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CMA Entrance Exam Questions and Answers 2024.
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1CMA Entrance Exam Questions and Answers 2024.
Corporate Finance
1. (+) JK Inc. is considering the acquisition of IBA Inc. to expand its business. Through
the acquisition, JK expects to benefit from IBA’s cash flows before tax and interest of:
i) $180,000 per year for the first two years;
ii) $240,000 per year from the fourth year into perpetuity;
iii) $700,000 cash inflow at the end of the fifth year.
Assume that the cash flows occur at the end of each year, the tax rate is 35% for both
companies, and JK’s after-tax required rate of return is 12%. What is the maximum
amount that JK is willing to pay to acquire IBA (rounded to the nearest thousand)?
a) $2,125,000
b) $1,381,000
c) $1,989,000
d) $1,756,000
2. Which of the following statements about preferred stock is NOT correct?
a) Preferred shareholders receive a dividend before the common shareholders are
entitled to dividend.
b) Preferred shareholders generally do not have voting rights.
c) Cash dividends paid to preferred shareholders are not an allowable deduction for
tax purposes.
d) In case of bankruptcy, preferred shareholders have a claim on the company’s
assets that ranks ahead of the common shareholders and bondholders.
3. KLN Co. plans to purchase new equipment in order to increase productivity of its
manufacturing division and save repair costs that are required for the old equipment.
Old Equipment New Equipment
Purchase price $100,000 $200,000
Salvage value today $30,000 n/a
Salvage value in 5 years $5,000 $100,000
Repairs immediately $9,000 n/a
Repairs at the end of 3 years $10,000 n/a
Annual operating costs $12,000 $10,000
Annual revenue $70,000 $90,000
Remaining life 5 years 5 years
Based on a cost of capital of 6%, assuming tax is not considered, what is the net
present value in favour of purchasing the new equipment?
a) $(18,971)
b) $11,029
c) $19,429
d) $28,365
,2
4. Which of the following is most likely to increase shareholder’s wealth in the short
term?
a) Stock dividend
b) Stock split
c) Special dividend
d) Reverse split
5. ARI Corp. has annual sales of $800,000 and cost of goods sold of $500,000 as of
December 31, Year 2. On January 1, Year 3, ARI Corp. announced that it will
decrease its days receivable from 28 days to 23 days and increase its days payable
from 20 days to 28 days.
ARI Corp. forecasts that its annual sales and cost of goods sold are increasing by 5%
and 6% respectively in Year 3. How much additional cash will this change in policy
bring to the company in Year 3?
a) $11,507
b) $23,123
c) $11,616
d) $21,918
6. GS Bank is offering a certificate of deposit with a 12% quoted annual interest rate. If
the bank compounds the interest monthly and you deposit $150,000 into the certificate
of deposit, what is the value after one year?
a) $168,000
b) $168,540
c) $168,825
d) $169,020
7. An investor purchased $70,000 worth of 10-year bonds with a coupon rate of 12% on
December 31, Year 1, for $65,450. The interest payment dates are June 30 and
December 31 each year. On July 1, Year 4, the investor decided to sell the bonds.
These bonds currently yield 8% in the market. How much will the bonds sell for
(rounded to the nearest hundred dollars)?
a) $70,000
b) $112,000
c) $84,000
d) $124,600
8. (-) Which of the following is an example of a secondary market financial instrument?
a) Publicly traded stocks on the stock exchange
b) Initial public offering (IPO) stocks
c) Seasoned offering
d) Private placement
,3
9. MAC Inc. is considering issuing preferred shares that have a market value of $120
and a cumulative dividend of $8.50. The expected issue cost is $4.25 per share and is
tax-deductible. The current tax rate of MAC is 38%.
If the company issues the preferred shares, what is the percentage cost of the
preferred shares?
a) 7.24%
b) 7.08%
c) 4.49%
d) 7.34%
10. Sandra is considering the purchase of stocks in the following three companies:
i) Company A – a beta of 1.5, no dividend history and a current share price of
$35.
ii) Company B – $6.00 in annual dividends that will continue indefinitely and a
current share price of $45.
iii) Company C – $3.80 in current dividends that are expected to grow 1.5% per
year and a current share price of $38.
The current risk-free rate is 3% and the market return is 7.5%. Sandra would like an
annual return of 12% on her investment. If taxes are not considered, which shares will
meet her expectation?
a) Company A
b) Company B
c) Company C
d) None of above
11. YSJ Inc. has the following financial information:
Current liabilities $1,500,000
Total liabilities $8,500,000
Preferred shares $3,000,000
Common equity $10,000,000
The long-term debt consists of a single bond issue paying 6% interest annually. The
annual yield for similar bonds in the market is currently 8%. The current cost of the
preferred shares is 6% and the current cost of the common shares is 17%. The
company’s tax rate is 37%. What is YSJ’s weighted average cost of capital (WACC)
(rounded to the nearest tenth of a percent)?
a) 10.7%
b) 11.2%
c) 12.2%
d) 10.3%
, 4
12. The shares of Sunshine Ltd. are currently trading at $54.65 per share and have a beta
of 1.5. If the risk-free rate of return is 2.0% and the risk premium is 4.5%, what is the
expected rate of return on Sunshine’s shares?
a) 8.75%
b) 6.75%
c) 11.75%
d) 5.75%
13. JYP Inc. is evaluating two projects and has gathered the following data about the two
projects. JYP has a 10% required rate of return for both projects.
Project A Project B
Initial costs $16,000 $20,000
Project life 5 years 4 years
Cash flow $7,000 per year $7,500 per year
If the projects are mutually exclusive and taxes are ignored, the company should
a) accept Project A and reject Project B.
b) reject Project A and accept Project B.
c) accept both projects.
d) reject both projects.
14. JM Ltd. has a single product that has a gross profit margin ratio of 60% per unit and
had total sales of $1,200,000 last year. JM has a degree of total leverage of 2.10 and
a degree of operating leverage of 1.20 for the current year. If the earnings before
interest and tax (EBIT) were to increase by 15% this coming year, what would be the
expected percentage change in earnings per share (rounded to the nearest percent)?
a) 18%
b) 32%
c) 9%
d) 26%
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