IMANET Certified Management Accountant CMA Exam Practice Test

Answer : B

According to the Gordon growth model, the three elements required to calculate the cost of equity capital are (1) the dividends per share, (2) the expected growth rate, and (3) the market price of the stock. If flotation costs are incurred when issuing new stock, they are deducted from the market price to arrive at the amount of capital the corporation will actually receive. According, the $100 selling price is reduced by the $3 discount and the $5 flotation costs to arrive at the $92 to be received for the stock. Because the dividend is not expected to increase in future years, no growth factor is included in the calculation Thus, the cost of the common stock is 7.6% ($7 dividend + $92). 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 kinds is estimated to be 4.8%. Williams can sell $8 preferred stock at par value, $105 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 under priced 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.

* Williams' preferred capital structure is

Long-term debt 30%

Preferred stock 20%

Common stock 50%

Answer : A

This problem requires the use of simultaneous equations. Set up a CAPM formula for each stock.

15.6 = RF + 1.2 (M-RF)

12.4 = RF + .8 (M --RF)

Removing the parentheses and combination terms, you get

15.6 = 1.2M - .2RF

12.4 = .8M + .2RF

Then solve for M. add the two equations above, M=14. Substitute 14 for M in the second equation:

12.4 = RF + .8 (14- RF)

12.4 = .2RF + 11.2

1.2 = .2 RF , or RF = 6

Answer : A

Using FV factor tables, the FV factor for 12% at the end of 4 years is 1 574. Thus, the future value of the account at the end of 4 years is $2.36 1 .00(1.574 x $1 500)

Answer : C

Based on the revised industry volume. Herbert should have sold 258,000 units (2.580,000 x 10%). Because 260,000 were actually sold, the company increased its market share by 2,000, or 20% of the 10,000 (260,000 --- 250,000) increase.

Answer : D

If the loan is discounted, the borrower receives the face amount minus the prepaid interest. Thus, the borrower will receive proceeds of $1,800,000 [$2,000,000 - ($2,000,000 x 10%)]. The effective interest rate is 11.11% ($200,000 $1,800,000).

Answer : C

The profitability index is the ratio of the present value of future net cash inflows to the initial net cash investment. It is a variation of the net present value (NPV) method and facilitates the comparison of different-sized investments. Because it is based on the NPV method, the profitability index will yield the same decision as the NPV for independent projects. However, decisions may differ for mutually exclusive projects of different sizes.

Answer : A

Uncertainly exists when the results of possible outcomes cannot even be estimated using the tools of statistical probability'. This environment is the most difficult for decision making because objective mathematical analyses cannot be made. Hence, creativity' is required in the decision-making process, and reliance on the educated guess rather than the probabilistically calculated estimate is necessary.