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Resourceful is one of the key

Some questions that appears in Actual Board Exam this May 2016 Batch
From Wiley AICPA 2013-2014: Page 1262
Marketable Securities Management
25. The most important considerations with respect to short- term investments are
a. Return and value.
b. Risk and liquidity.
c. Return and risk.
d. Growth and value.
**26. All of the following are alternative marketable securities suitable for investment
except:
a. US treasury bills. b. Eurodollars.
c. Commercial paper. d. Convertible bonds.
27. Which of the following investments generally pay the highest return?
a. Money market accounts.
b. Treasury bills.
c. Treasury notes.
d. Commercial paper.
From Wiley AICPA 2013-2014 Page 1243
39. Tam Co. is negotiating for the purchase of equipment that would cost $100,000, with
the expectation that $20,000 per year could be saved in after-tax cash costs if the
equipment were acquired. The equipments estimated useful life is ten years, with no
residual value, and it would be depreciated by the straight-line method. Tams
predetermined minimum desired rate of return is 12%. The present value of an annuity of
1 at 12% for ten periods is 5.65. The present value of 1 due in ten periods at 12% is .322.
Accrual accounting rate of return based on the initial investment is
a. 30% b. 20% c. 12% d. 10%
From Wiley AICPA 2013-2014 Page 1244
46. For the next two years, a lease is estimated to have an operating net cash inflow of
$7,500 per annum, before adjusting for $5,000 per annum tax basis lease amortization,
and a 40% tax rate. The present value of an ordinary annuity of $1 per year at 10% for
two years is 1.74. What is the leases after-tax present value using a 10% discount factor?
a. $ 2,610
b. $ 4,350
c. $ 9,570
d. $11,310
ANSWERS:
25. (b) The requirement is to identify the most important
consideration with respect to short-tem investments. Answer (b)
is correct because short-term investments must be available to
convert to cash when needed. Therefore, risk and liquidity are
the most important considerations. Answers (a), (c), and (d) are
incorrect because they are important considerations with respect
to long-term investments.
26. (d) The requirement is to identify the security that is
not suitable as a marketable investment. Answer (d) is correct
because convertible bonds are long-term investments that have
more risk than securities that are typically used for short-term
investment. The primary considerations regarding short-term
investments are liquidity and safety. Answers (a), (b), and (c)
are all appropriate as marketable investments. They are liquid
and have a low degree of risk.
27. (d) The requirement is to identify the instrument with
the highest return. Answer (d) is correct because commercial
paper is issued by a corporation and, therefore, has more risk
than Treasury notes, Treasury bonds, or money market accounts
39. (d) The accounting rate of return (ARR) computes an
approximate rate of return which ignores the time value of
money. It is calculated as Expected increase in annual net income
Initial (or Average) investment in a project. Tams expected
increase in annual income is as follows:
Annual savings in after-tax cash costs $20,000
Annual depreciation on equipment
($100,000 10 years) (10,000)
Increase in annual net income $10,000
A $100,000 initial investment is required to purchase the equipment.
Thus, the ARR of the equipment under consideration by
Tam is
$10,000 $100,000 = 10%
46. (D). $7,500 5,000 = $2,500 40% = $1,000
However, lease amortization is not a cash outflow and is thus excluded from the
calculation of NPV. The after-tax present value of the lease equals:
$ 7,500 1,000 = $6,500 1.74= $11,310
(ctto)