Key points, notes, and examples for the most heavily tested topics in the US CMA Part 2 exam.
📊 Section A: Financial Statement Analysis
1. Return on Equity (ROE) & DuPont Analysis
· Formula: ROE = Net Income / Average Total Equity.
· DuPont 3-Step: ROE = Net Profit Margin × Total Asset Turnover × Equity Multiplier. This breaks down ROE into profitability, efficiency, and leverage.
· DuPont 5-Step: Further splits net margin into Tax Burden (NI/EBT), Interest Burden (EBT/EBIT), and Operating Margin (EBIT/Sales).
· Example: A company has a net profit margin of 10%, asset turnover of 1.5, and an equity multiplier of 2.0. Its ROE = 10% × 1.5 × 2.0 = 30%.
2. Sustainable Growth Rate (SGR)
· Formula: SGR = ROE × (1 – Dividend Payout Ratio) = ROE × Retention Ratio.
· Meaning: The maximum growth rate a firm can achieve without issuing new external equity, while maintaining its capital structure.
· Illustration: If ROE is 15% and the dividend payout is 40%, SGR = 15% × (1 – 0.40) = 9%. The firm can grow at 9% using only internally generated funds.
3. Market-to-Book & P/E Ratios
· Market-to-Book (M/B): Market Price per Share / Book Value per Share. It measures how much investors value the company relative to its accounting net assets.
· P/E Ratio: Market Price per Share / Earnings per Share (EPS). A high P/E suggests high growth expectations or overvaluation.
4. Liquidity & Working Capital Ratios
· Net Working Capital (NWC): Current Assets – Current Liabilities.
· Current Ratio: Current Assets / Current Liabilities. A higher ratio indicates better short-term liquidity.
· Quick Ratio: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. Excludes inventory, providing a stricter liquidity test.
· Example: If a company has $500k in current assets, $200k in inventory, and $250k in current liabilities: NWC = $250k; Current Ratio = 2.0; Quick Ratio = 1.2.
💰 Section B: Corporate Finance
1. Beta (β) and CAPM
· Beta Definition: A measure of a stock's systematic risk (volatility) relative to the overall market. β = 1 means the stock moves with the market; β > 1 means it's more volatile; β < 1 means it's less volatile.
· CAPM Formula: Cost of Equity (Ke) = Risk-Free Rate (Rf) + β × (Market Return (Rm) – Rf).
· Example: If Rf = 4%, Rm = 10%, and β = 1.5, then Ke = 4% + 1.5 × (10% – 4%) = 13%.
2. Weighted Average Cost of Capital (WACC)
· Formula: WACC = (Weight of Debt × After-Tax Cost of Debt) + (Weight of Equity × Cost of Equity).
· After-Tax Cost of Debt: Pre-tax cost of debt × (1 – Tax Rate). The tax shield lowers the effective cost of debt.
· Illustration: A firm has 40% debt (pre-tax cost 8%, tax rate 30%) and 60% equity (cost 12%). WACC = (0.40 × 8% × (1 – 0.30)) + (0.60 × 12%) = 2.24% + 7.20% = 9.44%.
3. Dividend Policies
· Residual Dividend Theory: Dividends are paid only from earnings left over after funding all positive NPV projects, maintaining the target capital structure.
· Example: Net Income = $800k; Optimal investment = $1.2M; Target equity ratio = 60%. Equity needed = $720k. Residual dividend = $800k – $720k = **$80k** (Payout ratio = 10%).
4. Primary vs. Secondary Markets
· Primary Market: Where new securities are issued and sold for the first time (e.g., an IPO). The company receives the proceeds.
· Secondary Market: Where existing securities are traded among investors (e.g., NYSE). The company does not receive proceeds.
🎯 Section C: Decision Analysis (Heavily Tested)
· Rule: Accept a special order if the incremental revenue exceeds the incremental (relevant) costs.
· Key: Fixed costs are usually irrelevant unless the order requires additional fixed costs. If capacity is constrained, opportunity cost (lost contribution from regular sales) must be considered.
· Example: A company has spare capacity. A special order offers $100/unit for 2,500 units. Variable cost is $80/unit. Contribution = $20/unit × 2,500 = **$50,000**. Accept the order.
2. Make-or-Buy Decisions
· Decision Basis: Compare the relevant cost to make vs. the relevant cost to buy.
· Relevant Cost to Make: Variable costs + avoidable fixed costs + opportunity cost.
· Qualitative Factors: Supplier reliability, quality control, and loss of in-house expertise.
3. Sell or Process Further
· Rule: Process further if the incremental revenue from further processing exceeds the incremental cost.
· Illustration: A joint product can be sold for $50 or processed further for $20 to sell for $80. Incremental revenue = $30; Incremental cost = $20. **Process further** (net benefit $10).
4. Keep or Drop (Discontinue) Decisions
· Rule: Drop a segment if its avoidable fixed costs exceed its contribution margin.
· Trap: Allocated common fixed costs are usually irrelevant and should not be used in the decision.
5. CVP Analysis & Break-Even
· Contribution Margin per Unit: Selling Price – Variable Cost per Unit.
· Break-Even Point (Units): Total Fixed Costs / Contribution Margin per Unit.
· Margin of Safety: (Actual Sales – Break-Even Sales) / Actual Sales.
· Target Profit: (Fixed Costs + Target Profit) / Contribution Margin per Unit.
6. Target Costing & Value Engineering
· Target Cost: Market Price – Desired Profit Margin.
· Value Engineering: Analyzing the function of a product to reduce cost without sacrificing quality.
🛡️ Section D: Risk Management
1. COSO ERM Framework (5 Components)
· Governance & Culture: Sets the tone for risk oversight and ethical values.
· Strategy & Objective Setting: Integrates risk appetite with strategy.
· Performance: Identifies, assesses, and prioritizes risks.
· Review & Revision: Continuously monitors and adapts to changes.
· Information, Communication & Reporting: Ensures timely risk information flow.
2. Risk Response Strategies
· Avoidance: Eliminate the activity causing the risk.
· Reduction: Mitigate the risk through controls.
· Sharing: Transfer risk (e.g., insurance, hedging).
· Acceptance: Acknowledge risk with no action.
📈 Section E: Investment Decisions
· NPV: Present value of future cash flows minus initial investment. Accept if NPV > 0.
· IRR: The discount rate that makes NPV = 0. Accept if IRR > Required Rate.
· Payback Period: Time to recover the initial investment. Limitation: Ignores the time value of money and cash flows after the payback period.
· Example: Investment = $100k; Annual cash flow = $25k. Payback = 4 years.
2. Real Options
· Definition: The right, but not the obligation, to make future business decisions (e.g., expand, delay, abandon).
· Types:
· Growth/Expansion Option: Option to expand if conditions are favorable.
· Abandonment Option: Option to sell or shut down a project.
· Timing Option: Option to delay a project.
3. Discount Rate Calculation
· If NPV and initial investment are given, the discount rate can be inferred from the present value factor (PVIFA or PVIF).
· Illustration: Investment = $100k; Annual inflow = $30k for 5 years. PV factor = $100k / $30k = 3.333. From PVIFA tables for 5 years, a factor of 3.333 corresponds to a discount rate of approximately 15%.
⚖️ Section F: Professional Ethics
1. IMA Statement of Ethical Professional Practice
· Principles: Honesty, Fairness, Objectivity, and Responsibility.
· Standards: Competence, Confidentiality, Integrity, and Credibility.
· Pressure: A financial or personal problem motivating the fraud.
· Opportunity: A weakness in internal controls.
· Rationalization: Justifying the fraudulent act.
3. Ethical Conflict Resolution
1. Follow the organization's policies.
2. Discuss with your immediate supervisor (unless involved).
3. Escalate to the next level of management or the audit committee.
4. Consult an objective advisor (e.g., IMA ethics counselor).
5. Resign if the conflict remains unresolved.
Example Scenario: A controller is asked to book fictitious sales to meet analyst targets. This violates Integrity and Credibility. The controller should first try to resolve it internally, and if unsuccessful, resign.
💡 Overall Exam Strategy (Based on Candidate Feedback)
· Calculations: Practice multi-step problems for CVP, WACC, and Capital Budgeting.
· Theory: Don't just memorize—understand interpretation and application in business scenarios.
· CBQs: Read the entire case first, identify relevant data, and be prepared for mixed-topic questions.
· Ethics: Be ready for scenario-based questions on standards violations and resolution steps.
· Time Management: Practice calculations under timed conditions.
Solve following MCQ Questions ⁉️. Check ✔️ yourself Answers provided at the end.
Below is a 100-MCQ practice set based on the exam feedback/topics you Covered.
Note: These are practice questions, not actual exam questions.
Section A: Financial Statement Analysis (Q1–Q15)
1. Net income $120,000; beginning equity $800,000; ending equity $1,000,000. ROE = ?
A) 12% B) 13.33% C) 15% D) 10%
Answer:
2. Which is NOT a component of the 3-step DuPont ROE formula?
A) Net profit margin B) Total asset turnover C) Equity multiplier D) Inventory turnover
Answer:
3. ROE = 18%; dividend payout = 30%. Sustainable growth rate = ?
A) 12.6% B) 18% C) 5.4% D) 30%
Answer:
**4. EPS = $5; dividend payout = 40%. Dividend per share = ?**
A) $1 B) $2 C) $3 D) $5
Answer:
5. Market price = $50; book value per share = $20. Market-to-book ratio = ?
A) 0.4 B) 2.5 C) 5.0 D) 10.0
Answer:
6. Price = $60; EPS = $4. P/E ratio = ?
A) 4 B) 10 C) 15 D) 24
Answer:
7. Current assets $300; current liabilities $150. Current ratio = ?
A) 0.5 B) 1.0 C) 2.0 D) 3.0
Answer:
8. Cash $50; AR $100; inventory $150; CL $150. Quick ratio = ?
A) 0.5 B) 1.0 C) 1.5 D) 2.0
Answer:
9. Current assets $500; current liabilities $320. Net working capital = ?
A) $180 B) $320 C) $500 D) $820
Answer:
10. COGS $600; average inventory $100. Inventory turnover = ?
A) 3 B) 4 C) 6 D) 10
Answer:
11. In rising prices, LIFO liquidation usually causes reported profit to:
A) Decrease B) Increase C) Stay same D) Become zero
Answer:
12. DPS $2; market price $40. Dividend yield = ?
A) 2% B) 4% C) 5% D) 8%
Answer:
13. EBIT $300; interest expense $50. Times interest earned = ?
A) 4 B) 5 C) 6 D) 7
Answer:
14. Total equity $1,000; preferred equity $200; common shares 80. BVPS = ?
A) $8 B) $10 C) $12.5 D) $15
Answer:
15. Net profit margin 5%; asset turnover 2; equity multiplier 1.5. ROE = ?
A) 10% B) 15% C) 20% D) 25%
Answer:
---
Section B: Corporate Finance (Q16–Q30)
16. Beta measures:
A) Unsystematic risk B) Systematic risk C) Liquidity risk D) Default risk
Answer:
17. Rf = 3%; Rm = 9%; beta = 1.2. Cost of equity = ?
A) 7.2% B) 10.2% C) 12.0% D) 14.4%
Answer:
18. A beta of 0.5 means the stock is:
A) More volatile than market B) Less volatile than market C) Same as market D) Risk-free
Answer:
19. Debt 40% at 6% after-tax; equity 60% at 12%. WACC = ?
A) 8.4% B) 9.6% C) 10.2% D) 12%
Answer:
20. Pre-tax debt cost 8%; tax rate 30%. After-tax cost of debt = ?
A) 2.4% B) 5.6% C) 8.0% D) 11.4%
Answer:
21. Preferred dividend $5; price $50. Cost of preferred stock = ?
A) 5% B) 10% C) 15% D) 20%
Answer:
22. D1 = $2; P0 = $40; g = 5%. Cost of equity = ?
A) 5% B) 10% C) 12% D) 15%
Answer:
**23. D1 = $3; r = 10%; g = 4%. Intrinsic value = ?**
A) $30 B) $40 C) $50 D) $75
Answer:
24. IPO occurs in the:
A) Primary market B) Secondary market C) Money market D) Futures market
Answer:
25. Trading of existing shares on NYSE is in the:
A) Primary market B) Secondary market C) Third market D) IPO market
Answer:
26. Which is a key investment bank service?
A) Underwriting securities B) Auditing C) Tax filing D) Inventory control
Answer:
27. A lockbox system primarily:
A) Delays payments B) Accelerates cash collections C) Increases inventory D) Reduces sales
Answer:
28. Terms 2/10, net 30. Approx. cost of not taking discount = ?
A) 12.2% B) 24.5% C) 37.2% D) 50.0%
Answer:
29. Factoring without recourse means:
A) Seller retains credit risk B) Buyer assumes credit risk C) Bank assumes no risk D) It is a loan
Answer:
30. Currency appreciation generally makes exports:
A) Cheaper B) More expensive C) Unchanged D) Illegal
Answer:
---
Section C: Decision Analysis (Q31–Q50)
31. Selling price $100; variable cost $60. Contribution margin per unit = ?
A) $40 B) $60 C) $100 D) $160
Answer:
32. Fixed costs $200,000; CM per unit $40. Break-even units = ?
A) 2,000 B) 4,000 C) 5,000 D) 8,000
Answer:
33. Fixed costs $200,000; target profit $100,000; CM $40. Target units = ?
A) 5,000 B) 7,500 C) 10,000 D) 12,500
Answer:
34. Actual sales 8,000; break-even 5,000. Margin of safety ratio = ?
A) 25% B) 37.5% C) 60% D) 62.5%
Answer:
35. A special order should be accepted if:
A) Incremental revenue > incremental cost B) Total revenue > total cost C) Price > average cost D) Fixed costs are covered
Answer:
36. Special order price $50; variable cost $40; spare capacity. Effect = ?
A) Reject, loss $10 B) Accept, +$10 CM per unit C) Accept, loss $40 D) Reject, no effect
Answer:
37. If special order uses full capacity, the decision must include:
A) Sunk cost B) Opportunity cost C) Allocated fixed cost D) Depreciation
Answer:
38. Relevant cost to make usually includes:
A) Variable costs + avoidable fixed costs B) All allocated fixed costs C) Sunk costs D) Interest on old loan
Answer:
39. Sell at split-off $20; process further costs $10; final selling price $35. Decision?
A) Sell now B) Process further C) Drop product D) Buy instead
Answer:
40. Drop a segment if:
A) Avoidable fixed costs > contribution margin B) Allocated fixed costs > CM C) Sales > variable costs D) CM > 0
Answer:
41. In keep-or-drop decisions, allocated common fixed costs are usually:
A) Relevant B) Irrelevant C) Incremental D) Avoidable
Answer:
42. CM $400; operating income $100. Operating leverage = ?
A) 0.25 B) 1 C) 4 D) 5
Answer:
43. High operating leverage means:
A) Lower risk B) Higher risk and higher reward C) No fixed costs D) Lower CM
Answer:
44. Price +10%; quantity demanded -20%. Demand is:
A) Inelastic B) Elastic C) Unitary D) Perfectly inelastic
Answer:
45. Target cost = ?
A) Market price - desired profit B) Cost + markup C) Variable cost + fixed cost D) Actual cost - profit
Answer:
46. Value engineering focuses on:
A) Reducing cost without reducing value B) Increasing price C) Increasing inventory D) Delaying production
Answer:
47. Price skimming means:
A) Low initial price B) High initial price C) Cost-plus pricing D) Penetration pricing
Answer:
48. Penetration pricing means:
A) High initial price B) Low initial price C) Target costing D) Skimming
Answer:
49. Which is a form of divestiture?
A) Spin-off B) Merger C) IPO D) Lockbox
Answer:
50. Sensitivity analysis in CVP changes:
A) One variable at a time B) All variables randomly C) Only fixed costs D) Only taxes
Answer:
---
Section D: Risk Management (Q51–Q60)
51. Which is a COSO ERM component?
A) Governance and Culture B) Inventory turnover C) Dividend yield D) Quick ratio
Answer:
52. Buying insurance is which risk response?
A) Avoid B) Reduce C) Share D) Accept
Answer:
53. Eliminating an activity causing risk is:
A) Avoid B) Share C) Accept D) Reduce
Answer:
54. Inherent risk is risk:
A) Before controls B) After controls C) Only financial D) Only operational
Answer:
55. Residual risk is risk:
A) Before controls B) After controls C) Only strategic D) Only compliance
Answer:
56. Expected loss = ?
A) Probability × loss amount B) Loss / probability C) Probability + loss D) Loss - probability
Answer:
57. Monte Carlo simulation uses:
A) Random variables B) Only historical data C) One scenario D) No probability
Answer:
58. Scenario analysis evaluates:
A) Alternative future states B) Only best case C) Only worst case D) Random numbers only
Answer:
59. Capital adequacy ratio is most relevant to:
A) Banks B) Retail stores C) Manufacturing D) Service firms
Answer:
60. Data ethics primarily concerns:
A) Privacy, security, ownership B) Inventory costing C) Break-even D) Beta
Answer:
---
Section E: Investment Decisions (Q61–Q75)
61. A project with NPV > 0 should be:
A) Accepted B) Rejected C) Delayed D) Ignored
Answer:
62. A project with IRR > required rate should be:
A) Accepted B) Rejected C) Sold D) Hedged
Answer:
63. Payback period’s main weakness is:
A) Ignores time value of money B) Uses NPV C) Uses IRR D) Includes all cash flows
Answer:
64. Discounted payback uses:
A) Present values of cash flows B) Accounting income C) Gross profit D) Beta
Answer:
65. Initial investment includes:
A) Cost + installation + working capital B) Only cost C) Only working capital D) Sunk costs
Answer:
66. Relevant cash flows are:
A) Incremental B) Sunk C) Allocated D) Historical
Answer:
67. Sunk costs are:
A) Relevant B) Irrelevant C) Incremental D) Taxable
Answer:
68. Depreciation tax shield = ?
A) Depreciation × tax rate B) Depreciation / tax rate C) Tax rate / depreciation D) Depreciation + tax
Answer:
69. Option to expand is a:
A) Real option B) Put option C) Call option on stock D) Warrant
Answer:
70. Option to abandon is a:
A) Real option B) Financial option C) Futures contract D) Swap
Answer:
71. Option to delay a project is a:
A) Timing option B) Growth option C) Abandonment option D) Swap
Answer:
72. If NPV = 0, then IRR = ?
A) Discount rate B) Zero C) Risk-free rate D) Infinity
Answer:
73. ARR uses:
A) Accounting income B) Cash flow only C) NPV D) IRR
Answer:
74. Correct capital budgeting order?
A) Identify, evaluate, select, implement, review B) Evaluate, identify, review, select C) Select, identify, evaluate D) Implement, review, identify
Answer:
75. Risk analysis technique that changes one input is:
A) Sensitivity analysis B) Monte Carlo C) Scenario analysis D) Simulation
Answer:
---
Section F: Professional Ethics (Q76–Q90)
76. IMA ethical principles include:
A) Honesty, Fairness, Objectivity, Responsibility B) Competence, Confidentiality C) Integrity, Credibility D) Profit, Growth
Answer:
77. IMA standards include:
A) Competence, Confidentiality, Integrity, Credibility B) Honesty, Fairness C) Objectivity, Responsibility D) Profit, Cash
Answer:
78. Not disclosing confidential employer information is:
A) Confidentiality B) Integrity C) Competence D) Credibility
Answer:
79. Avoiding conflicts of interest is:
A) Integrity B) Confidentiality C) Competence D) Credibility
Answer:
80. Communicating information fairly and objectively is:
A) Credibility B) Integrity C) Confidentiality D) Competence
Answer:
81. Maintaining professional knowledge is:
A) Competence B) Integrity C) Credibility D) Confidentiality
Answer:
82. Fraud triangle includes:
A) Pressure, Opportunity, Rationalization B) Cash, Inventory, AR C) NPV, IRR, Payback D) Beta, WACC, CAPM
Answer:
83. Stealing cash is an example of:
A) Asset misappropriation B) Financial statement fraud C) Corruption D) CSR
Answer:
84. First step in resolving an ethical issue:
A) Follow organization’s policies B) Resign immediately C) Call police D) Ignore
Answer:
85. If supervisor is involved, next step is:
A) Escalate to next level B) Do nothing C) Resign D) Delete records
Answer:
86. FCPA prohibits:
A) Bribery of foreign officials B) Insider trading C) Tax evasion D) Money laundering
Answer:
87. CSR stands for:
A) Corporate Social Responsibility B) Cost Sales Ratio C) Cash Reserve Ratio D) Current Solvency Ratio
Answer:
88. Data ethics includes:
A) Protecting privacy B) Increasing sales C) Reducing tax D) Ignoring security
Answer:
89. CFO manipulates statements to hit targets. Which IMA standard is violated?
A) Integrity and Credibility B) Competence C) Confidentiality D) Fairness
Answer:
90. Which is an IMA standard?
A) Credibility B) Profitability C) Liquidity D) Solvency
Answer:
---
Mixed / CBQ-Style Questions (Q91–Q100)
91. If income tax rate increases, break-even point in sales usually:
A) Increases B) Decreases C) Unchanged D) Becomes zero
Answer:
92. Change in accounting principle is usually applied:
A) Retrospectively B) Prospectively C) Never D) Only future
Answer:
93. Change in accounting estimate is applied:
A) Prospectively B) Retrospectively C) Retroactively D) Not at all
Answer:
94. Collecting accounts receivable affects quick ratio as:
A) Increases B) Decreases C) Unchanged D) Becomes zero
Answer:
95. EBIT $500; interest $100. Times interest earned = ?
A) 4 B) 5 C) 6 D) 10
Answer:
96. Factoring with recourse means:
A) Seller retains credit risk B) Buyer assumes all risk C) Bank assumes all risk D) No risk exists
Answer:
97. Segment CM $50,000; avoidable FC $60,000. Decision?
A) Keep B) Drop C) Expand D) Ignore
Answer:
**98. Buy price $25; variable cost to make $18; avoidable FC $4 per unit. Make cost = ?**
A) $18 B) $22 C) $25 D) $29
Answer:
**99. Sell now $20; process further cost $10; final price $35. Incremental benefit = ?**
A) $5 B) $10 C) $15 D) $20
Answer:
100. ROE = 20%; dividend payout = 25%. SGR = ?
A) 5% B) 10% C) 15% D) 20%
Answer:
www.g
Answers:
Below is a 100-MCQ practice set based on the exam feedback/topics you covered
Note: These are practice questions, not actual exam questions.
Section A: Financial Statement Analysis (Q1–Q15)
1. Net income $120,000; beginning equity $800,000; ending equity $1,000,000. ROE = ?
A) 12% B) 13.33% C) 15% D) 10%
Answer: B
2. Which is NOT a component of the 3-step DuPont ROE formula?
A) Net profit margin B) Total asset turnover C) Equity multiplier D) Inventory turnover
Answer: D
3. ROE = 18%; dividend payout = 30%. Sustainable growth rate = ?
A) 12.6% B) 18% C) 5.4% D) 30%
Answer: A
**4. EPS = $5; dividend payout = 40%. Dividend per share = ?**
A) $1 B) $2 C) $3 D) $5
Answer: B
5. Market price = $50; book value per share = $20. Market-to-book ratio = ?
A) 0.4 B) 2.5 C) 5.0 D) 10.0
Answer: B
6. Price = $60; EPS = $4. P/E ratio = ?
A) 4 B) 10 C) 15 D) 24
Answer: C
7. Current assets $300; current liabilities $150. Current ratio = ?
A) 0.5 B) 1.0 C) 2.0 D) 3.0
Answer: C
8. Cash $50; AR $100; inventory $150; CL $150. Quick ratio = ?
A) 0.5 B) 1.0 C) 1.5 D) 2.0
Answer: B
9. Current assets $500; current liabilities $320. Net working capital = ?
A) $180 B) $320 C) $500 D) $820
Answer: A
10. COGS $600; average inventory $100. Inventory turnover = ?
A) 3 B) 4 C) 6 D) 10
Answer: C
11. In rising prices, LIFO liquidation usually causes reported profit to:
A) Decrease B) Increase C) Stay same D) Become zero
Answer: B
12. DPS $2; market price $40. Dividend yield = ?
A) 2% B) 4% C) 5% D) 8%
Answer: C
13. EBIT $300; interest expense $50. Times interest earned = ?
A) 4 B) 5 C) 6 D) 7
Answer: C
14. Total equity $1,000; preferred equity $200; common shares 80. BVPS = ?
A) $8 B) $10 C) $12.5 D) $15
Answer: B
15. Net profit margin 5%; asset turnover 2; equity multiplier 1.5. ROE = ?
A) 10% B) 15% C) 20% D) 25%
Answer: B
---
Section B: Corporate Finance (Q16–Q30)
16. Beta measures:
A) Unsystematic risk B) Systematic risk C) Liquidity risk D) Default risk
Answer: B
17. Rf = 3%; Rm = 9%; beta = 1.2. Cost of equity = ?
A) 7.2% B) 10.2% C) 12.0% D) 14.4%
Answer: B
18. A beta of 0.5 means the stock is:
A) More volatile than market B) Less volatile than market C) Same as market D) Risk-free
Answer: B
19. Debt 40% at 6% after-tax; equity 60% at 12%. WACC = ?
A) 8.4% B) 9.6% C) 10.2% D) 12%
Answer: B
20. Pre-tax debt cost 8%; tax rate 30%. After-tax cost of debt = ?
A) 2.4% B) 5.6% C) 8.0% D) 11.4%
Answer: B
21. Preferred dividend $5; price $50. Cost of preferred stock = ?
A) 5% B) 10% C) 15% D) 20%
Answer: B
22. D1 = $2; P0 = $40; g = 5%. Cost of equity = ?
A) 5% B) 10% C) 12% D) 15%
Answer: B
**23. D1 = $3; r = 10%; g = 4%. Intrinsic value = ?**
A) $30 B) $40 C) $50 D) $75
Answer: C
24. IPO occurs in the:
A) Primary market B) Secondary market C) Money market D) Futures market
Answer: A
25. Trading of existing shares on NYSE is in the:
A) Primary market B) Secondary market C) Third market D) IPO market
Answer: B
26. Which is a key investment bank service?
A) Underwriting securities B) Auditing C) Tax filing D) Inventory control
Answer: A
27. A lockbox system primarily:
A) Delays payments B) Accelerates cash collections C) Increases inventory D) Reduces sales
Answer: B
28. Terms 2/10, net 30. Approx. cost of not taking discount = ?
A) 12.2% B) 24.5% C) 37.2% D) 50.0%
Answer: C
29. Factoring without recourse means:
A) Seller retains credit risk B) Buyer assumes credit risk C) Bank assumes no risk D) It is a loan
Answer: B
30. Currency appreciation generally makes exports:
A) Cheaper B) More expensive C) Unchanged D) Illegal
Answer: B
---
Section C: Decision Analysis (Q31–Q50)
31. Selling price $100; variable cost $60. Contribution margin per unit = ?
A) $40 B) $60 C) $100 D) $160
Answer: A
32. Fixed costs $200,000; CM per unit $40. Break-even units = ?
A) 2,000 B) 4,000 C) 5,000 D) 8,000
Answer: C
33. Fixed costs $200,000; target profit $100,000; CM $40. Target units = ?
A) 5,000 B) 7,500 C) 10,000 D) 12,500
Answer: B
34. Actual sales 8,000; break-even 5,000. Margin of safety ratio = ?
A) 25% B) 37.5% C) 60% D) 62.5%
Answer: B
35. A special order should be accepted if:
A) Incremental revenue > incremental cost B) Total revenue > total cost C) Price > average cost D) Fixed costs are covered
Answer: A
36. Special order price $50; variable cost $40; spare capacity. Effect = ?
A) Reject, loss $10 B) Accept, +$10 CM per unit C) Accept, loss $40 D) Reject, no effect
Answer: B
37. If special order uses full capacity, the decision must include:
A) Sunk cost B) Opportunity cost C) Allocated fixed cost D) Depreciation
Answer: B
38. Relevant cost to make usually includes:
A) Variable costs + avoidable fixed costs B) All allocated fixed costs C) Sunk costs D) Interest on old loan
Answer: A
39. Sell at split-off $20; process further costs $10; final selling price $35. Decision?
A) Sell now B) Process further C) Drop product D) Buy instead
Answer: B
40. Drop a segment if:
A) Avoidable fixed costs > contribution margin B) Allocated fixed costs > CM C) Sales > variable costs D) CM > 0
Answer: A
41. In keep-or-drop decisions, allocated common fixed costs are usually:
A) Relevant B) Irrelevant C) Incremental D) Avoidable
Answer: B
42. CM $400; operating income $100. Operating leverage = ?
A) 0.25 B) 1 C) 4 D) 5
Answer: C
43. High operating leverage means:
A) Lower risk B) Higher risk and higher reward C) No fixed costs D) Lower CM
Answer: B
44. Price +10%; quantity demanded -20%. Demand is:
A) Inelastic B) Elastic C) Unitary D) Perfectly inelastic
Answer: B
45. Target cost = ?
A) Market price - desired profit B) Cost + markup C) Variable cost + fixed cost D) Actual cost - profit
Answer: A
46. Value engineering focuses on:
A) Reducing cost without reducing value B) Increasing price C) Increasing inventory D) Delaying production
Answer: A
47. Price skimming means:
A) Low initial price B) High initial price C) Cost-plus pricing D) Penetration pricing
Answer: B
48. Penetration pricing means:
A) High initial price B) Low initial price C) Target costing D) Skimming
Answer: B
49. Which is a form of divestiture?
A) Spin-off B) Merger C) IPO D) Lockbox
Answer: A
50. Sensitivity analysis in CVP changes:
A) One variable at a time B) All variables randomly C) Only fixed costs D) Only taxes
Answer: A
---
Section D: Risk Management (Q51–Q60)
51. Which is a COSO ERM component?
A) Governance and Culture B) Inventory turnover C) Dividend yield D) Quick ratio
Answer: A
52. Buying insurance is which risk response?
A) Avoid B) Reduce C) Share D) Accept
Answer: C
53. Eliminating an activity causing risk is:
A) Avoid B) Share C) Accept D) Reduce
Answer: A
54. Inherent risk is risk:
A) Before controls B) After controls C) Only financial D) Only operational
Answer: A
55. Residual risk is risk:
A) Before controls B) After controls C) Only strategic D) Only compliance
Answer: B
56. Expected loss = ?
A) Probability × loss amount B) Loss / probability C) Probability + loss D) Loss - probability
Answer: A
57. Monte Carlo simulation uses:
A) Random variables B) Only historical data C) One scenario D) No probability
Answer: A
58. Scenario analysis evaluates:
A) Alternative future states B) Only best case C) Only worst case D) Random numbers only
Answer: A
59. Capital adequacy ratio is most relevant to:
A) Banks B) Retail stores C) Manufacturing D) Service firms
Answer: A
60. Data ethics primarily concerns:
A) Privacy, security, ownership B) Inventory costing C) Break-even D) Beta
Answer: A
---
Section E: Investment Decisions (Q61–Q75)
61. A project with NPV > 0 should be:
A) Accepted B) Rejected C) Delayed D) Ignored
Answer: A
62. A project with IRR > required rate should be:
A) Accepted B) Rejected C) Sold D) Hedged
Answer: A
63. Payback period’s main weakness is:
A) Ignores time value of money B) Uses NPV C) Uses IRR D) Includes all cash flows
Answer: A
64. Discounted payback uses:
A) Present values of cash flows B) Accounting income C) Gross profit D) Beta
Answer: A
65. Initial investment includes:
A) Cost + installation + working capital B) Only cost C) Only working capital D) Sunk costs
Answer: A
66. Relevant cash flows are:
A) Incremental B) Sunk C) Allocated D) Historical
Answer: A
67. Sunk costs are:
A) Relevant B) Irrelevant C) Incremental D) Taxable
Answer: B
68. Depreciation tax shield = ?
A) Depreciation × tax rate B) Depreciation / tax rate C) Tax rate / depreciation D) Depreciation + tax
Answer: A
69. Option to expand is a:
A) Real option B) Put option C) Call option on stock D) Warrant
Answer: A
70. Option to abandon is a:
A) Real option B) Financial option C) Futures contract D) Swap
Answer: A
71. Option to delay a project is a:
A) Timing option B) Growth option C) Abandonment option D) Swap
Answer: A
72. If NPV = 0, then IRR = ?
A) Discount rate B) Zero C) Risk-free rate D) Infinity
Answer: A
73. ARR uses:
A) Accounting income B) Cash flow only C) NPV D) IRR
Answer: A
74. Correct capital budgeting order?
A) Identify, evaluate, select, implement, review B) Evaluate, identify, review, select C) Select, identify, evaluate D) Implement, review, identify
Answer: A
75. Risk analysis technique that changes one input is:
A) Sensitivity analysis B) Monte Carlo C) Scenario analysis D) Simulation
Answer: A
---
Section F: Professional Ethics (Q76–Q90)
76. IMA ethical principles include:
A) Honesty, Fairness, Objectivity, Responsibility B) Competence, Confidentiality C) Integrity, Credibility D) Profit, Growth
Answer: A
77. IMA standards include:
A) Competence, Confidentiality, Integrity, Credibility B) Honesty, Fairness C) Objectivity, Responsibility D) Profit, Cash
Answer: A
78. Not disclosing confidential employer information is:
A) Confidentiality B) Integrity C) Competence D) Credibility
Answer: A
79. Avoiding conflicts of interest is:
A) Integrity B) Confidentiality C) Competence D) Credibility
Answer: A
80. Communicating information fairly and objectively is:
A) Credibility B) Integrity C) Confidentiality D) Competence
Answer: A
81. Maintaining professional knowledge is:
A) Competence B) Integrity C) Credibility D) Confidentiality
Answer: A
82. Fraud triangle includes:
A) Pressure, Opportunity, Rationalization B) Cash, Inventory, AR C) NPV, IRR, Payback D) Beta, WACC, CAPM
Answer: A
83. Stealing cash is an example of:
A) Asset misappropriation B) Financial statement fraud C) Corruption D) CSR
Answer: A
84. First step in resolving an ethical issue:
A) Follow organization’s policies B) Resign immediately C) Call police D) Ignore
Answer: A
85. If supervisor is involved, next step is:
A) Escalate to next level B) Do nothing C) Resign D) Delete records
Answer: A
86. FCPA prohibits:
A) Bribery of foreign officials B) Insider trading C) Tax evasion D) Money laundering
Answer: A
87. CSR stands for:
A) Corporate Social Responsibility B) Cost Sales Ratio C) Cash Reserve Ratio D) Current Solvency Ratio
Answer: A
88. Data ethics includes:
A) Protecting privacy B) Increasing sales C) Reducing tax D) Ignoring security
Answer: A
89. CFO manipulates statements to hit targets. Which IMA standard is violated?
A) Integrity and Credibility B) Competence C) Confidentiality D) Fairness
Answer: A
90. Which is an IMA standard?
A) Credibility B) Profitability C) Liquidity D) Solvency
Answer: A
---
Mixed / CBQ-Style Questions (Q91–Q100)
91. If income tax rate increases, break-even point in sales usually:
A) Increases B) Decreases C) Unchanged D) Becomes zero
Answer: C
92. Change in accounting principle is usually applied:
A) Retrospectively B) Prospectively C) Never D) Only future
Answer: A
93. Change in accounting estimate is applied:
A) Prospectively B) Retrospectively C) Retroactively D) Not at all
Answer: A
94. Collecting accounts receivable affects quick ratio as:
A) Increases B) Decreases C) Unchanged D) Becomes zero
Answer: C
95. EBIT $500; interest $100. Times interest earned = ?
A) 4 B) 5 C) 6 D) 10
Answer: B
96. Factoring with recourse means:
A) Seller retains credit risk B) Buyer assumes all risk C) Bank assumes all risk D) No risk exists
Answer: A
97. Segment CM $50,000; avoidable FC $60,000. Decision?
A) Keep B) Drop C) Expand D) Ignore
Answer: B
**98. Buy price $25; variable cost to make $18; avoidable FC $4 per unit. Make cost = ?**
A) $18 B) $22 C) $25 D) $29
Answer: B
**99. Sell now $20; process further cost $10; final price $35. Incremental benefit = ?**
A) $5 B) $10 C) $15 D) $20
Answer: A
100. ROE = 20%; dividend payout = 25%. SGR = ?
A) 5% B) 10% C) 15% D) 20%
Answer c
