Question 1:

2B6-LS04

What is the primary responsibility of a credit rating agency?

Provides advice only to investors in making investing decisions.
Assigns a credit rating for the companies entering into a debt obligation as well as specific debt
instruments.
Provides advice to organizations regarding how much credit they can receive.
Provides credit to an organization seeking capital.

A credit rating agency analyzes organizations and provides a credit rating so investors,
issuers, investment banks, broker-dealers, governments, and other entities can utilize this
information to make informed decisions as to the credit risk of an organization and their
financial instrument(s).
Question 2:
2B6-AT01

Which one of the following statements concerning American Depository Receipts (ADRs)
is not correct?
ADRs allow foreigners to raise capital in the U.S.
ADRs facilitate the banking procedures for U.S. multinational firms.
ADRs are securities issued by American banks acting as custodians of shares of foreign firms.
ADRs allow Americans to invest abroad.

ADRs are certificates representing ownership of foreign stocks. They do not facilitate banking
procedures for U.S. multinational firms.
Question 3:
2B6-LS01

An investor is considering investing in companies in a particular industry. During research of

different companies within this industry, the investor begins to contact their investor relations
departments. Upon contacting the investor relations department of XYZ Company, they
inform the investor that they are going to be purchasing a competitor, providing them with a
near monopoly within the industry. The investor takes this information and purchases stock in
XYZ Company, no abnormal gains result. This is an example of what form of market
efficiency?
Semi-weak form.
Weak form.
Semi-strong form.
Strong form.

The strong form of the efficient market hypothesis states that all information in a market,
whether public or private, is accounted for in a stock price. Not even insider information could
give an investor an advantage.
Question 4:
2B6-AT09

Most states have laws that provide preemptive rights for shareholders. A preemptive right is
when a company must:
give existing shareholders the opportunity to maintain their proportionate ownership share in the
company when issuing a new public offering.
give dividends to the common shareholders first before giving dividends to the preferred
shareholders.
sell shares to existing shareholders equal to their proportionate ownership share in the company
when issuing a new public offering.
give existing shareholders stock warrants equal to their proportionate ownership share in the
company when issuing a new public offering.

The preemptive right gives existing shareholders stock warrants equal to their proportionate
ownership share in the company when the company issues more shares of stock.
Question 5:
2B6-CQ04

Manny Enterprises has 300,000 shares of common stock outstanding. Net income for the
fiscal year is $700,000. The stock of Manny Enterprises also includes a price-earnings ratio
of 6. The board of directors recently made public that there will be a five-for-three stock split.
An investor owns 200 shares of stock before the split, and is concerned about the value of
his stock diminishing because of the stock split. What will the approximate value of their
investment in Manny Enterprises stock be immediately after the split?
$4,200.
$1,680.
$466.
$2,800.

First calculate Earnings Per Share by taking $700,000 net income / 300,000 pre-split shares
outstanding, or $2.33. Take the $2.33 and multiply it by the PE Ratio of 6.0 to get the current
approximate per-share price of $13.98. Multiply this by the 200 shares owned by this
investor, results in a current market value of $2,796 for their holdings. The result of the stock
split will be an increase in total shares of Manny Enterprises common stock outstanding but
at a proportionately lower per-share market price, (# of shares outstanding increases, price of
each share decreases) with no immediate change in any investors' total investment value.
Question 6:

2B6-AT03

All of the following are functions of the Securities and Exchange Commission except the:
determination of fair trading prices for the common stock of large public companies.
regulation of the American Stock Exchange.
review of stock trades by corporate insiders.
regulation of interstate offerings of new securities to the public.

The stock markets determine the values of publicly traded stocks.

Question 7:
2B6-AT08

When a company desires to increase the market value per share of common stock, the
company will implement:
a stock dividend.
a reverse stock split.
the sale of treasury stock.
a stock split.

A stock split does not affect the value of the firm. A reverse stock split would increase the
stock price in the same proportion as the decrease in the number of shares outstanding. For
example, a one-for-two split would double the price of the stock and decrease the number of
shares outstanding by one half.
Question 8:
2B6-LS08

When determining the amount of dividends to be declared, the most important factor to
consider is the:
*Source: Retired ICMA CMA Exam Questions.

future planned uses of cash.

impact of inflation on replacement costs.
future planned uses of retained earnings.
expectations of the shareholders.

When determining the amount of dividends to be declared, the most important factor to
consider is the future planned uses of cash.
Question 9:
2B6-LS09

Underhall Inc.'s common stock is currently selling for $108 per share. Underhall is planning a
new stock issue in the near future and would like to stimulate interest in the company. The
Board, however, does not want to distribute capital at this time. Therefore, Underhall is
considering whether to offer a 2-for-1 common stock split or a 100% stock dividend on its
common stock. The best reason for opting for the stock split is that:
*Source: Retired ICMA CMA Exam Questions.

the impact on earnings per share will not be as great.

it will not impair the company's ability to pay dividends in the future.
it will not decrease shareholders' equity.
the par value per share will remain unchanged.

The best reason for opting for the stock split is that it will not impair the company's ability to
pay dividends in the future.
Question 10:
2B6-LS06

A multi-national firm is seeking to raise capital overseas. After much consideration, the board
of directors chooses the Tokyo Stock Exchange. This type of market transaction would be
referred to as:
Money market.
Secondary market.
International sales market.
Primary market.

The market that is used in the trading of new securities, including bonds and stocks, is called
the primary market. In the primary market, the investor typically purchases newly issued
securities from the investment bank doing the underwriting for the company selling the
security. No matter what country the firm has their initial public offering it is still considered
the primary market. The secondary market is the market an investor uses to purchase an
asset from another investor.
Question 11:
2B6-AT04

The contents of the section of the annual report entitled "Management's Discussion and
Analysis" (MD&A) are:
not reviewed by independent auditors.
mandated by regulations of the Securities and Exchange Commission (SEC).
mandated by pronouncements of the Financial Accounting Standards Board.
not mandated.

The SEC requires that all publicly held corporations include an MD&A in their annual financial
report. The SEC mandates coverage of liquidity, risk, and sustainability of earnings in the
MD&A.
Question 12:
2B6-LS07

The residual theory of dividends argues that dividends:

*Source: Retired ICMA CMA Exam Questions.

can be paid if there is income remaining after funding all attractive investment opportunities.
are irrelevant.
can be foregone unless there is an excess demand for cash dividends.
are necessary to maintain the market price of the common stock.

The residual theory of dividends argues that dividends can be paid if there is income
remaining after funding all attractive investment opportunities.
Question 13:
2B6-LS05

Which of the following best describes the over-the-counter (OTC) market?

A market where brokers and dealers buy and sell securities on a trading floor, much like the New
York Stock Exchange.
A market where investors can enter a financial institution and purchase shares of stocks directly from
an organization selling stocks.
A market where brokers and dealers buy and sell securities utilizing a telecommunications system to
trade securities.
A market where buyers and sellers trade securities in an auction-type atmosphere, much like that of
the New York Stock Exchange.

An OTC market is the trading of financial instruments such as stocks, bonds, commodities or
derivatives directly between two parties, facilitated by brokers and dealers, using
telecommunications equipment. An example in the United States would be NASDAQ.
Question 14:
2B6-AT06

Arch Inc. has 200,000 shares of common stock outstanding. Net income for the recently
ended fiscal year was $500,000, and the stock has a price/earnings (P/E) ratio of eight. The
Board of Directors has just declared a three-for-two stock split. For an investor who owns 100
shares of stock before the split, the approximate value (rounded to the nearest dollar) of the
investment in Arch stock immediately after the split is:
$4,000.
$2,000.

$1,333.
$3,000.

The stock split will not change the value of the firm, nor will it change the value of the
investor's holding.
Original Stock price = (P/E ratio)(EPS)
Where EPS = Earnings Per Share
EPS = Net Income / # share common stock outstanding
EPS = $500,000 / 200,000 = $2.50
Original Stock price = (8)($2.50) = $20
Since the investment value doesn't change with the split, ($20)(100 shares) = $2,000.
After the split, the investor will have 3/2 more shares.
(100 shares)(3/2) = 150 shares
Each share will be worth : $2,000 / 150 shares = $13.33.
Question 15:
2B6-CQ03

Mason Inc. is considering four alternative opportunities. Required investment outlays and
expected rates of return for these investments are given below.

The investments will be financed through 40% debt and 60% common equity. Internally
generated funds totaling $1,000,000 are available for reinvestment. If the cost of capital is
11%, and Mason strictly follows the residual dividend policy, how much in dividends would the
company likely pay?
$328,000.
$120,000.
$650,000.
$430,000.

A firm using the residual dividend policy would first reinvest earnings in the firm. Any residual
amount remaining would be paid out in dividends. Given an 11% cost of capital, Mason would
invest in the three projects that have IRR's greater than 11%, which would include a total
investment of $1,120,000 ($200,000 for Project A, $350,000 for Project B, and $570,000 for
Project C).
Given a 60% equity financing structure, 60% of the investment would be from the $1,000,000
in earnings, ending up with $672,000.
(0.6)($1,120,000) = $672,000
The remaining amount of $328,000 ($1,000,000 $672,000) would be available for
dividends.
Question 16:
2B6-LS03

A company wishes to raise capital in the capital markets. They file the appropriate paperwork
and come to the point where they are ready to issue new shares of stock, commonly known
as in Initial Public Offering, or IPO. The market that the organization uses to sell these new
shares of stock is known as the:
Money market.
Sales market.
Primary market.
Secondary market.

The market that is used in the selling of new securities, including bonds and stocks, is called
the primary market. In the primary market, the investor typically purchases the newly issued
securities from the investment bank or syndicate underwriting the issue of the security for the
issuing company. The secondary market is the market an investor uses to purchase an asset
from another investor.
Question 17:
2B6-AT05

In practice, dividends:
fluctuate more widely than earnings.
are usually set as a fixed percentage of earnings.
are usually changed every year to reflect earnings changes.
usually exhibit greater stability than earnings.

The price of a stock is the present value of its dividend stream at the market's required rate of
return. The price of the stock is directly proportional to the level of dividends. To help prevent
excessive stock price fluctuations, corporations try to maintain relatively constant dividend
levels.

Question 18:
2B6-AT02

A large public company that is well-known can reduce the time required to register and issue
securities by using a(n):
secondary market registration.
shelf registration.
red herring registration.
Subchapter S filing.

The Securities and Exchange Commission (SEC) Rule 415 allows companies that have a
one-year history of timely SEC filings to file an SEC Form S-3ASR shelf registration. The
Form S-3ASR as well as the Form S-3 and S-2 allow for a streamlined registration process.
The Form S-1 is used for those who do not qualify for streamlined registration such as an
initial public offering.
Question 19:
2B6-CQ02

Kalamazoo Inc. has issued 25,000 shares of its authorized 50,000 shares of common stock.
There are 5,000 shares of common stock that have been repurchased and are classified as
treasury stock. Kalamazoo has 10,000 shares of preferred stock. If a $0.60 per share
dividend has been authorized on its common stock, what will be the total common stock
dividend payment?
$21,000.
$15,000.
$30,000.
$12,000.

The dividend paid would be $0.60 per share, multiplied by the number of shares outstanding.
The number of outstanding shares is calculated by taking the number of issued shares and
subtracting the number of share that were repurchased and held in treasury.
Number of shares = # shares issued # shares of treasury stock
Number of shares = 25,000 5,000 = 20,000
Dividend: ($0.60 per share)(20,000 shares) = $12,000.
Question 20:
2B6-AT07

Brady Corporation has 6,000 shares of 5%, cumulative, $100 par value preferred stock
outstanding and 200,000 shares of common stock outstanding. Brady's Board of Directors
last declared dividends for the year ended May 31, Year 1, and there were no dividends in

arrears. For the year ended May 31, Year 3, Brady had net income of $1,750,000. The Board
of Directors is declaring a dividend for common shareholders equivalent to 20% of net
income. The total amount of dividends to be paid by Brady at May 31, Year 3, is:
$60,000.
$410,000.
$380,000.
$350,000.

The total dividend is $410,000 made up of $350,000 in common stock dividends plus
$60,000 in preferred stock dividends.
The 350,000 in common stock dividends is calculated by taking the $1,750,000 in net income
and multiplying it by the 20% dividend payout ratio.
The $60,000 in preferred stock dividends is derived by taking the Year 3 dividend [(6,000)
($100)(0.05) = $30,000] and adding to it the $30,000 dividend missed in Year 2.
Note that the last dividends were paid in Year 1.
Question 21:
2B6-CQ01

James Hemming, the chief financial officer of a Midwestern machine parts manufacturer, is
considering splitting the company's stock, which is currently selling at $80.00 per share. The
stock currently pays a $1.00 per share dividend. If the split is two-for-one, Mr. Hemming may
expect the post split price to be:
greater than $40.00, if the dividend is changed to $0.55 per new share.
exactly $40.00, regardless of dividend policy.
less than $40.00, regardless of dividend policy.
greater than $40.00, if the dividend is changed to $0.45 per new share.

The price of a common stock is calculated by taking the present value of its projected
dividend stream, computed using the expected return on the stock. If, during a two-for-one
stock split, the dividend is split two-for-one to $0.50 per share, then the stock price will
become half of its current value, or $40. If the dividend is cut by less than 50%, to $0.55 in
this case, then the stock price after the split will be greater than $40 per share.
Question 22:
2B6-LS02

Which of the following markets is involved with the trading of debt securities with maturities of
less than one year?
Primary markets.

Capital markets.
Money markets.
Secondary markets.

The market that is involved in the trading of debt securities with maturities of less than one
year is called a money market.