CMA Exam Dumps and Practice Questions

Business risk is the risk of fluctuations in earnings before interest and taxes or in operating income when the firm uses no debt. It is the risk inherent in its operations that excludes financial risk, which is the risk to the shareholders from the use of financial leverage. Business risk depends on factors such as demand variability, sales price variability, input price variability, and amount of operating leverage.

Company A will withhold $6,000 ($100,000 x 6%) as a reserve against returns and allowances and $1,400 ($100,000 x 14%) as a commission. The remaining $92,600 will be reduced by interest at the rate of 15% annually. The interest charge will be $2,315, assuming a 360-day year [($92,600 x 15) x (60-day payment period - 360 days)). The proceeds to be received by Gatsby equal $90,285 ($92,600 - $2,315).

A forward contract is an executor contract in which the parties involved agree to the terms of a purchase and a sale, but performance is deferred. Accordingly, a forward contract involves a commitment today to purchase a product on a specific future date at a price determined today

The first step is to determine the actual annual percentage interest rate for each of the four options. Assuming a $100 invoice, the Fort Company discount represents interest of $1 on a loan of $99 for 20 days (30-day credit period - 10-day discount period). The annual interest rate is 18.1818% ((360 20) periods x ($1 $99)). The Riley Company discount represents an interest charge of $2 on a loan of $98; i.e., by not paying on the 15th day, the company will have the use of $98 for 45 days (60-day credit period - 15-day discount period). The number of periods in a year would be 8(360 45). The interest would be 16.326% ($2 $98 x 8 periods) The Shad loan would be for $91 at a cost of $3. The loan would be for 75 days (90 - 15). Given 4.8 interest periods in a year (360 75), the annual interest rate would be 14.845% ($3 $97 x 4.8). The bank loan was quoted at 14.75% on a discount basis. On a $100 note, the borrower would only receive $85.25, giving an interest rate of 17.302% ($14.75 $85.25). Thus, not paying Shad, Inc.'s invoices on time would be the lowest cost source of capital.

The most desirable set of terms are those that result in the lowest cost of borrowing. Discount interest results in a higher effective borrowing cost than simple interest because the bank deducts interest in advance so the borrower receives less than the face value of the loan. A compensating balance results in a higher effective borrowing cost because the compensating balance is an amount of cash that the firm is unable to use. The cheapest terms, given that all options have the same nominal interest rate, will be simple interest with no compensating balance.