9CMA Part 2 – Answers
1. Correct answer c. 120,000/600,000 = 0.20 or 20%
2. Correct answer d. Both the current ratio and the quick ratio include cash, accounts receivable, and marketable securities;
therefore a, b, and c are incorrect. Choice d is correct because the quick ratio does not include inventory, which is considered
less liquid than the other current assets.
3. Correct answer c. The expected current value of Frasier’s common stock in $20 as shown below.
Dividend = Payout ratio x Earnings per share
= .35 x $4.00
= $1.40
Required return = Risk-free rate + Beta (Market rate – Risk-free rate)
= .07 + 1.25 (.15 - .07)
= .17
Value of stock = Dividend ÷ (Required return – Dividend growth rate)
= $1.40 ÷ (.17 - .10)
= $20.00
4. Correct answer d. Powell would need to reduce its average collection time by 1.5 days in order to justify the use of the lockbox
as shown below.
Daily collections: 300 x $2,500 = $750,000
Daily interest: $750,000 x .08 = $60,000
Reduction in days: $90,000 ÷ $60,000 = 1.5 days
5. Correct answer b. Breakeven quantity can be dened as the point where operating income is equal to zero. Therefore, revenue
must equal total costs.
6. Correct answer c. The benets sacriced by selecting an alternative use of resources is opportunity cost. Opportunity cost is the
contribution foregone by not using a limited resource in its next best alternative use.
7. Correct answer c. Allstar’s initial investment is $26,160 as shown below.
Present value of cash inows $9,000 x 3.24 = $29,160
Initial investment $29,160 - $3,000 = $26,160
8. Correct answer c. BGN Industries should select Option Z as it has the highest net present value ($2,825,000 - $2,000,000) and
the internal rate of return is greater than the hurdle rate.
9. Correct answer c. Residual risk is the risk remaining after controls have been put in place to mitigate the inherent risk.
10. Correct answer d. Quint’s payback period is 3.7 years as shown below.
After-tax cash ow Investment less cash ow
Year 1 $60,000 x .6 = $36,000 $104,000
Year 2 $60,000 x .6 = $36,000 68,000
Year 3 $60,000 x .6 = $36,000 32,000
Year 4 $80,000 x .6 = $48,000 $32,000 ÷ $48,000 = .667
Payback period = 3.7 years
Answers
CMA Part 2