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CMA test
Acknowledgement:

Ross, S & Trayler, R 2008, Instructor CD to accompany Essentials of corporate finance, McGraw-Hill,
Sydney, chs 1–11.

Chapter 1 – Introduction to Financial Management

QUESTION 1

The top financial officer in a firm is commonly referred to as the:

chief financial officer

president of finance
controller
treasurer
finance manager

QUESTION 2

A business organization that is similar to a sole proprietorship but has two or more owners is called a:

limited liability company

corporation
dual company
partnership
joint stock company

Chapter 2 – Financial Statements, Taxes and Cash Flow

QUESTION 3

A tangible asset:

is defined as any asset which adds value to a firm

by definition includes both equipment and patents
is another term for a fixed asset
 is defined as an asset with a market value that exceeds the book value
is a fixed asset with a physical existence

QUESTION 4

An intangible asset is a:

valuable fixed asset that has no physical existence

physical fixed asset that loses value over time, such as equipment
fully-depreciated fixed asset which has no remaining market value
current asset with a negligible book value but considerable market value
current asset with minimal market value and no physical existence

QUESTION 5

Which one of the following will increase the cash flow from assets, all else constant?

a decrease in net capital spending

a decrease in the cash flow to creditors
a decrease in the annual depreciation
an increase in the change in net working capital
an increase in the net new equity raised

Chapter 3 – Working with Financial Statements

QUESTION 6

Your company has cash available of $4 300, net working capital of $1 348, inventory of $10 500, and
accounts receivable of $2 340. What is the cash ratio?

3.19
0.31
0.27
1.84
0.41

QUESTION 7

The cash ratio is defined as cash divided by:

current assets
 current liabilities
total assets
total debt
total equity

QUESTION 8

The amount of profit a firm earns for every $1 of equity is referred to as the:

profit margin
equity multiplier
return on equity
capital intensity ratio
price-earnings ratio

Chapter 4 – Introduction to Valuation: The Time Value of Money

QUESTION 9

The process of accumulating interest in an investment over time to earn more interest is called:

discounting
compounding
complexing
indexing
multiplying

QUESTION 10

Which one of the following is the correct formula for the future value of a lump sum invested today?

FV = PV / (1 + r)t
FV = PV / (1 + rt)
FV = PV × rt
FV = PV × (1 + t)r
FV = PV × (1 + r)t

QUESTION 11

Given a rate of return of zero, the future value of a lump sum invested today will always:
 remain constant, regardless of the period of time
decrease as the period of time decreases
decrease as the period of time increases
increase as the period of time increases
remain constant or increase as the period of time increases

Chapter 5 – Discounted Cash Flow Valuation

QUESTION 12

An annuity where the cash flows continue forever is called a(n):

ordinary annuity
annuity due
absolute annuity
perpetuity
perpetuity due

QUESTION 13

In Canada and the United Kingdom, a perpetuity is also called a(n):

consol
infinite bond
infinity flow
dowry
preference stream

QUESTION 14

Which one of the following is generally valued as a perpetuity?

short-term bond
long-term bond
non-dividend paying common stock
common stock paying increasing dividends
preferred stock

Chapter 6 – Interest Rates and Bond Valuation

QUESTION 15

The coupon rate is best defined as the:

annual coupon divided by the current price of a bond

periodic payment divided by the premium value of a bond
semi-annual interest payment divided by the market price
semi-annual interest payment divided by the par value
annual coupon divided by the face value of a bond

QUESTION 16

The rate required in the market on a bond is called the:

yield to maturity
call yield
current yield
liquidity premium
risk premium

QUESTION 17

When interest payments on a bond are made directly to the owner of record, the bond is said to be in
__________ form.

bearer
coupon
street
registered
secure

QUESTION 18

The lowest rating a bond can receive from Moody's and still be classified as investment grade is:

A
BBB
B
Baa
Ba
Chapter 7 – Equity Markets and Share Valuation

QUESTION 19

Tellite Ltd, a telecommunication company, did not pay a dividend in the last financial year. However, the
company has indicated that it expects to earn $1 per share in this financial year and to pay out 20% of
these earnings in dividends. Financial analysts expect that Tellite’s earnings per share and dividend per
share will grow at a rate of 10% a year. The rate of return required by investors has been estimated at 12%
per annum. Estimate the present value of the share.

$10
$50
$11
$5.50
$5

QUESTION 20

The company share market price is $25, its next-period expected dividend is $1 and investors in that
market require a rate of return at 14% per annum. What is the implied rate of growth in dividends at this
time?

14%
10%
8%
9%
12%

QUESTION 21

The market in which new securities are originally sold to investors is called the __________ market.

primary
open
secondary
free
initial public

QUESTION 22

The market where one shareholder sells shares to another shareholder is called the __________ market.
 primary
open
secondary
free
dealer

Chapter 8 – Net Present Value and Other Investment Criteria

QUESTION 23

The internal rate of return identifies:

the minimum acceptable discount rate

the benefit-cost ratio
the average profit from a project
none of the given answers
all of the given answers

QUESTION 24

Nawano is considering an investment of $200 000 with cash inflows of $80 000; $70 000; $75 000;
$10 000 and $35 000 over the next 5 years respectively. What is the net present value of this investment,
if the relevant discount rate is 11%?

$63 063.10
$11 083.10
$17 008.60
$14 200.87
$44 151.62

QUESTION 25

Your firm requires an average accounting return (AAR) of at least 15 percent on all fixed Asset purchases.
Currently, you are considering some new equipment costing $96 000. This equipment will have a 3-year
life over which time it will be depreciated on a straight line basis to a zero book value. The annual net
income from this project is estimated at $5 500, $12 400, and $17 600 for the 3 years. Should you accept
this project based on the accounting rate of return? Why or why not?

yes; because the AAR is less than 15 percent

yes; because the AAR is equal to 15 percent
 yes; because the AAR is greater than 15 percent
no; because the AAR is less than 15 percent
no; because the AAR is equal to 15 percent

QUESTION 26

Ben Lake Enterprises is currently considering a project that will produce cash inflows of $3 500 a year for
3 years followed by $1 200 a year for 2 more years. The cost of the project is $10 000. What is the
profitability index if the discount rate is 7 percent?

.96
.98
1.00
1.06
1.10

Chapter 9 – Making Capital Investment Decisions

QUESTION 27

Shere Khan Corporation is currently evaluating a new project. Relatively inexpensive equipment with an
estimated cost of $300 000 would be purchased, but shipping costs to move the equipment would total
$25 000 and installation charges would add another $15 000 to the total equipment costs. Further, the
company’s inventories would have to be increased by $20 000 at the time of initial investment. The
straight-line depreciation rate is 20% and corporate tax rate is 25%.

Calculate the tax effect of depreciation on annual cash flows.

$15 000
$11 250
$18 000
$18 750
$17 000

QUESTION 28

A cost that has already been incurred and cannot be recouped is referred to as a(n) __________cost.

sunk
relevant
opportunity
 financial
side

QUESTION 29

Alfsonso and Sons purchased a new grinding machine 2 years ago at a cost of $390 000. Last year, some
revolutionary developments occurred making their machine virtually worthless as it cannot produce
products which meet the higher quality standards of the newer machines. If Alfsonso and Sons continues
using their current machine, they will lose all their customers. They have not found anyone willing to
purchase the machine even at a deeply discounted price. The best description of this machine today is that
it is a(n) __________ cost.

erosion
rationed
sunk
market
opportunity

QUESTION 30

Wislon and Taylor are implementing a project which will increase accounts payable by $5 000, increase
inventory by $3 000, and decrease accounts receivable by $2 000. All net working capital will be
recouped when the project terminates. What is the cash flow related to the net working capital for the last
year of the project?

–$10 000
–$4 000
$0
$1 000
$4 000

Chapter 10 – Some Lessons from Capital Market History

QUESTION 31

Refer to Table 10.2 (page 300): What is the historical real return on long-term government bonds?

10.60%
2.20%
3.80%
6.45%
 6.70%

QUESTION 32

One of the biggest Australian companies’ stock returned 9.37%, –3.55% and 11.55% over the past three
years, respectively. What is the arithmetic average return for this period?

8.16%
5.79%
8.68%
9.37%
4.46%

QUESTION 33

Which of the following statements are correct?

I. The risk-free rate of return generally earns a risk premium of about one percent.
II. The reward for bearing risk is called the standard deviation.
III. Based on historical returns, there are rewards for bearing risk.
IV. In general, the higher the risk, the higher the expected return.

I and II only
III and IV only
I, II, and IV only
II, III, and IV only
I, II, III, and IV

QUESTION 34

The geometric average return of 8, 12, 2, and 16 percent is computed as:

(1.08 + 1.12 + 1.02 + 1.16)1/2 – 1

(1.08 + 1.12 + 1.02 + 1.16)1/4
(1.08 × 1.12 × 1.0 × 1.16) × 4 – 1
(1.08 + 1.12 + 1.02 + 1.16) × 1/2
(1.08 × 1.12 × 1.02 × 1.16)1/4 – 1

QUESTION 35
If the financial markets are strong form efficient, then:

only the most talented analysts can determine the true value of a security
only company insiders have a marketplace advantage
technical analysis provides the best tool to use to gain a marketplace advantage
no one person has an advantage in the marketplace
the only true advantage in the marketplace is having insider information

Chapter 11 – Risk and Return

QUESTION 36

Suppose an investor created the following portfolio:

Amount invested Expected return Beta

Share A $10 000 8% 0.80
Share B $20 000 12% 0.95
Share C $30 000 15% 1.10
Risk-free asset $40 000 5% Beta of risk-free asset

What is the portfolio beta?

0.60
0
0.71
0.95
1.00

QUESTION 37

Consider the following information on two securities.

Expected return Beta

Security I 10% Market beta
Security II 8% 0.50

What is the risk-free rate?

 8%
10%
9%
6%
5%

QUESTION 38

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is
called the:

market risk premium

beta coefficient
standard deviation
asset mean
security’s alpha

QUESTION 39

If the reward-to-risk ratio of a security is greater than that supported by the security market line, then the
security:

is under-priced in the marketplace

must be trading in a market which is strong-form efficient
is one which compensates investors for unsystematic risk
is one which compensates investors for the total risk associated with that security
must have a beta which is greater than 1.0

QUESTION 40

The slope of the security market line is equal to:

1 minus the risk-free rate of return

the risk-free rate of return plus beta times the market risk premium
the market risk premium
the return on the market
the risk-free rate plus the market risk premium
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