CMA P2 Flashcards

1
Q

“Fairness.” IMA Statement of Ethical Professional Practice, one of the overarching
ethical principles

A

acting in an impartial manner and being free from bias, dishonesty, or injustice; being
open-minded, tolerant and accepting

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2
Q

Objectivity

A

basing a judgment on an established set of criteria.

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3
Q

“Responsibility”

A

performing an act or a function completely and in a timely manner; being answerable or
accountable for something that is within your own power, control or management.

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4
Q

Fraud Triangle

A

The three sides of the Fraud Triangle are pressure, opportunity, and rationalization. All
three conditions need to be present for an employee to commit a fraudulent act against
an employer. Pressure is present, because the employee has a gambling problem.
Rationalization is present, because the employee is disgruntled and can rationalize the
fraudulent act. However, because the company has a strong internal control structure in
its accounting department, the disgruntled employee will not have much opportunity to
commit a fraudulent act. The fraud risk for the company’s situation is not eliminated, but
it is lowered by the strong internal control structure.

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5
Q

If consumer income increases,

A

the demand curve for all normal goods will shift to the
right.

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6
Q

When a product has elastic demand, the percentage change in price

A

is less than the percentage change in quantity demanded.

When a product has an elastic demand, any percentage change in price results in
a larger percentage change
in the quantity demanded.

For example, a 12% decrease in price will cause the quantity
demanded to increase by more than 12%.

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7
Q

A monopoly will maximize profits if it produces an output

A

where marginal cost (the cost to produce one more unit) is equal to
the marginal revenue (the revenue received from producing and selling one more unit)

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8
Q

represents a plot of the relation between expected return and systemic risk

A

security market line

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9
Q

represents a plot of the relation between expected return and systemic risk

A

beta coefficient

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10
Q

Stock price = D1 ÷ (r − g)

A

A company’s stock is trading at $20 per share. If the company has a 7% cost of capital and announced that it would distribute $1 dividends per share next year, what is the dividend growth that investors expect out of the stock?

2% = 7% − ($1 ÷ $20)

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11
Q

A company paid $10 dividends per share in the current year and is expected to pay 3% more of this next year. Assuming the company’s cost of equity is 8%, and dividend growth remains the same in perpetuity, what is the price of the company’s stock?

A

The stock price computation is: [$10 × (1 + 3%)] ÷ ( 8% − 3% ) resulting in $206.

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