board of directors of Landau Corporation met on October 4 of the current year and declared the regular quarterly
cash dividend amounting to $750,000 ($0.60 per share). The dividend is payable on October 25 of the current year to
all shareholders of record as of October 12 of the current year.

Assume that the only transactions to affect Landau Corporation during October of the current year are the dividend
transactions and that the closing entries have been made.

Landau Corporation's working capital was

A. Decreased by the dividend declaration and unchanged by the dividend payment.

B. Unchanged by either the dividend declaration or the dividend payment.
C. Decreased by the dividend declaration and increased by the dividend payment.
D. Unchanged by the dividend declaration and decreased by the dividend payment.

Question 14 - CIA 0592 P4 Q25 - Ratios: Profitability, Market and Profitability Analysis

A company issues financial statements in which conversion of warrants and options into common stock is assumed.
This scenario is most closely associated with which of the following?

A. Application of the if-converted method.

B. Computation of diluted earnings per share.
C. Extraordinary items and prospective changes.
D. Retrospective changes and common stock equivalents.

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 Part 2 : Mock Examination Set 1

Question 15 - CMA 695 2.2 - Ratios: Liquidity, Leverage, Coverage and Activity

CPZ Enterprises had the following account information.

Accounts receivable $200,000
Accounts payable 80,000
Bonds payable, due in ten years 10,000
Cash 100,000
Interest payable, due in three months 10,000
Inventory 400,000
Land 250,000
Notes payable, due in six months 50,000
Prepaid expenses 40,000

The company has an operating cycle of five months.

What is the company's acid test (quick) ratio?

A. 1.68
B. 0.68
C. 2.31
D. 2.14

Question 16 - CMA 1292 1.12 - Special Issues

The definition of economic cost is

A. all the dollar costs employers pay for all inputs purchased.
B. the opportunity cost of all inputs minus the dollar cost of those inputs.
C. the difference between all implicit and explicit costs of the business firm.
D. the sum of all explicit and implicit costs of the business firm.

Question 17 - ICMA 10.P2.054 - Ratios: Liquidity, Leverage, Coverage and Activity

Zubin Corporation experiences a decrease in sales and the cost of good sold, an increase in accounts receivable, and
no change in inventory. If all else is held constant, what is the total effect of these changes on the receivables turnover
and inventory ratios?

A. Inventory turnover decreased; receivables turnover increased.

B. Inventory turnover increased; receivables turnover decreased.
C. Inventory turnover increased; receivables turnover increased.
D. Inventory turnover decreased; receivables turnover decreased.

Question 18 - CMA 691 1.11 - Working Capital Management

The marketable securities with the least amount of default risk are:

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A. Federal government agency securities.

B. Commercial paper.
C. U.S. treasury securities.
D. Repurchase agreements.

Question 19 - CMA 1292 1.20 - Working Capital Management

Best Computers believes that its collection costs could be reduced through modification of collection procedures. This
action is expected to result in a lengthening of the average collection period from 28 days to 34 days; however, there
will be no change in uncollectible accounts. The company's budgeted credit sales for the coming year are $27,000,000,
and short-term interest rates are expected to average 8%. To make the changes in collection procedures cost
beneficial, the minimum savings in collection costs (using a 360-day year) for the coming year would have to be

A. $30,000.
B. $36,000.
C. $360,000.
D. $180,000.

Question 20 - CIA 1190 IV.51 - Risk and Return

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

A. Default risk.
B. Purchasing-power risk.
C. Liquidity risk.
D. Interest-rate risk.

Question 21 - ICMA 10.P2.193 - International Finance

If the U.S. dollar appreciated against the British pound, other things being equal, we would expect that

A. trade between the U.S. and Britain would decrease.

B. U.S. demand for British products would decrease.
C. U.S. demand for British products would increase.
D. the British demand for U.S. products would increase.

Question 22 - CIA 1196 IV.64 - International Finance

A company has a foreign-currency-denominated trade payable, due in 60 days. In order to eliminate the foreign
currency exchange-rate risk associated with the payable, the company could

A. Sell foreign currency forward today.

B. Buy foreign currency forward today.
C. Borrow foreign currency today, convert it to domestic currency on the spot market, and invest the funds in a
domestic bank deposit until the invoice payment date.
D. Wait 60 days and pay the invoice by purchasing foreign currency in the spot market at that time.

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Question 23 - CMA 694 1.20 - Working Capital Management

Using a 360-day year, what is the opportunity cost to a buyer of not accepting terms of 3/10, net 45?

A. 55.67%
B. 22.27%
C. 101.73%
D. 31.81%

Question 24 - CMA 694 1.29 - Working Capital Management

A firm that often factors its accounts receivable has an agreement with its finance company that requires the firm to
maintain a 6% reserve and charges 1% commission on the amount of receivables. The net proceeds would be further
reduced by an annual interest charge of 10% on the monies advanced. Assuming a 360-day year, what amount of
cash (rounded to the nearest dollar) will the firm receive from the finance company at the time a $100,000 account that
is due in 90 days is turned over to the finance company assuming the firm withdraws the full amount of cash available
immediately?

A. $90,000
B. $83,700
C. $93,000
D. $90,675

Question 25 - HOCK CFMQ6 - L-T Financial Management-Financial Instruments

A share has a market price of $50.00. It is expected to be able to pay a steady dividend of $2.50 per share each year
starting in one year's time. There will not be any growth in the dividend. If the investors' required rate of return changes
to 8%, the effect would be

A. the share price will go down to $31.25.

B. the dividend would increase to $4.00.
C. there will be no change in either the dividend or the share price.
D. the share price will go up to $62.50.

Question 26 - CMA 697 1.15 - Working Capital Management

The treasury analyst for Garth Manufacturing has estimated the cash flows for the first half of next year (ignoring any
short-term borrowings) as follows.
Cash (millions)
Inflows Outflows
January $2 $1
February 2 4
March 2 5
April 2 3
May 4 2
June 5 3

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 Part 2 : Mock Examination Set 1

Garth has a line of credit of up to $4 million on which it pays interest monthly at a rate of 1% of the amount utilized.
Garth is expected to have a cash balance of $2 million on January 1 and no amount utilized on its line of credit.
Assuming all cash flows occur at the end of the month, approximately how much will Garth pay in interest during the
first half of the year?

A. $132,000
B. Zero.
C. $61,000
D. $80,000

Question 27 - ICMA 13.P2.068 - L-T Financial Management-Financial Instruments

An analyst is in the process of determining what the current share price should be for PaperToy Inc. In early January,
the analyst collected the following information on PaperToy Inc.
Dividend at end of current year = $1.00
Yearly dividend increase = 5%
Expected investor return = 10%

Based on the data provided, the current share price for PaperToy Inc. should be

A. $6.67.
B. $20.00.
C. $7.00.
D. $21.00.

Question 28 - ICMA 10.P2.121 - L-T Financial Management-Cost of Capital

Which one of the following situations would prompt a firm to issue debt, as opposed to equity, the next time it raises
external capital?

A. Low fixed-charge coverage.

B. Significant percentage of assets under capital lease.
C. High effective tax rate.
D. High breakeven point.

Question 29 - ICMA 10.P2.117 - L-T Financial Management-Financial Instruments

Protective clauses set forth in an indenture are known as

A. requirements.
B. addenda.
C. covenants.
D. provisions.

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 Part 2 : Mock Examination Set 1

Question 30 - CMA 690 1.12 - L-T Financial Management-Cost of Capital

Acme Corporation is selling $25 million of cumulative, non-participating preferred stock. The issue will have a par value
of $65 per share with a dividend rate of 6%. The issue will be sold to investors for $68 per share, and issuance costs
will be $4 per share. The cost of preferred stock to Acme is:

A. 5.42%.
B. 6.09%.
C. 5.74%.
D. 6.00%.

Question 31 - CMA 1288 1.2 H1 - L-T Financial Management-Cost of Capital

When calculating a firm's cost of capital, all of the following are true except that

A. The calculation of the cost of capital should focus on the historical costs of alternative forms of financing rather than
market or current costs.
B. The cost of capital of a firm is the weighted average cost of its various financing components.
C. The time value of money should be incorporated into the calculations.
D. All costs should be expressed as after-tax costs.

Question 32 - CMA 695 1.8 - L-T Financial Management-Cost of Capital

Below is a Statement of Financial Position for Martin Corporation:

Martin Corporation
Statement of Financial Position
(Dollars in millions)

Assets:
Current Assets $ 75
Plant and Equipment 250
Total Assets $325
Liabilities and shareholders' equity:
Liabilities:
Current Liabilities $ 46
Long-term debt (12%) 64
Common equity:
Common stock, $1 par $ 10
Additional paid in capital 100
Retained earnings 105
Total liabilities and shareholders' equity $325

Additional Data:
The long term debt was originally issued at par ($1,000 per bond) and is currently trading at $1,250 per bond.
Martin Corporation can now issue debt at 150 basis points over U.S. treasury bonds.
The current risk-free rate (U.S. Treasury bonds) is 7%.
The expected market return is currently 15%.
The beta for Martin is 1.25.
Martin's effective corporate income tax rate is 40%.

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 Part 2 : Mock Examination Set 1

Using the Capital Asset Pricing Model (CAPM), Martin Corporation's current cost of common equity is:

A. 10.00%
B. 8.75%
C. 17.00%
D. 15.00%

Question 33 - CMA 1294 1.21 - Working Capital Management

An example of a carrying cost is

A. Disruption of production schedules.

B. Spoilage.
C. Quantity discounts lost.
D. Handling costs.

Question 34 - CMA 692 1.25 - Working Capital Management

Net working capital is the difference between

A. Total assets and total liabilities.

B. Shareholders' investment and cash.
C. Current assets and current liabilities.
D. Fixed assets and fixed liabilities.

Question 35 - CMA 694 1.21 - Working Capital Management

A company obtained a short-term bank loan of $500,000 at an annual interest rate of 8%. As a condition of the loan,
the company is required to maintain a compensating balance of $100,000 in its checking account. The checking
account earns interest at an annual rate of 3%. Ordinarily, the company maintains a balance of $50,000 in its account
for transaction purposes. What is the effective interest rate of the loan?

A. 8.22%
B. 7.77%
C. 9.25%
D. 8.56%

Question 36 - ICMA 10.P2.180 - Working Capital Management

Gates Inc. has been offered a one-year loan by its commercial bank. The instrument is a discounted note with a stated
interest rate of 9%. If Gates needs $300,000 for use in the business, what should the face value of the note be?

A. $275,229.
B. $329,670.
C. $327,154.
D. $327,000.

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 Part 2 : Mock Examination Set 1

Question 37 - CMA 696 1.17 - Working Capital Management

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

A. Variability of sales decreases.

B. Sales level falls to a permanently lower level.
C. Cost of carrying inventory decreases.
D. Cost of running out of stock decreases.

Question 38 - CMA 696 1.14 - Working Capital Management

Which one of the following responses is not an advantage to a corporation that uses the commercial paper market for
short-term financing?

A. This market provides a broad distribution for borrowing.

B. This market provides more funds at lower rates than other methods provide.
C. There are no restrictions as to the type of corporation that can enter into this market.
D. The borrower avoids the expense of maintaining a compensating balance with a commercial bank.

Question 39 - ICMA 10.P2.190 - Raising Capital

Underhall Inc.’s common stock is currently selling for $108 per share. Underhall is planning a new stock issue in the
near future and would like to stimulate interest in the company. The Board, however, does not want to distribute capital
at this time. Therefore, Underhall is considering whether to offer a 2-for-1 common stock split or a 100% stock
dividend on its common stock. The best reason for opting for the stock split is that

A. the par value per share will remain unchanged.

B. it will not decrease shareholders’ equity.
C. the impact on earnings per share will not be as great.
D. it will not impair the company’s ability to pay dividends in the future.

Question 40 - CMA 692 1.2 - L-T Financial Management-Cost of Capital

Williams, Inc. is interested in measuring its overall cost of capital and has gathered the following data. Under the terms
described as follows, the company can sell unlimited amounts of all instruments.
Williams can raise cash by selling $1,000, 8%, 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 flotation costs of $30 per bond.
The after-tax cost of funds is estimated to be 4.8%.
Williams can sell $8 preferred stock at par value, $100 per share. The cost of issuing and selling the preferred
stock is expected to be $5 per share.
Williams' common stock is currently selling for $100 per share. The firm expects to pay cash 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 flotation costs are expected to amount to $5 per share.
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.

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 Part 2 : Mock Examination Set 1

The capital structure that Williams would like to use for any future financing is:
Long-term debt: 30%
Preferred stock: 20%
Common stock: 50%

The cost of funds from retained earnings for Williams, Inc. is

A. 7.6%.
B. 7.0%.
C. 7.4%.
D. 8.1%.

Question 41 - CMA 1295 1.3 - Working Capital Management

Average daily cash outflows are $3 million for Evans Inc. A new cash management system can add 2 days to the
disbursement schedule. Assuming Evans earns 10% on excess funds, how much should the firm be willing to pay per
year for this cash management system?

A. $1,500,000
B. $6,000,000
C. $600,000
D. $3,000,000

Question 42 - CMA 696 1.9 - L-T Financial Management-Derivatives

The current market price of ActionPharmaceutical's common stock is $34. A 6-month call option has been written on
the stock. The option has an exercise price of $40 and a market value of $4. A financial analyst estimates that, at the
end of 6 months, the expected value of the stock is $42.

What is the theoretical value of exercising the option on the date it is written?

A. $0
B. $4.00
C. $6.00
D. $8.00

Question 43 - CMA 1291 1.8 - L-T Financial Management-Cost of Capital

The firm's marginal cost of capital

A. is a weighted average of the investors' required returns on debt and equity.

B. should be the same as the firm's rate of return on equity.
C. is inversely related to the firm's required rate of return used in capital budgeting.
D. is unaffected by the firm's capital structure.

(c) HOCK international, page 13

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Question 44 - CMA 1293 1.19 - Working Capital Management

Starrs Company has current assets of $300,000 and current liabilities of $200,000. Starrs could increase its working
capital by the

A. Collection of $50,000 of accounts receivable.

B. Prepayment of $50,000 of next year's rent.
C. Refinancing of $50,000 of short-term debt with long-term debt.
D. Purchase of $50,000 of temporary investments for cash.

Question 45 - CMA 1288 1.18 - International Finance

Consider a world consisting of only two countries, Canada and the United Kingdom. Inflation in Canada in 1 year was
5%, and in the United Kingdom it was 10%. Which one of the following statements about the Canadian exchange rate
(rounded) with the U.K. pound sterling during that year will be true?

A. The Canadian dollar will depreciate by 5% against the pound sterling.

B. The Canadian dollar will depreciate by 15% against the pound sterling.
C. The Canadian dollar will appreciate by 5% against the pound sterling.
D. Inflation has no affect on the exchange rates.

Question 46 - CMA 695 1.24 - International Finance

Assuming exchange rates are allowed to fluctuate freely, which one of the following factors would likely cause a
nation's currency to appreciate on the foreign exchange market?

A. A high rate of inflation relative to other countries.

B. Domestic real interest rates that are lower than real interest rates abroad.
C. A relatively rapid rate of growth in income that stimulates imports.
D. A slower rate of growth in income than in other countries, which causes imports to lag behind exports.

Question 47 - HOCK RRI 91 - Risk and Return

Systematic risk is

A. risk that can be diversified away by holding securities in a diversified portfolio.

B. the possibility that an investment cannot be sold (converted into cash) for its market value.
C. risk that cannot be diversified away by holding securities in a diversified portfolio.
D. risk that can be quantified.

Question 48 - CIA 1192 IV.52 - Working Capital Management

The following are the January 1 and June 30 balance sheets of a company:
Assets (in millions)
January 1 June 30
Cash $ 3 $ 4

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Accounts receivable 5 4
Inventories 8 10
Fixed assets 10 11
Total assets $26 $29
Accounts payable 2 3
Notes payable 4 3
Accrued wages 1 2
Long-term debt 9 11
Stockholder's equity 10 10
Total liabilities and stockholders' equity $26 $29

From January 1 to June 30, the net working capital:

A. Increased by $1 million.
B. Stayed the same.
C. Decreased by $1 million.
D. Increased by $2 million.

Question 49 - CMA 689 1.6 - L-T Financial Management-Financial Instruments

The equity section of Allen Corporation's statement of financial position is presented as follows.
Preferred stock ($100 par value) $ 8,000,000
Common stock ($5 par value) 5,000,000
Paid-in capital in excess of par 12,000,000
Retained earnings 6,000,000
Net worth $31,000,000

The common shareholders of Allen Corporation have preemptive rights. If Allen Corporation issues 200,000 additional
shares of common stock at $6 per share, a current holder of 10,000 shares of Allen Corporation's common stock must
be given the option to buy

A. 2,000 additional shares.

B. 2,400 additional shares.
C. 1,667 additional shares.
D. 500 additional shares.

Question 50 - CMA 1296 1.26 - Corporate Restructuring and Bankruptcy

An example of a "poison pill," a form of takeover defense, is

A. The act of substantially increasing a company's debt.

B. The selling off of profitable units in an attempt to dissuade the hostile corporate raider.
C. An agreement to buy back from the hostile raider a large block of stock at a premium.
D. The issuance of rights that allow shareholders to purchase stock in the proposed merged company at a substantial
discount.

Question 51 - CMA 1291 1.10 - Raising Capital

(c) HOCK international, page 15

 Part 2 : Mock Examination Set 1

A firm's dividend policy may treat dividends either as the residual part of a financing decision or as an active policy
strategy.

Treating dividends as the residual part of a financing decision assumes that

A. Dividends are important to shareholders, any earnings left over after paying dividends should be invested in
high-return assets.
B. Dividend payments should be consistent.
C. Dividends are relevant to a financing decision.
D. Earnings should be retained and reinvested as long as profitable projects are available.

Question 52 - CMA 1291 1.7 - L-T Financial Management-Financial Instruments

A call provision

A. lowers the investors' required rate of return.

B. allows bondholders to require the organization to retire the bond before original maturity.
C. provides an organization flexibility in financing if interest rates fall.
D. protects investors against margin calls.

Question 53 - CMA 1288 1.9 - L-T Financial Management-Financial Instruments

A financial manager usually prefers to issue preferred stock rather than debt because

A. Payments to preferred stockholders are not considered fixed payments.

B. The preferred dividend is often cumulative, whereas interest payments are not.
C. The cost of fixed debt is less expensive since it is tax deductible even if a sinking fund is required to retire the debt.
D. In a legal sense, preferred stock is equity; therefore, dividend payments are not legal obligations.

Question 54 - CMA 690 1.10 - L-T Financial Management-Cost of Capital

Osgood Products has announced that it plans to finance future investments so that the firm will achieve an optimum
capital structure. Which one of the following corporate objectives is consistent with this announcement?

A. Maximize the net worth of the firm.

B. Minimize the cost of equity.
C. Maximize earnings per share.
D. Minimize the cost of debt.

Question 55 - CMA 1285 1.34 - International Finance

An American importer of English clothing has contracted to pay an amount fixed in British pounds three months from
now. If the importer worries that the U.S. dollar may depreciate sharply against the British pound in the interim, it would
be well advised to:

A. Sell dollars in the forward exchange market.

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B. Buy pounds in the forward exchange market.

C. Buy dollars in the forward exchange market.
D. Sell pounds in the forward exchange market.

Question 56 - HOCK CMA P2 SDV1 - Risk and Return

New Company's sales and profits are growing rapidly, and so is its dividend. Its dividend is growing at an annual rate of
25%. This growth in the dividend is expected to continue for two years. After that, the rate of growth is expected to slow
down to 10% per year. The investors' required rate of return on the stock is 16%. The next annual dividend is expected
to be $1.00. The beta of New Company's stock is 1.5. The U.S. Treasury bill rate is 4%.

What is the expected market rate of return?

A. 12.0%
B. 14.67%
C. 16.0%
D. 10.67%

Question 57 - CMA 1286 1.20 - International Finance

Given a spot exchange rate for the U.S. dollar against the pound sterling of 1.4925 and a 90-day forward rate of
1.4775:

A. The pound sterling is selling at a discount against the dollar and is undervalued in the forward market.
B. The pound sterling is selling at a premium against the dollar and is overvalued in the forward market.
C. The forward pound sterling is selling at a discount against the dollar in the forward market.
D. The forward pound sterling is selling at a premium against the dollar in the forward market.

Question 58 - ICMA 10.P2.134 - L-T Financial Management-Cost of Capital

Cox Company has sold 1,000 shares of $100 par, 8% preferred stock at an issue price of $92 per share. Stock issue
costs were $5 per share. Cox pays taxes at the rate of 40%. What is Cox's cost of preferred stock capital?

A. 8.25%.
B. 8.70%.
C. 9.20%.
D. 8.00%.

Question 59 - ICMA 10.P2.179 - Working Capital Management

Lang National Bank offered a one-year loan to a commercial customer. The instrument is a discounted note with a
nominal rate of 12%. What is the effective interest rate to the borrower?

A. 10.71%
B. 12.00%
C. 13.20%

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D. 13.64%

Question 60 - ICMA 10.P2.128 - L-T Financial Management-Cost of Capital

Which of the following, when considered individually, would generally have the effect of increasing a firm's cost of
capital?
I. The firm reduces its operating leverage.
II. The corporate tax rate is increased.
III. The firm pays off its only outstanding debt.
IV. The Treasury Bond yield increases.

A. II and IV.
B. I, III and IV.
C. III and IV.
D. I and III.

Question 61 - CMA 694 1.27 - Working Capital Management

All of the following are inventory carrying costs except

A. Storage.
B. Insurance.
C. Opportunity cost of inventory investment.
D. Inspections of received inventory.

Question 62 - CMA 1293 1.20 - Working Capital Management

A lock-box system

A. Accelerates the inflow of funds.

B. Provides security for late night deposits.
C. Reduces the need for compensating balances.
D. Reduces the risk of having checks lost in the mail.

Question 63 - CMA 1294 1.27 - L-T Financial Management-Cost of Capital

DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following
combination of debt and equity to finance the investment.
Issue $15 million of 20-year bonds at 101, with a coupon rate of 8%, and flotation costs of 2% of par.
Use $35 million of funds generated from earnings.
The equity market is expected to earn 12%. U.S. Treasury bonds are currently yielding 5%. The beta coefficient
for DQZ is estimated to be 0.60. DQZ is subject to an effective corporate income tax rate of 40%.

The capital asset pricing model (CAPM) computes the expected return on a security by adding the risk-free rate of
return to the incremental yield of the expected market return, which is adjusted by the company's beta. Compute DQZ's

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expected rate of return.

A. 7.20%
B. 12.20%
C. 9.20%
D. 12.00%

Question 64 - CMA 689 1.2 - L-T Financial Management-Financial Instruments

Serial bonds are attractive to investors because

A. all bonds in the issue mature on the same date.

B. investors can choose the maturity that suits their financial needs.
C. the yield to maturity is the same for all bonds in the issue.
D. the coupon rate on these bonds is adjusted to the maturity date.

Question 65 - ICMA 13.P2.024 - L-T Financial Management-Financial Instruments

Vega Inc. needs to raise $50,000,000 for expansion. The two available options are to sell 7%, 10-year bonds at face
value or to sell 5% preferred stock at par for which annual dividends would be paid. Vega’s effective income tax rate is
30%. Which one of the following best describes the difference in Vega’s cash flow for the second year after issue?

A. Cash flow with the bond issue is $225,000 higher.

B. Cash flow with the bond issue is $50,000 higher.
C. Cash flow with the stock issue is $700,000 higher.
D. Cash flow with the stock issue is $525,000 higher.

Question 66 - CMA 1292 1.21 - Working Capital Management

Dartmoor Company's budgeted sales for the coming year are $40,500,000, of which 80% are expected to be credit
sales at terms of n/30. Dartmoor estimates that a proposed relaxation of credit standards will increase credit sales by
20% and increase the average collection period from 30 days to 40 days. Based on a 360-day year, the proposed
relaxation of credit standards will result in an expected increase in the average accounts receivable balance of

A. $1,620,000.
B. $540,000.
C. $2,700,000.
D. $900,000.

Question 67 - ICMA 10.P2.222 - Marginal Analysis

Jack Blaze wants to rent store space in a new shopping mall for the three month holiday shopping season. Blaze
believes he has a new product available which has the potential for good sales. The product can be obtained on
consignment at the cost of $20 per unit and he expects to sell the item for $100 per unit. Due to other business
ventures, Blaze's risk tolerance is low. He recognizes that, as the product is entirely new, there is an element of risk.
The mall management has offered Blaze three rental options: (1) a fixed fee of $8,000 per month, (2) a fixed fee of

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$3,990 per month plus 10% of Blaze's revenue, or (3) 30% of Blaze's revenues. Which one of the following actions
would you recommend to Jack Blaze?

A. Choose the first option no matter what Blaze expects the revenues to be.
B. Choose the third option no matter what Blaze expects the revenues to be.
C. Choose the second option no matter what Blaze expects the revenues to be.
D. Choose the second option only if Blaze expects revenues to exceed $5,700.

Question 68 - CMA 696 4.19 - Marginal Analysis

When an organization decides on a course of action that is selected from a group of alternative courses of action, the
benefit lost by not choosing the best alternative course of action is the

A. Expected value.
B. Opportunity cost.
C. Incremental cost.
D. Net realizable value.

Question 69 - ICMA 10.P2.197 - Cost-Volume-Profit (CVP) Analysis

Bolger and Co. manufactures large gaskets for the turbine industry. Bolger's per unit sales price and variable costs for
the current year are as follows.
Sales price per unit $300
Variable costs per unit 210

Bolger's total fixed costs aggregate $360,000. As Bolger's labor agreement is expiring at the end of the year,
management is concerned about the effect a new agreement will have on its unit breakeven point. The controller
performed a sensitivity analysis to ascertain the estimated effect of a $10 per unit direct labor increase and a $10,000
reduction in fixed costs. Based on these data, it was determined that the breakeven point would

A. decrease by 1,000 units.

B. decrease by 125 units.
C. increase by 500 units.
D. increase by 375 units.

Question 70 - ICMA 10.P2.218 - Marginal Analysis

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

A. the value of the $200 to the ticket agent.

B. Johnson’s best alternative use of the $200.
C. Johnson’s best alternative use of both the $200 and the two hours spent in line.
D. Johnson’s best alternative use of the two hours it took to wait in line.

Question 71 - CIA 1188 IV.17 - Cost-Volume-Profit (CVP) Analysis

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Which of the following is a characteristic of a contribution income statement?

A. Fixed expenses are listed separately from variable expenses.

B. Fixed and variable operating expenses are combined as one line item, but fixed manufacturing expenses are shown
separately from variable manufacturing expenses.
C. Fixed and variable expenses are combined as one line.
D. Fixed and variable manufacturing costs are combined as one line item, but fixed operating expenses are shown
separately from variable operating expenses.

Question 72 - ICMA 10.QA.P2.032 - Pricing and Pricing Strategy

Highfield Corporation expects to sell 10,000 units of its product at a target price of $50 per unit. The current full cost of
the product is $60 per unit. If Highland wants to earn an operating profit margin of 20%, the target cost per unit is

A. $40.
B. $12.
C. $10.
D. $38.

Question 73 - CMA Sample Q4.2 - Marginal Analysis

All of the following costs are relevant to a decision to accept or reject an order except

A. Replacement costs.
B. Differential costs.
C. Out-of-pocket costs.
D. Sunk costs.

Question 74 - ICMA 10.P2.277 - Pricing and Pricing Strategy

Which one of the following is not a characteristic of market-based pricing?

A. It has a customer-driven external focus.

B. It is used by companies facing stiff competition.
C. It starts with a target selling price and target profit.
D. It is used by companies facing minimal competition.

Question 75 - CMA 1289 1.7 - Marginal Analysis

If a firm currently producing 500 units of output incurs total fixed costs of $10,000 and total variable costs of $15,000,
the average total cost per unit is

A. $50.
B. $30.
C. $25.
D. $20.

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Question 76 - CMA 1296 4.1 - Marginal Analysis

The term that best refers to past costs that have been incurred and are not relevant to any future decisions is

A. Incurred marginal costs.

B. Full absorption costs.
C. Discretionary costs.
D. Sunk costs.

Question 77 - CIA 594 III.45 - Marginal Analysis

A company has 7,000 obsolete toys carried in inventory at a manufacturing cost of $6 per unit. If the toys are reworked
for $2 per unit, they could be sold for $3 per unit. If the toys are scrapped, they could be sold for $1.85 per unit. Which
alternative is more desirable (rework or scrap) and what is the total dollar amount of the advantage of that alternative?

A. Rework, $8,050.
B. Rework, $36,050.
C. Scrap, $5,950.
D. Scrap, $47,950.

Question 78 - CMA 1283 5.19 - Cost-Volume-Profit (CVP) Analysis

The process of evaluating the effect of changes in variables such as sales price or wage rates on operating income is
called

A. Sensitivity analysis.
B. Iterative analysis.
C. Regression analysis.
D. Matrix analysis.

Question 79 - CMA 690 5.16 - Cost-Volume-Profit (CVP) Analysis

Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density
monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical
manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each
Precisionmix device:
Direct labor $180
Direct materials 240
Factory overhead 105
Total variable production costs $525
Marketing costs 75
Total variable costs $600

Madengrad's income tax rate is 40%, and annual fixed costs are $6,600,000. Except for an operating loss incurred in
the year of incorporation, the firm has been profitable over the last 5 years.

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 Part 2 : Mock Examination Set 1

Assume a 10% increase in annual fixed costs, a 20% unit cost increase for direct labor, and a reduction in unit material
costs of 25%, with no change in selling price. Madengrad Company's breakeven point would increase (decrease)
(rounded to the nearest whole unit) by

A. 407 units.
B. (1,620) units.
C. 3,960 units.
D. 1,604 units.

Question 80 - ICMA 10.P2.256 - Marginal Analysis

The Doll House, a very profitable company, plans to introduce a new type of doll to its product line. The sales price and
costs for the new dolls are as follows.
Selling price per doll $100
Variable cost per doll $60
Incremental annual fixed costs $456,000
Income tax rate 30%

If 10,000 of the new dolls are produced and sold, the effect on Doll House's profit (loss) would be

A. $280,000.
B. $(39,200).
C. $(56,000).
D. $(176,000).

Question 81 - ICMA 10.P2.219 - Marginal Analysis

In a management decision process, the cost measurement of the benefits sacrificed due to selecting an alternative use
of resources is most often referred to as a(n)

A. sunk cost.
B. relevant cost.
C. opportunity cost.
D. differential cost.

Question 82 - CIA 593 IV.17 - Cost-Volume-Profit (CVP) Analysis

A company with $280,000 of fixed costs has the following data:

Product AProduct B
Sales price per unit $5 $6
Variable costs per unit $3 $5

Assume three units of A are sold for each unit of B sold. How much will sales be in dollars of product B at the
breakeven point?

A. $840,000
B. $200,000
C. $280,000
D. $240,000

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Question 83 - ICMA 10.P2.279 - Pricing and Pricing Strategy

Fennel Products is using cost-based pricing to determine the selling price for its new product based on the following
information.
Annual volume 25,000 units
Fixed costs $700,000 per year
Variable costs $200 per unit
Plant investment $3,000,000
Working capital $1,000,000
Effective tax rate 40%

The target price that Fennel needs to set for the new product to achieve a 15% after-tax return on investment (ROI)
would be

A. $228.
B. $268.
C. $258.
D. $238.

Question 84 - ICMA 10.P2.341 - Capital Budgeting Methods

Jones & Company 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 as follows.
Time Period After-Tax Cash
Year Inflow/(Outflow)
0 $(600,000)
1 $(500,000)
2 $ 450,000
3 $ 450,000
4 $ 350,000
5 $ 250,000

Management anticipates the equipment will be sold at the beginning of year 6 for $50,000 and its book value is zero.
Jones' internal hurdle and effective income tax rates are 14% and 40%, respectively. Based on this information, a
negative net present value was computed for the project. Accordingly, it can be concluded that

A. the project has an internal rate of return (IRR) less than 14% since IRR is the interest rate at which net present
value is equal to zero.
B. Jones should examine the determinants of its hurdle rate further before analyzing any other potential projects.
C. Jones should calculate the project payback to determine if it is consistent with the net present value calculation.
D. the project has an IRR greater than 14% since IRR is the interest rate at which net present value is equal to zero.

Question 85 - CMA 693 4.28 - Capital Budgeting Methods

When evaluating projects, breakeven time is best described as

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A. Project investment ÷ annual net cash inflows.

B. The point where cumulative cash inflows on a project equal total cash outflows.
C. The point at which discounted cumulative cash inflows on a project equal discounted total cash outflows.
D. Annual fixed costs ÷ monthly contribution margin.

Question 86 - CMA 1294 4.24 - Capital Budgeting Methods

The method that divides a project's annual after-tax net income by the average investment cost to measure the
estimated performance of a capital investment is the

A. Internal rate of return method.

B. Payback method.
C. Accounting rate of return method.
D. Net present value (NPV) method.

Question 87 - CMA 1295 4.22 - Capital Budgeting Process

In equipment-replacement decisions, which one of the following does not affect the decision-making process?

A. Original fair market value of the old equipment.

B. Cost of the new equipment.
C. Operating costs of the old equipment.
D. Current disposal price of the old equipment.

Question 88 - CMA 693 4.30, adapted - Capital Budgeting Methods

Jasper Company has a payback goal of 3 years on new equipment acquisitions. A new sorter is being evaluated that
costs $450,000 and has a 5-year life. Straight-line depreciation will be used; no salvage is anticipated. Jasper is subject
to a 40% income tax rate. To meet the company's payback goal, the sorter must generate reductions in annual cash
operating costs of

A. $100,000.
B. $114,000.
C. $190,000.
D. $150,000.

Question 89 - CMA 1295 4.11 - Capital Budgeting Process

Which one of the following statements concerning cash flow determination for capital budgeting purposes is not
correct?

A. Sunk costs are not incremental flows and should not be included.
B. Book depreciation is relevant because it affects net income.
C. Net working capital changes should be included in cash flow forecasts.
D. Tax depreciation must be considered because it affects cash payments for taxes.

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Question 90 - ICMA 13.P2.064 - Capital Budgeting Methods

Assume that an investment project's assumed cash flows are not changed, but the assumed weighted average cost of
capital is reduced. What impact would this have on the net present value (NPV) and the internal rate of return (IRR) of
this project?

A. NPV would not change and IRR would not change.

B. NPV would increase and IRR would increase.
C. NPV would decrease and IRR would increase.
D. NPV would increase and IRR would not change.

Question 91 - ICMA 10.P2.324 - Capital Budgeting Methods

Parker Industries is analyzing a $200,000 equipment investment to produce a new product for the next 5 years. A study
of expected annual after tax cash flows from the project produced the following data.
Annual After-
Tax Cash Flow Probability
$45,000 0.10
$50,000 0.20
$55,000 0.30
$60,000 0.20
$65,000 0.10
$70,000 0.10

If Parker utilizes a 14% hurdle rate, the probability of achieving a positive net present value is

A. 40%.
B. 30%.
C. 60%.
D. 20%.

Question 92 - CMA 1291 4.1 - Capital Budgeting Methods

Yipann Corporation is reviewing an investment proposal. The initial cost as well as other related data for each year are
presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of
the investment at the end of each year is equal to its net book value, and there will be no salvage value at the end of
the investment's life.
Investment Proposal
Initial Annual Net
Cost and After-Tax Annual
Year Book Value Cash Flows Net Income
0 $105,000 $ 0 $ 0
1 70,000 50,000 15,000
2 42,000 45,000 17,000
3 21,000 40,000 19,000
4 7,000 35,000 21,000
5 0 30,000 23,000

Yipann uses a 24% after-tax target rate of return for new investment proposals. The discount figures for a 24% rate of

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 Part 2 : Mock Examination Set 1

return are given.

Present Value of
Present Value of Annuity of $1
$1 Received at Received at End
Year the End of Period of Each Period
1 0.81 0.81
2 0.65 1.46
3 0.52 1.98
4 0.42 2.40
5 0.34 2.74
6 0.28 3.02
7 0.22 3.24

The traditional payback period for the investment proposal is

A. Over 5 years.
B. 2.250 years.
C. 1.833 years.
D. 0.875 years.

Question 93 - ICMA 10.P2.344 - Capital Budgeting Methods

Which one of the following is not a shortcoming of the payback method?

A. It offers no consideration of cash flows beyond the expiration of the payback period.
B. It ignores the time value of money.
C. It offers no indication of a project’s liquidity.
D. It encourages establishing a short payback period.

Question 94 - ICMA 10.P2.308 - Capital Budgeting Methods

Webster Products is performing a capital budgeting analysis on a new product it is considering. Annual sales are
expected to be 50,000 units in the first year, 100,000 units in the second year, and 125,000 units the year thereafter.
Selling price will be $80 in the first year and is expected to decrease by 5% per year. Annual costs are forecasted as
follows.
Fixed costs $300,000 each year
Labor cost per unit $20 in year 1, increasing 5% per year thereafter
Material cost per unit$30 in year 1, increasing 10% per year thereafter

The investment of $2 million will be depreciated on a straight-line basis over 4 years for financial reporting and tax
purposes. Webster's effective tax rate is 40%. When calculating net present value (NPV), the net cash flow for year 3
would be

A. $1,058,750.
B. $558,750.
C. $858,750.
D. $1,070,000.

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Question 95 - CMA 1293 4.12 - Capital Budgeting Methods

The internal rate of return for a project can be determined

A. Only if the project cash flows are constant.

B. By finding the discount rate that yields a net present value of zero for the project.
C. If the internal rate of return is greater than the firm's cost of capital.
D. By subtracting the firm's cost of capital from the project's required rate of return.

Question 96 - HOCK Ethics P1E H11 - Ethical Considerations for Professionals

According to the IMA Statement of Ethical Professional Practice, one of the overarching ethical principles is "Fairness."
"Fairness" means

A. communicating both good and bad news; not just telling your superiors what they want to hear.
B. acting in an impartial manner; being open-minded, tolerant and accepting; being free from injustice.
C. being free from personal feelings or prejudice, basing analyses and decisions on the facts alone and basing a
judgment on an established set of criteria.
D. communicating information fairly and objectively.

Question 97 - HOCK Ethics P2E H05 - Ethical Considerations for the Organization

Which of the following methods can be used as a tool to identify process controls related to ethical or behavioral
issues?

A. Ratio analysis
B. Decision trees
C. Sensitivity analysis
D. Business process re-engineering

Question 98 - HOCK Ethics P2E H09 - Ethical Considerations for the Organization

What is one of the reasons why a documented code of ethics is important to a business and its employees?

A. A documented code of ethics provides a framework for decision making in situations where an explicit company
policy does not exist.
B. Once the code of ethics is documented, senior management can turn their attention to more important issues such
as revenue generation and customer satisfaction.
C. Existence of a documented code of ethics frees senior management from responsibility for inappropriate behavior
by employees of the business.
D. Once the code of ethics is documented, expensive company training regarding ethical behavior standards in the
company can be discontinued to save money.

Question 99 - ICMA 13.P2.055 - Risk Management

For a firm engaged in risk management, Value at Risk is defined as the

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A. maximum loss within a certain time period at a given level of confidence.

B. worst possible outcome given the distribution of outcomes.
C. maximum value a company can lose.
D. most likely negative outcome at a given level of confidence.

Question 100 - ICMA 13.P2.056 - Risk Management

DRP Insurance Company wants to be “best in class” in terms of Enterprise Risk Management (ERM) implementation.
To achieve this goal, the company plans to identify events that affect the implementation of strategy and achievement
of objectives. Which of the following best reflects an analysis that would help its identification process?

A. Review of accidents and operational measures.

B. Summary of driving records and age.
C. Review of incidents and new market conditions.
D. Analysis of default histories and dispersion.

(c) HOCK international, page 29