IMANET CMA Practice Test Questions ( Updated) – Real Exam Questions & Dumps PDF
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IMANET CMA Sample Questions – Free Practice Test & Real Exam Prep
Question #1
The relevance of a particular cost to a decision is determined by
A. Riskiness of the decision.
B. Number of decision variables.
C. Amount of the cost.
D. Potential effect on the decision.
Answer: D
Explanation:
Relevance is the capacity of information to make a difference in a decision by helping users of that
information to predict the outcomes of events or to confirm or correct prior expectations. Thus,
relevant costs are those expected future costs that vary with the action taken. All other costs are
constant and therefore have no effect on the decision.
Question #2
Which of the following is not an example of a real option in a capital budgeting decision?
A. Abandonment.
B. Follow-up investment.
C. Option to wait and learn.
D. Risk-adjusted discount rates.
Answer: D
Explanation:
Real options include such factors as the ability to abandon the project early. the opportunity for
follow-up investments or ability’ to create new products, the ability’ to base additional cash outflows
on a wait-and-learn opportunity’, or the option to change capacity’ during the project. Risk-adjusted
discount rates are not real options but are a form of sensitivity’ analysis.
Question #3
When evaluating a capital budgeting project, a company’s treasurer wants to know how changes inoperating income and the number of years in the project’s useful life will affect its breakeven internalrate of return. The treasurer is most likely to use
A. Scenario analysis.
B.Sensitivity analysis.
C. Monte Carlo simulation.
D. Learning curve analysis.
Answer: B
Explanation:
Forecasts of many calculated NPVs under various assumptions are compared to see how sensitive
NPV is to changing conditions. Changing or relaxing the assumptions about a certain variable or
group of variables may drastically alter the NPV. Thus, the asset may appear to be much riskier than
was originally predicted. In summary, sensitivity analysis is simply an iterative process of recalculated
returns based on changing assumptions
Question #4
When determining net present value in an inflationary environment, adjustments should be made to
A. Increase the discount rate, only.
B. Increase the estimated cash inflows and increase the discount rate.
C. Increase the estimated cash inflows but not the discount rate.
D. Decrease the estimated cash inflows and increase the discount rate.
Answer: B
Explanation:
In an inflationary environment, nominal future cash flows should increase to refilect the decrease in
the value of the unit of measure. Also, the investor should increase the discount rate to refilect the
increased inflation premium arising from the additional uncertainty. Lenders will require a higher
interest rate in an inflationary environment.
Question #5
Sensitivity analysis is used in capital budgeting to
A. Estimate a project’s internal rate of return.
B. Determine the amount that a variable can change without generating unacceptable results.
C. Simulate probabilistic customer reactions to a new product.
D. Identify the required market share to make a new product viable and produce acceptable results.
Answer: B
Explanation:
After a problem has been formulated into any mathematical model, it may be subjected to sensitivity
analysis, which is a trial-and-error method used to determine the sensitivity o f the estimates used.
For example, forecasts of many calculated NPVs under various assumptions may be compared to
determine how sensitive the NPV is to changing conditions. Changing the assumptions about a
certain variable or group of variables may drastically alter the NPV, suggesting that the risk of the
investment may be excessive.
Question #6
A widely used approach that is used to recognize uncertainly about individual economicvariables while obtaining an immediate financial estimate of the consequences of possible predictionerrors is
A. Expected value analysis.
B. Learning curve analysis.
C. Sensitivity analysis.
D. Regression analysis.
Answer: C
Explanation:
Sensitivity analysis recognizes uncertainly about estimates by making several calculations using
varying estimates. For instance, several forecasts of net present value (NPV) might be calculated
under various assumptions to determine the sensitivity of the NPV to changing conditions or
prediction errors. Changing or relaxing the assumptions about a certain variable or group of variables
may drastically alter the NPV, resulting in a much riskier asset than was originally forecast.
Question #7
A manager wants to know the effect of a possible change in cash flows on the net present value of aproject. The technique used for this purpose is
A. Sensitivity analysis.
B. Risk analysis.
C. Cost behavior analysis.
D. Return on investment analysis.
Answer: A
Explanation:
Sensitivity analysis is a technique to evaluate a model in terms of the effect of changing the values of
the parameters. It answers “what if” questions. In capital budgeting models, sensitivity analysis is the
examination of alternative outcomes under different assumptions.
Question #8
When the risks of the individual components of a project’s cash flows are different, an acceptableprocedure to evaluate these cash flows is to
A. Divide each cash flow by the payback period.
B. Compute the net present value of each cash flow using the firm’s cost of capital.
C. Compare the internal rate of return from each cash flow to its risk.
D. Discount each cash flow using a discount rate that refilects the degree of risk.
Answer: D
Explanation:
Risk-adjusted discount rates can be used to evaluate capital investment options. If risks differ among
various elements of the cash flows, then different discount rates can be used for different flows.
Question #9
The proper discount rate to use in calculating certainty equivalent net present value is the
A. Risk-adjusted discount rate.
B. Cost of capital.
C. Risk-free rate.
D. Cost of equity capital.
Answer: C
Explanation:
Rational investors choose projects that yield the best return given some level of risk. If an investor
desires no risk, that is, an absolutely certain rate of return, the risk4ree rate is used in calculating net
present value. The risk-free rate is the return on a risk-free investment such as government bonds.
Certainty equivalent adjustments involve a technique directly drawn from utility theory. It forces the
decision maker to specify at what point the firm is indifferent to the choice between a sum of money
that is certain and the expected value of a risky sum.
Question #10
An analysis of a company’s planned equity financing using the Capital Asset Pricing Model (orSecurity Market Line) incorporates only the
A. Expected market earnings, the current U.S. treasury bond yield, and the beta coefficient.
B. Expected market earnings and the price-earnings ratio.
C. Current U.S. treasury bond yield, the price-earnings ratio, and the beta coefficient.
D. Current U.S. treasury bond yield and the dividend payout ratio.
Answer: A
Explanation:
The capital asset pricing model adds the risk-free rate to the product of the market risk premium and
the beta coefficient. The market risk premium is the amount above the risk1ree rate (approximated
by the U.S. treasury bond yield) that must be paid to induce investment in the market. The beta
coefficient of an individual stock is the correlation between the price volatility of the stock market as
a whole and the price volatility of the individual stock.
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