## questions - CMA part 2

shrutisharma1101
Posts: 2
Joined: Mon May 30, 2016 9:45 am

### questions - CMA part 2

Kindly help me on the following problems:-
1) Logan Corporation, located in Boston, has experienced major distribution problems in supplying key Los Angeles-based customers. Delivery times have been as follows over the last four months.
Delivery Time in Days Number of Times Occurring
5 12
6 18
7 15
8 9
9 6

The company’s marketing manager wants to simulate the distribution process by assigning random numbers to delivery times and to other random variables. If the marketing manager uses 100 different random numbers to simulate the process, an appropriate assignment of random numbers to a 6-day delivery time would be

a. 09-14.
b. 30-60.
c. 45-74.
d. 00-18.

2) November 30, 2014 an American company signed a purchase contract to buy 2,000 specialized printed circuit board (PCB) components from a British supplier at £120 per PCB. The PCB components are to be shipped on December 30, 2014, and delivered January 15, 2015. Payment is due February 1, 2015. Payment is to be made in British pounds.
Given the information above, when should the American company record the payable on their accounting books?
A. When the contract is signed by both parties.
C. When the goods have been shipped.

Should payable be reported when delivery is made or when the contract is signed?

3)The owner of Woofie’s Video Rental cannot decide how to project the real costs of opening a rental store in a new shopping mall. The owner knows the capital investment required but is not sure of the returns from a store in a new mall. Historically, the video rental industry has had an inflation rate equal to the economic norm. The owner requires a real internal rate of return of 10%. Inflation is expected to be 3% during the next few years. The industry expects a new store to show a growth rate, without inflation, of 8%. First year revenues at the new store are expected to be \$400,000.
The revenues for the second year, using both the real rate approach and the nominal rate approach, respectively, would be
a. \$432,000 real and \$444,960 nominal.
b. \$432,000 real and \$452,000 nominal.
c. \$440,000 real and \$452,000 nominal.
d. \$440,000 real and \$453,200 nominal.

4) Right-Way Right-Way Stores is a chain of home improvement stores with 150 locations. Right-Way has identified an attractive site for a new store and Jim Smith, Director of Financial Planning, has been asked to prepare an analysis and make a recommendation for or against opening this proposed new store. In preparing his analysis, Smith has determined that the land at the proposed site will cost \$500,000 and the new store will cost \$3.5 million to build. The building contractor requires full payment at the start of construction, and it will take one year to build the store. Right-Way will finance the purchase of the land and construction of the new building with a 40-year mortgage. The mortgage payment will be \$118,000 payable annually at year end. Fixtures for the store are estimated to cost \$100,000 and will be expensed. Inventory to stock the store is estimated to cost \$100,000. Concerned about the possibility of rising prices, the company expects to purchase the fixtures and inventory at the start of construction. Advertising for the grand opening will be \$50,000, paid to the advertising agency on retainer at the start of construction. The new store will begin operations one year after the start of construction. Right-Way will depreciate the building over 20 years on a straight-line basis, and is subject to a 35% tax rate. Right-Way uses a 12% hurdle rate to evaluate projects. The company expects to earn aftertax operating income from the new store of \$1,200,000 per year.
Calculate the annual expected cash flow from the proposed new store. Show your calculation.
[the answer for this problem does not add interest expense, kindly clarify]

5) An increase in fixed operating costs will result in ______ in the degree of operating leverage.
should it not be increase??-> Edupristine quiz mentions decrease??

6)Which of the following statements is definitely correct?
a. Adding negatively correlated stocks to a portfolio can completely eliminate all the market risk from the portfolio
b. A large portfolio of stocks each with a β > 1.0, will have more market risk than a single stock with a β = 0.75
c. Company-specific risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk
d. Both B & C are correct
Is C not correct??

edupristine
Finance Junkie
Posts: 946
Joined: Wed Apr 09, 2014 6:28 am

### Re: questions - CMA part 2

Ans 1. The correct answer is C.

Ans 2. Payable should be reported when the delivery is made because in terms of realization the cost / value of the obligation can be measured reliably.

Ans 3. Could please tell us the source of the question.

Ans 4. The scenario tells us that the after tax operating income is \$1,200,000. We find the depreciation expense by dividing the building cost into the depreciation period, \$3,500,000 / 20 = \$175,000 annual depreciation expense. Assuming the interest on the mortgage is not considered when we discount a cash flow, or it is included in (taken out to arrive at) the \$1.2 million, and no change in working capital, we can calculate the Cash Flow three ways: a. Simply add the \$1,200,000 and the \$175,000 to get \$1,375,000. b. Find total net income: \$1,200,000 after tax operating income / 1-.35 = \$1,846,150 taxable income. The tax on this is 646,154, getting us back to 1,200,000 net income. Add back the 175,000 depreciation to get \$1,375,000. c. Use depreciation tax shield: Start with the \$1,846,154 taxable income. Adding the 175,000 depreciation, we get before tax cash flow of \$2,021,154. The tax on this is 707,404, but the depreciation tax shield is 61,250, resulting in 1,375,000 cash flow.

Ans 5. Yes, The operating leverage will increase with the increase of Fixed operating cost.

Ans 6. The correct answer is D. Both Option B and C are correct.

shrutisharma1101
Posts: 2
Joined: Mon May 30, 2016 9:45 am

### Re: questions - CMA part 2

edupristine
Finance Junkie
Posts: 946
Joined: Wed Apr 09, 2014 6:28 am

### Re: questions - CMA part 2

Hi Shruti

5. An increase in fixed costs will increase the company's Degree of Operating Leverage.