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Free CMA Exam Braindumps (page: 134)

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Richardson Supply has a $100 invoice with payment terms of 2/10, net 60. Richardson can either take the discount or place the funds in a money market account pang 6% interest. Using a 360-day year, Richardson's cost of not talking the cash discount is

  1. 12.2%.
  2. 8.7%
  3. 6.4%
  4. 6.2%.

Answer(s): B

Explanation:

The company will initially lose $2 by not taking the discount. This amount is partially offset by interest earned on $98 for 50 days of $817. Thus, the net cost is $1.183 ($200 - $817). Since a 360-dayyear has 7.2 fifty-day periods, the total annualized cost is $8.52 (7.2 x $1.183). The loss rate is about 8.7% ($8.52/$98)



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Using a 380-day year, what is the opportunity cost to a buyer of not accepting terms 3/10, net 45?

  1. 55.67%
  2. 31.81%
  3. 22.27%
  4. 101.73%

Answer(s): B

Explanation:

Payments should be made within discount periods if the return is more than the firm's cost of capital. With terms of 3/10, net45; the buyer is earning a 3% savings for paying on the tenth day, or 35 days earlier than would otherwise be required. For example, on a $1,000 invoice, the payment would be only $970. The $30 savings is comparable to interest earned on a $970 loan to the vendor (the payment is not due for another 35 days). The interest rate on this hypothetical loan is 3.09278% ($30 - $970). That return is for a 35-day period. Annualizing the return requires determining the number of 35-day periods in a year. Multiplying the return for 35 days times the periods in a year results in an annual rate of return of about 31.81% [3.09276% x (360 days ÷ 35 days)].



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A company obtained a short-term bank loan of $500,000 at an annual interest rate of 8%. As a condition of the loan, the company is required to maintain a compensating balance of $100,000 in its checking account. The checking account earns interest at an annual rate of 3%. Ordinarily, the company maintains a balance of $50,000 in its account for transaction purposes. What is the effective interest rate of the loan?

  1. 7.77%
  2. 8.22%
  3. 9.25%
  4. 8.56%

Answer(s): D

Explanation:

Of the $500,000 borrowed, the debtor has the use of only $450,000. The compensating balance provision requires a minimum balance that is $50,000 greater than the balance that the company usually maintains. At 8% on a $500,000 loan, the annual interest expense is $40,000. However, this amount is reduced by the interest earned on the extra $50,000 in the checking account. At 3%, the extra $50,000 earns $1,500 per year. Thus, the net expense is $38,500. The effective interest rate is 8.56% ($38500 ÷ $450,000)



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A firm that often factors its accounts receivable has an agreement with its finance company that requires the firm to maintain a 6% reserve and charges 1% commission on the amount of receivables. The net proceeds would be further reduced by an annual interest charge of 10% on the monies advanced. Assuming a 360-day year, what amount of cash (rounded to the nearest dollar) will the firm receive from the finance company at the time a $100,000 account that is due in 90 days is turned over to the finance company?

  1. $93,000
  2. $90,000
  3. $83,700
  4. $90,675

Answer(s): D

Explanation:

The calculation of the cash that the company will initially receive from factoring $100,000 in receivables is as follows:






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