Study Questions Deck 1 Flashcards
(124 cards)
1
Q
Which of the following are important uses of variance analysis in comparing actual cash flows with projected cash flows?
I. Identifying unanticipated changes in inventory
II. Enhancing short-term investment income
III. Validating a capital budget
IV. Identifying delays in accounts receivable collections
A. I and II only
B. I and IV only
C. II and IV only
D. I, II, III, and IV
A
Answer : B. I and IV only
2
Q
An instrument that gives the right to buy a stated number of shares of common stock at a specified price is known as:
A. an equity warrant
B. a put option
C. a zero coupon bond
D. a subordinated debenture
A
Answer : A. an equity warrant
3
Q
A company plans to issue additional equity within the next 12 months but needs to issue debt at a low interest rate now. Which of the following instruments would BEST meet this objective?
A. Convertible bonds
B. Private placement issue
C. Preferred stock
D. Subordinated debentures
A
Answer: A. Convertible bonds
4
Q
An arrangement in which a borrower makes periodic payments to a separate custodial account that is used to repay debt is known as a:
A. sinking fund
B. balloon payment
C. mortgage
D. zero-coupon bond
A
Answer : A. sinking fund
5
Q
Which of the following instruments simplifies the paperwork connected with loans that have multiple advance features?
A. Master note
B. Banker’s acceptance
C. Indenture agreement
D. Note purchase agreement
A
Answer : A. Master note
6
Q
A put option on a company’s stock has an exercise price of $20. On the delivery date, the stock is trading at $24 per share. What should the investor who has paid $2 for the option do?
A. Not exercise the option and lose $2.
B. Not exercise the option and lose $6.
C. Exercise the option and gain $2.
D. Exercise the option and gain $4.
A
Answer : A. Not exercise the option and lose $2.
7
Q
A call option for a company has an exercise price of $50. The stock is currently trading at $60. At maturity, what should an investor who paid $3 for the option do?
A. Exercise the option and gain $7.
B. Exercise the option and gain $10.
C. Not exercise the option and lose $3.
D. Not exercise the option and lose $13.
A
Answer : A. Exercise the option and gain $7.
8
Q
In a typical swap transaction, two parties agree to exchange:
A. notional principal amounts.
B. amortization schedules.
C. maturity dates of obligations.
D. cash flows at future points in time.
A
Answer: D. cash flows at future points in time.
9
Q
A Chicago meat processor is concerned about the volatility of pork belly prices. Which of the following derivative products would be used to fix these prices within a given range?
A. Collar
B. Swap
C. Cap
D. Spot purchase
A
Answer : A. Collar
10
Q
On the basis of the following exchange rates, which of the following currency amounts has the greatest value in U.S. dollars?
A. C$750,000
B. £850,000
C. €900,000
D. ¥5,000,000
A
Answer : B. £850,000
11
Q
Which of the following is a characteristic of GIRO systems used in countries in Europe?
A. They operate through their postal systems.
B. They are primarily used for company-to-company payments.
C. They do not replace checks for the payment of bills.
D. They do not allow the use of direct debits and credits.
Answer : A. They operate through their postal systems.
A
Answer : A. They operate through their postal systems.
12
Q
Netting is used by which of the following as a cross-border payment technique?
A. European giro providers
B. Foreign subsidiaries of a company
C. Counterparties in a letter of credit transaction
D. TARGET participants
A
Answer : B. Foreign subsidiaries of a company
13
Q
In which of the following international cash management methods is title for goods transferred for intercompany sales?
A. Pooling
B. Internal factoring
C. Multilateral netting
D. Re-invoicing
A
Answer : D. Re-invoicing
14
Q
A company is based in the United States and has an operating subsidiary in Germany.
With a stable U.S. dollar and a depreciating euro, the company’s cash manager may elect to:
A. pool excess funds in the United States to offset German deficits.
B. implement a dollar-based multilateral netting system.
C. start leading receivables from the German subsidiary.
D. establish a multicurrency account in the United States.
A
Answer : C. start leading receivables from the German subsidiary.
15
Q
Account analysis statements should be examined for which of the following reasons?
I. To verify volumes processed -
II. To determine daily cash shortages
III. To verify the accuracy of bank service charges
IV. To ensure that company-initiated transactions have occurred
A. I and IV only
B. I and III only
C. II and III only
D. II and IV only
A
Answer : B. I and III only
16
Q
An optimal concentration system minimizes all of the following EXCEPT:
A. administrative costs.
B. disbursement float.
C. excess balances.
D. transfer costs.
A
Answer : B. disbursement float
17
Q
A bank issues a letter of credit (L/C) and receives a request for payment under the L/C.
The buyer notifies the issuing bank not to make payment because there is a dispute over the quality of the merchandise. However, the documents received fully comply with the terms of the L/C. Which of the following statements is true?
A. The buyer may immediately return the merchandise and cancel the L/C.
B. The bank may delay payment until reimbursed by the buyer.
C. The bank may delay payment, provided the seller is notified of the dispute within three business days.
D. The bank must make payment and is entitled to immediate reimbursement from the buyer.
A
Answer : D. The bank must make payment and is entitled to immediate reimbursement from the buyer.
18
Q
The KEY decision in using CCD+ and CTX formats for B2B payments is:
A. whether to keep the payment and remittance information together or separate.
B. whether to use the Internet or an EDI spoke to transmit electronic payments.
C. whether to use an EDI or a UN/EDIFACT protocol to transfer the value electronically.
D. whether an evaluated receipts or paid-on-production technique is being used for the transfer.
A
Answer: A. whether to keep the payment and remittance information together or separate.
19
Q
Which one of the following ties a user’s private key to a user’s public key?
A. A digital signature
B. A digital certificate
C. A digitized signature
D. A digital token
A
Answer : B. A digital certificate
20
Q
A French company conducts business strictly within the euro zone (the EMU). Which type of risk is of LEAST concern?
A. Terrorist
B. Regulatory
C. Payment
D. Currency
A
Answer : D. Currency
21
Q
For a defined benefit plan,
A. plan assets equal plan liabilities.
B. plan assets can be less than plan liabilities.
C. plan assets are greater than plan equity.
D. plan assets always equal plan equity.
A
Answer : B. plan assets can be less than plan liabilities.
22
Q
A public corporation may value a defined contribution plan highly because it:
A. allows the corporation to capture plan investment surpluses.
B. allows proxy voting in favor of management.
C. shifts investment shortfall risk to employees.
D. defines allowed investments within the plan.
A
Answer : C. shifts investment shortfall risk to employees.
23
Q
Which of the following is MOST LIKELY to have a significant impact on the financial condition of an organization?
A. Defined benefit pension plans
B. Defined contribution pension plans
C. 401(k) plans
D. Tax-deferred annuities
A
Answer : A. Defined benefit pension plans
24
Q
Company XYZ is now required to make electronic payments by its suppliers. To prevent an increase in costs, the company should.
A. negotiate a change in payment timing with its suppliers.
B. institute a just-in-time inventory system.
C. negotiate a change in cash disbursement with its concentration bank.
D. institute a modified RSA system for its inventory.
A
Answer : A. negotiate a change in payment timing with its suppliers.
25
A company's capital structure includes $800,000,000 in total capital, of which $200,000,000 comes from debt. The firms after-tax cost of debt is 6%, and its cost of equity is 12%. The marginal tax rate is currently 40%. What is the company's weighted average cost of capital?
A. 9.9%
B. 10.3%
C. 10.5%
D. 10.8%
WACC = (E/V x Re) + (D/V x Rd) x (1 - Tc)),
where:
E = Market value of the company's equity
V = Total value of capital (equity + debt)
Re = Cost of equity (required rate of return on equity)
D = Market value of the company's debt
Rd = Cost of debt (yield to maturity on existing debt)
Tc = Corporate tax rate
Break this down step by step to find the company's weighted average cost of capital (WACC).
1. Calculate the weight of debt (Wd)
WD = Total Debt/Total Capital = 200,000,000/800,000,000 = 0.25
2. Calculate the weight of equity (We):
WE = Total Equity\Total Capital =
Total Capital - Total Debt \Total Capital = 800,000,000 - 200,000,000 \ 800,000,000 = 0.75
3. After-tax cost of debt (Cd):
The after-tax cost of debt is given as 6% (convert to decimal point 6% =0.06)
4. Cost of equity (Ce):
The cost of equity is given as 12%. here (convert to decimal point
5. WACC Formula:
Plug in the values:
WACC = (E/V x Re) + (D/V x Rd) x (1 - Tc)),
WACC = (0.75 x 0.12) + (0.25 x 0.60 x (1 - 0.40))
WACC = (0.09) + (0.009)
WACC = Answer
0.099 = 9.99%
Convert to a percentage. Move decimal point two spaces to the right
Answer : A 9.9%
26
The stock of a manufacturing company is priced so that its expected rate of return is below its required rate, as calculated by the Capital Asset Pricing Model (CAPM). Which of the following will occur in an efficient capital market?
A. Buying pressure for the firm’s stock will drive the price up.
B. Buying pressure for the firm’s stock will drive the price down.
C. Selling pressure for the firm’s stock will drive the price up.
D. Selling pressure for the firm’s stock will drive the price down.
Answer : D. Selling pressure for the firm’s stock will drive the price down.
27
XYZ Company is considering selling treasury stock but is concerned about the amount of capital it will raise given the current high volatility of the stock market. What is the BEST strategy a firm can employ to reduce its uncertainty?
A. Hire an investment banker to underwrite the stock on a full underwriting basis.
B. Hire an investment banker to issue the stock using a master registration statement.
C. Hire an investment banker to underwrite the stock with no flotation costs.
D. Hire an investment banker to underwrite the stock on a best efforts basis.
Answer : A. Hire an investment banker to underwrite the stock on a full underwriting basis.
28
Company A is a large public company with annual revenue of $1.2 billion and high fixed costs. Its stock is listed on the New York Stock Exchange. Company B is a mid-sized company with annual revenue of $100 million and low fixed costs. Its stock is listed on the NASDAQ. Which of the following statements is MOST LIKELY to be true when comparing Company A and Company B?
A. Company A has greater reporting requirements and more marketable stock than Company B.
B. Company A has greater reporting requirements and less marketable stock than Company B.
C. Company B has greater reporting requirements and more marketable stock than Company A.
D. Company B has greater reporting requirements and less marketable stock than Company A.
Answer : A. Company A has greater reporting requirements and more marketable stock than Company B.
29
An investor concerned about taxes on dividend distributions will MOST LIKELY purchase stock on which of the following dates?
A. Ex-dividend date
B. Record date
C. Declaration date
D. Payment date
Answer : A. Ex-dividend date
30
A large mature company with limited growth opportunities (positive NPV projects) achieved abnormally high profits this year. After paying mandatory principal, interest, and taxes, the company has $200 million in surplus cash on hand. Assuming its investor base is most concerned with capital appreciation, which of the following is the BEST option for the company?
A. Declare a special dividend.
B. Reinvest cash into the company.
C. Declare a cash dividend.
D. Repurchase shares of outstanding stock.
Answer : D. Repurchase shares of outstanding stock.
31
Over the past 3 years XYZ Company has expanded into multiple countries and significantly grown its banking relationships. The company now incurs significant expenses related to payment transaction costs and maintaining multiple bank connections. What should the company use to combat these rising costs?
A. SWIFT network
B. ACH Network
C. CHIPS network
D. TARGET 2
Answer : A. SWIFT network
32
With respect to the Sarbanes-Oxley Act, a company may avoid additional reporting requirements by:
A. issuing shares in an IPO.
B. providing an SSAE 16.
C. redeeming bond issues.
D. delisting its securities.
Answer: D. delisting its securities.
33
Which of the following would be expected to happen on the ex-dividend date?
A. The stock is sold with the dividend attached.
B. The stock price drops.
C. The stock's volume increases.
D. The stock's dividend is paid.
Answer: B. The stock price drops
34
Which of the following is subject to transaction exposure?
A. A U.S. company's foreign subsidiary in Japan has a receivable denominated in Yen.
B. A Japanese company's foreign subsidiary in the U.S. has a receivable denominated in Yen.
C. A U.S. company's foreign subsidiary in Japan has a payable denominated in Yen.
D. A Japanese company's foreign subsidiary in the U.S. has a payable denominated in dollars.
Answer: B. A Japanese company's foreign subsidiary in the U.S. has a receivable denominated in Yen.
35
Which of the following is NOT a key area to consider when establishing treasury policies?
A. Equity method investments accounting
B. Medium-term financing
C. Management reporting
D. Foreign currency management
Answer: C. Management reporting
36
The Governmental Accounting Standards Board (GASB) is the authoritative standard- setting body for which of the following?
A. Private universities
B. Healthcare organizations
C. Public works agencies
D. Publicly traded companies
Answer: C. Public works agencies
37
A cash manager has determined that the break-even amount for justifying a wire transfer over an ACH for concentration of funds is $145,000. Using a wire instead of an ACH gives the company use of the funds two days earlier to make overnight investments. Based on a wire transfer cost of $10.00 and an ACH transaction cost of $0.70, what is the company's overnight investment interest rate on a 365-day year basis?
A. 0.95%
B. 1.17%
C. 2.34%
D. 2.57%
Set up the equation:
The interest earned in 2 days on the $145,000 investment should equal the cost savings difference.
The cost savings difference is $9.30.
Interest earned = $145,000 x r x 2
1. Set the interest earned equal to the cost difference.
$145,000 x r x 2 = 9.30
2.multiply 2 x 145,000 to simplify the left side (145,000 x 2 =290,000)
Updated equation: 290,000 x r = 9.30
Next Solve for r.
3. Need to signalize the r by dividing 9.30 by 290,000
(r= 9.30/290,000 result is
r= 0.000032069)
4. Convert the daily interest rate to an annual interest rate (365 days):
Annual Interest Rate = r x 365
Equation: 0.000032069 x 365 =
Answer: B. 1.17%
company's overnight investment interest rate on a 365-day year is 1.17%
Determine the cost savings of using an ACH:
- Cost of a wire transfer: $10.00
- Cost of an ACH transaction: $0.70
- Savings per transaction by using ACH:
$10.00 - $0.70 = $9.30
Therefore:
145,000 x r x 2 = 9.30
Solve for r : Need to signalize the r by dividing 9.30 by 290,000
(r= 9.30/290,000 result is
r= 0.000032069)
Convert the daily interest rate to an annual interest rate (365 days):
Annual Interest Rate = r x 365
Equation: 0.000032069 x 365 = 0.0117
Convert to a decimal point into a percentage.
Move point two spaces to the right. 0.0117 = 1.17
38
Which of the following is NOT a drawback to using ROI as a performance measure?
A. It may be misleading when cash flows are not evenly distributed over time.
B. It does not consider the profit generated by a project.
C. It does not include a charge for cost of capital.
D. It may lead to rejection of a positive NPV project.
Answer: B. It does not consider the profit generated by a project.
39
A company is starting a project to redesign its cash management information systems. What would be an important tool in this effort?
A. ERP software
B. Treasury operations manual
C. Cash application
D. Treasury workstation
Answer: B. Treasury operations manual
40
The treasury management department of a company hires a consulting firm to provide research on how other companies in the industry have structured their treasury operations. This is an example of which practice?
A. Outsourcing
B. Benchmarking
C. Re-engineering
D. Restructuring
Answer: B. Benchmarking
41
A company has a line of credit and a bond trustee agreement with a bank. To prevent a decline in the company's bond rating from having a negative impact on the company's line of credit, the bank should have which of the following in place?
A. Code of conduct
B. Confidentiality agreement
C. Notional barrier
D. Risk profile
Answer: C. Notional barrier
42
ABC Company is a national retail company and uses XYZ Bank for its collections and payroll services. XYZ has recently experienced financial problems; what is the greatest risk to ABC Company?
A. Damage to their working relationship
B. Deterioration of service quality
C. Increase in service fees
D. Loss of assets
Answer: D. Loss of assets
43
A public company's risk profile is currently in balance. The management's mission statement is to minimize stock devaluation. However, it is forecasting a need for working capital in the short term. Which of the following solutions would BEST assist management in accomplishing its mission?
A. Redeem outstanding shares
B. Issue additional shares
C. Use debt financing
D. Pay out dividends
Answer: C. Use debt financing
44
Company A regularly modifies its capital structure by repurchasing stock. Which one of the following is a true statement?
A. Investors may feel that management is manipulating the stock price.
B. Stock repurchases are not an attractive alternative to dividend payments.
C. Partial disclosure to the SEC is required for repurchases.
D. Stock repurchases do not offer tax deferral advantages over dividends.
Answer: A. Investors may feel that management is manipulating the stock price.
45
A lender is evaluating the creditworthiness of a company that has high levels of operating leverage. In determining the debt capacity of the company, the bank would MOST LIKELY prefer a:
A. high total liabilities to total assets ratio.
B. high debt to tangible net worth ratio.
C. low long-term debt to capital ratio.
D. low times interest earned ratio.
Answer: C. low long-term debt to capital ratio.
46
A distribution business has used several bank loans to finance its expansion plans. After a fire destroyed the company's facility and inventory, it went out of business due to the loss of revenue during the month it was closed. What type of insurance coverage should the company have had to prevent its demise?
A. Cost reimbursement
B. Property
C. General liability
D. Business interruption
Answer: D. Business interruption
47
Assume the cost of an ACH transaction is $0.80, the charges for a wire transfer are $30.00, the monthly account maintenance fee is $10.00, and the company earns interest at an annual rate of 1.825% on overnight investments. What is the break-even point where the interest earned on overnight investments offsets the incremental wire costs?
A. $3,840
B. $5,840
C. $284,000
D. $584,000
Break Even Calculation
1. Determine the incremental cost per d using a wire transfer comparison to an ACH transfer.
Cost difference = wire transfer cost - ACH transaction cost
$30.00 - 0.80 =$29.20
2. Evaluate the annual interest rate on overnight investments and convert it to a daily interest rate.
Interest rate per year: 1.825% divided by days in the year 365
1.825% / 365 days = 0.005%
Formula:
Break-even overnight investment amount = (Incremental cost per wire) / (Daily interest rate)
Plugging in the values:
Break-even point = $29.20 / 0.00005 =
Answer: D. $584,000
Formula:
Break-even overnight investment amount = (Incremental cost per wire) / (Daily interest rate)
Plugging in the values:
Break-even point = $29.20 / 0.00005 = $584,000.
48
An analyst for a landscaping company wants to adjust her cash-flow forecast to account for the seasonality of outflows. How can this be accomplished?
A. Simple moving average
B. Regression analysis
C. Accounts receivable balance pattern
D. Contingency forecasting
Answer: B. Regression analysis
49
A company has negotiated a credit facility with the following terms:
$5,000,000 line of credit $3,000,000 average borrowing 30 basis point commitment fee on the unused portion of the line Interest rate on advances is 1-month LIBOR plus 4% 1-month LIBOR is currently 2%
What is the annual interest rate on the line of credit?
A. 6.0%
B. 6.2%
C. 9.0%
D. 9.3%
Let's break down the components to calculate the annual interest rate on the line of credit.
1. Calculate the interest expense and the Interest Expense commitment fee, then add them together to find the total cost of the credit line. Divide the total cost by the average borrowing to find the annual interest rate.
Calculate the interest expenses
Interest Rate on Advances = LIBOR + 4%
Interest Rate on Advances = 2% + 4% = 6%
Interest Expense = Average Borrowing x The Interest Rate
Interest Expense = $3,000,000.00 x 6% = $180,000.00
2. Calculate the commitment fee
Unused portion of the line = Total line - Average Borrowing
Unused portion of the line = $5,000,000.00 - $3,000,000.00 =$2,000,000.00
Workout the commitment fee
Commitment fee = unused portion x commitment fee rate (30 basis points translates to 0.30%)
Commitment fee = $2,000,000.00 x 0.30% =$6,000.00
3. Calculate the total cost of the line
Total Cost = Interest Rate + Commitment Fee
Total Cost = $180,000.00 + $6,000.00 =$186,000.00
4. Calculate the annual interest rate
Annual Interest Rate = Total Cost/Average borrowing
Annual Interest Rate = $186,000.00 /$3,000,000.00 =
Answer: B. 6.2%
Translate a decimal into a percentage. Move the decimal point two spaces to the right. 0.062 = 6.2%
50
A company has negotiated a credit facility with the following terms:
$5,000,000 line of credit $3,000,000 average borrowing 30 basis point commitment fee on unused portion of line Interest rate on advances is 1-month LIBOR plus 4% 1-month LIBOR is currently 2% Compensating balance requirement of 20% on the outstanding borrowings
What is the effective annual borrowing rate for the line of credit?
Let's work through the effective annual borrowing rate for this credit facility step-by-step.
Given Terms:
1. **Line of Credit**: $5,000,000
2. **Average Borrowing**: $3,000,000
3. **Commitment Fee on Unused Portion**: 30 basis points (0.30%)
4. **Interest Rate on Advances**: 1-month LIBOR + 4%
5. **1-month LIBOR**: 2%
6. **Compensating Balance Requirement**: 20% on outstanding borrowings
Step 1: Calculate the Compensating Balance
The compensating balance required on the outstanding borrowings:
Compensating Balance = 0.20 x 3,000,000 = 600,000
Step 2: Calculate the Unused Portion Fee
The unused portion of the line of credit is the difference between the line of credit and the average borrowing:
Unused Portion = 5,000,000 - 3,000,000 = 2,000,000
The fee on the unused portion:
Unused Portion Fee = 0.30% x 2,000,000 = 0.003 \times 2,000,000 = 6,000
Step 3: Calculate the Interest on Borrowings
The interest rate on advances is 1-month LIBOR + 4%. Given 1-month LIBOR is 2%, the total interest rate is:
Interest Rate = 2% + 4% = 6%
The interest cost on the average borrowing:
Interest Cost = 6 x 3,000,000 = 0.06 \times 3,000,000 = 180,000
Step 4: Calculate the Total Annual Cost
Total annual cost includes both the interest cost and the unused portion fee:
Total Annual Cost = 180,000 + 6,000 = 186,000
Step 5: Calculate the Effective Borrowing Amount
Since the compensating balance reduces the effective borrowing amount, we need to subtract the compensating balance from the average borrowing to find the effective borrowing amount:
Effective Borrowing Amount = 3,000,000 - 600,000 = 2,400,000
Step 6: Calculate the Effective Annual Borrowing Rate
Finally, the effective annual borrowing rate is the total annual cost divided by the effective borrowing amount:
Effective Annual Borrowing Rate = 186,000 x 2,400,000} \ 100 =
Answer: C. 7.8%
Effective Annual Borrowing Rate = 186,000 x 2,400,000} \ 100 = 7.75%
Therefore, the effective annual borrowing rate for the line of credit is approximately **7.75%**.
51
As an internal control tool, what does the matching of an invoice to the original purchase confirm?
A. The placement of the order
B. The fulfillment of the order
C. The execution of the order
D. The payment of the order
Answer: A. The placement of the order.
52
A large U.S. company is planning to fund its Canadian subsidiary. Currently, the Canadian dollar is trading at CAD 1.25 per U.S. dollar, and the U.S. dollar is expected to depreciate in the near term. To manage this FX exposure, what technique should the company implement?
A. Leading
B. Re-invoicing
C. Lagging
D. Multi currency accounts
Answer: A. Leading
53
Company XYZ's government relations team has done a poor job in maintaining and nurturing its relationship with the local government. Because of new business ventures it is pursuing, the company needs a method that will help it monitor and collect international accounts receivables between subsidiaries. What technique is more suited given its situation?
A. Internal factoring
B. Re-invoicing
C. Bilateral netting
D. Multilateral netting
Answer: A. Internal factoring
54
A company enters into a cash flow hedge to offset fluctuations in the value of foreign currency transactions occurring in two years. How should the company record the gains and/or losses on the cash flow hedge in the current year?
A. The hedged gains and losses are reported in comprehensive income.
B. The hedged gains and losses are reported in current period income.
C. The hedged gains and losses are reported in current period income together with the offsetting gains and losses of the foreign currency.
D. The hedged gains and losses are reported in comprehensive income together with the offsetting gains and losses of the foreign currency.
Answer: A. The hedged gains and losses are reported in comprehensive income.
55
The auditors of a private college are examining and auditing the college's financial statements. The statements are not presented in accordance with GAAP. What should the auditors do?
A. Issue a standard unqualified opinion.
B. Not render an opinion.
C. Base their opinion on GASB standards.
D. Issue an adverse opinion.
Answer: D. Issue an adverse opinion.
56
Which of the following could be considered a weakness of a forecast derived by regression analysis?
A. More than one factor may affect the event being measured.
B. Seasonality cannot be incorporated into the forecast.
C. A large amount of data is required.
D. It is only valid for long-term forecasting.
Answer: C. A large amount of data is required.
57
The CFO of a growing company has decided that it would be prudent to insure the company against potential loss from dishonest acts of employees. The treasurer has been given the responsibility of selecting and negotiating the type and amount of protection required. After Analyzing the overall risk to the company, the treasurer decides that the greatest exposure to this type of risk is within the cash management function of the company. The MOST appropriate type of protection would be:
A. fidelity.
B. crime.
C. blanket.
D. fiduciary.
Answer: A. fidelity
58
Company X has a rating that is below grade. The treasurer would prefer to use commercial paper for its short-term financing needs and has a commitment from its bank to provide a standby letter of credit. What costs would be associated with this process?
A. Rating agency charges, credit enhancement costs, and dealer fees
B. Discount, broker fees, and commitment fees
C. Dealer fees, compensating balances, and participation fees
D. Commissions, rating agency charges, and broker fees
Answer: C. Dealer fees, compensating balances, and participation fees.
59
A main characteristic of a company with regional offices using a centralized treasury function is:
A. high level of control.
B. increased borrowing costs.
C. centrally determined depository accounts.
D. increased operating costs
Answer: A. high level of control.
60
When evaluating a FSP during the RFP process, a company should place a high value on a FSPs financial strength when the provider:
A. is located in a remote location.
B. holds assets for the company.
C. processes high dollar value transactions.
D. processes international transactions.
Answer: B. holds assets for the company.
61
The first step in the financial institution and financial services provider (FSP) selection process should be:
A. selecting a pool of available candidates.
B. identifying the critical product or service specifications.
C. establishing a grading mechanism.
D. evaluating the cost of switching providers.
Answer: B. identifying the critical product or service specifications.
62
Which of the following statements BEST applies when evaluating fees in an RFP for bank services?
A. Flexible credit terms are the most important consideration.
B. Ability of financial institution to customize services is critical.
C. A proforma account analysis statement captures all pricing and compensation detail.
D. Accurate evaluation and comparison of the proforma account analysis statements are critical.
Answer: D. Accurate evaluation and comparison of the proforma account analysis statements are critical.
63
An evaluated receipts settlement would be MOST commonly used in an environment where:
A. the cash conversion cycle is typically long.
B. inventory turns over rapidly.
C. volumes involved are small.
D. the supplier sends an invoice
Answer: A. the cash conversion cycle is typically long.
64
The key parties involved in a disaster recovery plan are generally classified as internal resources or external counterparties. When evaluating the risks of both parties, which of the following can be assumed?
A. The review of internal resources takes greater importance.
B. The infrastructure linking the parties' systems must be considered.
C. The disaster recovery sites of both parties must be in the same location.
D. The systems used by both parties must be compatible.
Answer: B. The infrastructure linking the parties' systems must be considered.
65
Under Section 404 of the Sarbanes-Oxley Act, management must state its responsibility for which of the following?
A. Knowledge of the penalties for noncompliance.
B. Selection of auditors who are knowledgeable about Sarbanes-Oxley requirements.
C. Establishment and maintenance of adequate internal controls for financial reporting.
D. Accuracy and completeness of financial statements.
Answer: C. Establishment and maintenance of adequate internal controls for financial reporting.
66
When projecting the closing cash position, a cash manager must estimate which of the following?
A. ACH credits
B. lockbox receipts
C. checks in the process of clearing
D. clearings on non-controlled disbursement accounts
Answer: D. clearings on non-controlled disbursement accounts
67
In an organization with personnel limitations, which of the following strategies should be considered to mitigate cash management system risk?
A. Outsourcing
B. Verification
C. Matching
D. Hedging
Answer: A. Outsourcing
68
Some treasury management systems are capable of initiating investment purchases and loan drawdowns automatically. The automating of these transactions is related to which of the following treasury management functions?
A. Payment management
B. Liquidity management
C. International trade management
D. Capital budget management
Answer: B. Liquidity management
69
When using the internet to access auction markets, companies may use certificate authorities to reduce their exposure to which of the following types of risk?
A. Credit
B. Valuation
C. Counter party
D. Foreign exchange
Answer: C. Counter party
70
A large, nation-wide, retailer of plumbing fixtures is considering implementing ACH technology to improve its accounts receivable processing. Which of the following pre- authorized ACH transactions can the company use for this application?
A. ARC (Accounts Receivable Conversion)
B. CIE (Customer-Initiated Entry)
C. TEL (Telephone-Initiated Entry)
D. WEB (Internet-Initiated Entry)
Answer: B. CIE (Customer-Initiated Entry)
71
A treasurer has been advised that his privately held company has just lost its largest customer, which will have a significant impact on earnings. The treasurer applies an aggressive working capital strategy. Presently, the yield curve is upward sloping. Given this information, the treasurer should ensure that the company has:
A. short-term non-committed lines.
B. short-term committed lines.
C. long-term non-committed lines.
D. long-term committed lines.
Answer: B. short-term committed lines.
72
A treasurer is monitoring the yeild curve through a service provider and notices that it is moving from downward sloping to upward sloping. Based on this information the treasurer should consider:
A. A commercial Paper Program
B. A short-term borrowing facility
C. Interest rate Collars
D. A variable rate long term facility
Answer: C. Interest rate Collars
73
An accounts payable manager has been mandated to accept all trade discount opportunities with an effective cost of discount above 25%. An invoice has been presented and approved for payment with terms of 3/5, net 30 days. What is the difference between the effective cost of discount offered, and the 25% rate set by the company?
A. 14%
B. 17%
C. 20%
D. 22%
The terms 3/5, net 30 mean that a 3% discount is offered if the invoice is paid within 5 days, otherwise the net (full) amount is due in 30 days.
To calculate the effective annual cost of not taking the discount, we can use the formula.
Effective Cost of Discount = Discount Percentage/ 1 - Discount Percentage x 360/Difference in days
In this case:
- Discount Percentage = 3% or 0.03
- Difference in Days = 30 days - 5 days = 25 days
Plugging in the values:
(3% or 0.03 / 1 - 0.03) x (360/25) = 0.03093 x 14.4 = 0.0445
Translate to percentage 0.445 = 44.5%
Minus 44.5 % - 25% =0.195
44.5 - 25 = 19.5%
Round up = 20%
Answer: C. 20%
74
For a retirement plan to be qualified under ERISA, employer and employee contributions must be:
A. invested to maximize portfolio return.
B. placed in a separate fund held by a third party.
C. placed with a professional investment manager.
D. invested to provide a defined benefit for plan participants.
Answer: B. placed in a separate fund held by a third party.
75
To strengthen outside auditor independence with regard to publicly held companies, the Sarbanes-Oxley Act requires that:
A. Employment of staff from companies' accounting firms be approved in advance by the audit comitees
B. companies change accounting firms for audit services at least every seven years
C. accounting firms supply audit work papers annually to the SEC for their clients
D. the lead audit partner and audit review partner be rotated every five years
Answer: D. the lead audit partner and audit review partner be rotated every five years.
76
A company's credit agreements or loan covenants may require:
A. minimum ratings for insurance carriers.
B. high deductible levels and risk retention in order to minimize premium payments.
C. outsourcing of the claims approval and payment process to an insurance company.
D. risk management staff to work directly with underwriters to reduce commission payments
Answer: A. minimum ratings for insurance carriers.
77
A multinational company (MNC) that operates a shared service center charges its foreign subsidiaries a management fee. This management fee may need to be:
A. manipulated to locate profits in low-tax countries.
B. paid through a third-party intermediary.
C. negotiated with the host government.
D. significantly taxed by the host government
Answer: C. negotiated with the host government.
78
A multinational company may use which of the following to locate profits in subsidiaries in low-tax countries?
A. Dividends
B. Transfer pricing
C. Management fees
D. Intracompany loans
Answer: B. Transfer pricing
79
A U.S.-based electronics company that buys components from one of its foreign subsidiaries at a price above market is likely to:
A. be paid large dividends by the subsidiary.
B. be sheltering profits in a low-tax country.
C. need tax consultants to act as intermediaries.
D. make payment with an intracompany loan.
Answer: B. be sheltering profits in a low-tax country.
80
One primary ways the Fed addressess systemic risk is by
A. assigning passwords and PINs to identify authorized users of its Fedwire systems
B. establishing intra-day credit limits for ACH origination
C. setting minimum reserve requirnments for its member banks
D. setting daylight overdraft limits for its member banks.
Answer: D. setting daylight overdraft limits for its member banks.
81
To arrive at today's projected closing cash position, a cash manager starts with:
A. the opening bank available balance.
B. yesterday's projected closing cash position.
C. the general ledger cash balance.
D. today's expected settlements.
Answer: A. the opening bank available balance.
82
Which of the following is a KEY operational advantage of short-term debt?
A. It can be arranged quickly and easily.
B. It improves the current ratio for debt covenant and compliance purposes.
C. It reduces the risk of interest rate fluctuation and lowers interest expense.
D. It improves the overall liquidity position and reduces risk.
Answer: A. It can be arranged quickly and easily
83
Which of the following is true when a company purchases goods using trade credit from suppliers?
A. The buyer incurs no added cost if it pays on time.
B. The supplier will charge interest to the buyer.
C. The buyer should record this as a long-term liability.
D. The supplier places a lien on the goods sold until payment.
Answer: A. The buyer incurs no added cost if it pays on time.
84
Today's modern cash management systems would include which of the following?
A. Full integration to ERP systems
B. Performance management systems and support
C. Remote check disbursement software
D. Full customer relationship management (CRM) capability
Answer: A. A. Full integration to ERP systems
85
A U.S. based multinational company is filing its U.S. tax return and notes that its U.K. subsidiary had pre-tax income equal to $1 million. The U.K. subsidiary paid an effective tax rate on this income of 40%. If the U.S. tax rate is 34%, what will be the amount of the foreign tax credit on the U.S. tax return related to the U.K. income?
A. $60,000
B. $280,000
C. $340,000
D. $400,000
Let's calculate the foreign tax credit step by step:
1. **Calculate the tax paid by the U.K. subsidiary:**
Tax Paid in U.K. = $1,000,000 x 40% = $400,000
2. Calculate the U.S. tax liability on the same income:
U.S. Tax Liability = $1,000,000 x 34% = $340,000
The foreign tax credit is the lesser of the foreign taxes paid and the U.S. tax liability on the same income.
Answer: C. $340,000
3. Determine the foreign tax credit:
Since the U.S. tax liability ($340,000) is less than the U.K. taxes paid ($400,000), the foreign tax credit will be $340,000.
So, the amount of the foreign tax credit on the U.S. tax return related to the U.K. income will be $340,000.
86
What does a company with a restrictive current asset investment strategy typically have?
A. High financing costs
B. Low accounts receivable balances
C. High inventory levels
D. Low tax liabilities
Answer: B. Low accounts receivable balances.
87
A buyer receives an invoice from a supplier that offers discount terms of 3/10, net 60. What is the effective cost of discount?
A. 15.64%
B. 16.13%
C. 21.90%
D. 22.58%
Formula
Effective Cost of Discount = (Discount Percentage/ 1 - Discount Percentage) x (360/Difference in Days)
Discount Percentage = 3% or 0.03
Difference in Days = 60 days - 10 days = 50 days
Effective Cost of Discount = (0.03/1-0.03) x (360/50)
Effective Cost of Discount = (0.0309278) x (7.2) =
Effective Cost of Discount = (0.0309278) x (7.2) = 0.22268
Round Up = 0.2227
Translate to decimal I to percentage. Move the decimal point two spaces to the right = 22.27%
Answer: D. 22.58%?
88
A seller's cost of capital is 12%. The average credit sale is $200,000, and the credit terms are 2/10, net 30. What is the present value of receiving full payment on day 30?
A. $198,019.80
B. $198,046.66
C. $199,335.55
D. $199,344.62
Formula:
First, let's calculate the daily rate:
Daily Rate = (1 + (12/365)) - 1 =
(1 + (0.12/365)) - 1 = 0.000328767
Calculate the number of days for the discounting period.
N= 30
Next, we'll use this daily rate to discount the payment received on day 30 back to the present value (day 0).
The formula for the present value (PV) is:
PV = Future Value/ (1 + Daily Rate) x Number of Days
In this case:
- Future Value (FV) = $200,000
- Daily Rate = 0.000328767
- Number of Days = 30
Plugging in the values:
PV = 200,000/(1 + 0.000328767) 30th power
PV = 200,000 / (1.000328767) 30th power
1.000328767 x 1.000328767 x 1.000328767 etc until you complete 30 times
PV = 200,000/ (1.0099068)
PV = 200,000/1.0099068
PV = 200,000/1.0099068 =198,038.07
PV rounded up approximately =198,038.00
So, the present value of receiving full payment of $200,000 on day 30, given a cost of capital of 12%, is approximately $198,038.00.
Answer: B. $198,046.66
89
What is one chief advantage of issuing short-term securities in book-entry form?
A. The securities cannot be transferred electronically.
B. The physical exchange of certificates is required.
C. Transaction clearing can be performed with ease and speed.
D. Security registration is not required.
Answer: C. Transaction clearing can be performed with ease and speed.
90
Which of the following is not an operational risk?
A. Workers' compensation risk
B. fidelity risk
C. surety risk
D. Currency Risk
Answer: D. Currency Risk
91
A company with 50 million in foreign assets decides to increase its foreign debt by 40 million for a debt ratio of 80%. This action will reduce which exposure?
A. Hedged
B. Economic
C. Transaction
D. Translation
Answer: D. Translation
92
which of the following is sought from a typical cash MGMT service RFP?
A. CAMELS score
B. Asset investment strategy
C. Pension funding status
D. Implementation team
Answer: D. Implementation team
93
What document serves as the basic account or service authorization, empowering a representative of a business to enter into agreements for financial services?
A. Account resolution
B. Credit agreement
C. Service agreement
D. Signature card
Answer: A. Account resolution
94
Loss exposures related to treasury management may include which of the following?
A. Excessive product recalls
B. PBGC violations
C. Deterioration of investment principal
D. Bank consolidations
Answer: C. Deterioration of investment principal
95
Which of the following would be considered insurance risk management services?
A. Information-system consultants who upgrade loss controls
B. External auditors who are hired to review financial statements
C. IT professionals who ensure the treasury workstation properly converts FX
D. Risk group that recommends the CFO approve SOX 404 compliance
Answer: A. Information-system consultants who upgrade loss controls
96
What is the premium (price) for an oil contract, if the following conditions are present?
LIBOR rate of 5%
Out of the money cost of $3
Strike price is $4
In the money price of $1
Speculative premium of $2
A. 3
B. 5.25
C. 7
D. 7.35
Formula
Premium Price = (LIBOR rate + Out of the money cost + In the money price + Speculative premium) - Strike price
Premium Price = (5 + 3 + 1 + 2) - 4
Premium Price = 11 - 4 =
Answer: C. 7
Premium Price = 11 - 4 = 7
97
An art history museum has recently finished renovating its new location. Before the move, the treasurer considers purchasing additional insurance to protect the art during transit. What form of additional insurance should the treasurer choose?
A. Special multi-peril (SMP)
B. Business interruption
C. General liability
D. Difference in conditions (DIC)
Answer: D. Difference in conditions (DIC)
98
A retail brokerage firm is MOST like which one of the following types of financial institutions?
A. Captive finance companies
B. Factoring companies
C. Investment banks
D. Insurance companies
Answer: C. Investment banks
99
The controller is developing a financial plan that includes an operating budget and a financial budget. Which of the following statements is true?
A. The financial budget is used to determine the operating activity level the company can support.
B. The two budgets do not have any impact on each other.
C. The operating budget is developed to determine the staffing level needed for operations.
D. The financial budget is impacted by the company's sources and uses of cash.
Answer: D. The financial budget is impacted by the company's sources and uses of cash.
100
The controller is developing a financial plan that includes an operating budget and a financial budget. Which of the following statements is true?
A. The financial budget is used to determine the operating activity level the company can support.
B. The two budgets do not have any impact on each other.
C. The operating budget is developed to determine the staffing level needed for operations.
D. The financial budget is impacted by the company's sources and uses of cash.
Answer: D. The financial budget is impacted by the company's sources and uses of cash.
101
A bank is evaluating the credit risk for a company seeking to optimize costs and originate a high volume of outgoing ACH payments. What is the BEST provision the bank should establish to control its credit exposure?
A. An intraday credit limit for the company
B. A limit on the number of items processed per day
C. An overdraft facility for the company
D. A standby letter of credit for the company
Answer: A. An intraday credit limit for the company
102
A large retailer is preparing to accept credit cards and anticipates monthly credit card sales of $1,000,000. If the terms with the acquiring bank include bundled allocated fees of 6% and the retailer wishes to delay fee payment as long as possible, what should the retailer do?
A. Accept gross settlement.
B. Place a hold on consumer credit limits.
C. Receive net settlement
D. Delay funds transfer to card-issuing bank
Answer: A. Accept gross settlement.
103
A company is evaluating its employee healthcare expense and payroll applications. If the company wishes to provide maximum convenience to its employees, which payment method is the BEST choice?
A. Purchasing cards
B. Checks
C. Travel cards
D. Stored value cards
Answer: D. Stored value cards
104
Two months after a government overthrow, the new Minister of Industry and Culture took over the country's largest steel company and compensated the owners at 50% of book value. What is the governments action called?
A. Consolidation
B. Deregulation
C. Expropriation
D. Nationalization
Answer: C. Expropriation
105
Which of the following actions would the CFO of a Canadian multinational conglomerate MOST LIKELY take to repatriate profits from its international subsidiaries?
A. Re-invoicing
B. Multilateral netting
C. Unbundle cash flows
D. Pooling
Answer: C. Unbundle cash flows
106
A treasury manager at a multinational manufacturing corporation assigned a team of analysts to re-engineer the company's FX exposure management program. Which of the following alternatives would BEST accomplish this objective?
A. Leading and lagging
B. Re-invoicing
C. Transfer pricing
D. Value dating
Answer: B. Re-invoicing
107
ABC Ltd. uses a third party lockbox provider to collect and clear its paper receivables. A customer disputes the price charged for a binding machine and issues a check to ABC Ltd. for 50% of the balance due, noting "paid in full" on the face of the check. The third party provider does not bring the check to ABC's attention prior to depositing it. Which regulation allows ABC to attempt to collect the remaining balance?
A. UCC Article 2 - Clearing of Checks
B. Federal Reserve Regulation CC
C. UCC Article 3 - Negotiable Instruments
D. UCC Article 4 - Bank Deposits and Collections
Answer: C. UCC Article 3 - Negotiable Instruments
108
Which of the following is a purpose of the Check 21 Act?
A. Grant legal status for digital signatures
B. Foster innovation in the ACH payment system
C. Facilitate check truncation
D. Improve check imaging and archiving
Answer: C. Facilitate check truncation
109
A small regional bank is losing market share in fiduciary services and the CEO has decided to scale back the trust department. Which of the following is considered a core service of a trust department?
A. Paying agent for dividend and interest payments
B. Monitoring compliance with audit procedures
C. Providing consulting services in debt origination
D. Processing drafts for collection.
Answer: A. Paying agent for dividend and interest payments
110
Which of the following is NOT true for both bankers' acceptances and trade acceptances?
A. They are both used to finance the shipment of goods.
B. They both may be sold to an investor at a discount prior to maturity.
C. They are both less expensive forms of financing than loans.
D. They both transfer the buyer's credit risk to a third party.
Answer: D. They both transfer the buyer's credit risk to a third party.
111
A-Plus Company has made arrangements for a new insurance broker to provide products to its employees. Historically, A-Plus Company's employees made insurance payments via payroll deduction, but the new broker will be collecting payments from employees directly.
What will the broker MOST LIKELY use to minimize collection float?
A. ARC
B. CCD
C. PPD
D. RCK
Answer: C. PPD
112
Making payments through electronic payments networks can be a part of a treasury management system's functionality, but it is subject to numerous constraints. Which of the following is a true statement of those constraints?
A. The process is easy for the payee but very intensive manually for the payor.
B. Negotiation of trade terms is required, but float terms are excluded.
C. Remittance detail, whether a lot or a little, can be easily included with all payment forms.
D. Collecting payment-routing details, and populating these into the software, is a significant task.
Answer: D. Collecting payment-routing details, and populating these into the software, is a significant task.
113
Which of the following regulations requires financial institutions and creditors to implement programs designed to prevent identity theft?
A. The Red Flags Rule
B. Regulation Z
C. Bank Secrecy Act
D. Gramm-Leach-Bliley Act
Answer: A. The Red Flags Rule
114
A forecast that estimates the daily impact that a single event has on cash flows over a specified period based on historical patterns is referred to as a:
A. Time series forecast
B. Distribution forecast
C. A receipts and disbursement forecast
D. Degree of certainty forecast
Answer: B. Distribution forecast
115
Which of the following are the main benefits of E-Commerce?
I. Improves productivity, enhancing working capital management
II. Improves communication capabilities
III. Eliminates mail time, enhancing cash flow processes
IV. Allows straight-through processing (STP)
A. I, III and IV only
B. II and IV only
C. II, III and IV only
D. I, II, III and IV
Answer: D. I, II, III and IV
116
Which of the following are the main benefits of E-Commerce?
I. Improves productivity, enhancing working capital management
II. Improves communication capabilities
III. Eliminates mail time, enhancing cash flow processes
IV. Allows straight-through processing (STP)
A. I, III and IV only
B. II and IV only
C. II, III and IV only
D. I, II, III and IV
Answer: I, III and IV only
117
An investor is considering investing in a $250,000 T-bill, selling for $248,750 and 67 days to maturity. If they are comparing this investment to a bank CD, what is the appropriate yield to use for comparison?
If you have more financial questions or need further assistance, feel free to ask!
A. 2.65%
B. 2.69%
C. 2.70%
D. 2.74%
To compare the yield of the T-bill to a bank CD, we need to calculate the annualized yield (also known as the bond equivalent yield or discount yield) of the T-bill.
Here's how to calculate it:
1. **Determine the discount amount:**
Discount = Face Value - Purchase Price
Discount = $250,000 - $248,750 = $1,250
2. **Calculate the yield for the period:**
Yield for the Period = Discount\Purchase Price x (360\Days to Maturity)
Yield for the Period= $1,250 \ $248,750 x (360\67)
3. **Perform the calculations:**
Yield for the Period = 0.005025 x 5.3731 =
Answer: D. 2.74%
Yield for the Period = 0.005025 x 5.3731 = 0.02699
4. **Convert to a percentage:**
Yield for the Period = approximately 2.699\%
So, the appropriate yield to use for comparison to a bank CD is approximately **2.699%**.
118
All of the following agencies and organizations play a role in combating money laundering and terrorist financing at either the national or international level EXCEPT:
A. Department of Justice (DOJ)
B. The Financial Action Task Force (FATF)
C. Office of Foreign Assets Control (OFAC)
D. Financial Crimes Enforcement Network (FinCen)
Answer: A. Department of Justice (DOJ)
119
Which of the following is impacted by spontaneous changes in current assets and current liabilities?
A. Changes in total assets to total liabilities requirements
B. Changes in capital budgeting requirements
C. Changes in external financial requirements
D. Changes in performance measurement requirements
Answer: C. Changes in external financial requirements
120
The individual responsible for developing a company's investment strategy and approving minor policy exceptions is the:
A. Chief Financial Officer
B. Risk Manager
C. Investor Relations Manager
D. Treasurer
Answer: A. Chief Financial Officer
121
Which of the following are reasons why a company would prefer to compensate a bank using balances rather than fees
I. For budgeting purposes, balance compensation is not as visible as fee compensation
II. Earnings credits on collected balances are not taxable
III. The earnings credit rate is viewed as a low-risk source of earnings
IV. The earnings credit rate is usually higher than the interest than can be earned on other short-term investments
A. I only
B. I and II only
C. II and III only
D. II, III and IV only
Answer: B. I and II only
122
Which of the following is NOT an example of measuring the ongoing operational performance of a company?
A. Residual income
B. Free cash flow
C. Return on investment
D. Cash conversion efficiency
Answer: D. Cash conversion efficiency
123
Studies of failed companies find that the ratio that is the most reliable predictor of financial failure is
A. Cash flow to total debt
B. Cash conversion efficiency
C. Current ratio
D. Quick ratio
Answer: A. Cash flow to total debt
124
Standard and Poor's highest credit rating for short-term debt issues is
A. P1
B. AAA
C. A-1
D. AAA+
Answer: C. A-1
