Essay 1 - Efficient Markets Hypothesis

This study unit contains 2 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-3 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

The treasurer of Whitechapel Company has called you, a CMA, into his office to discuss
investment strategies for the firm’s long-term cash balances. The treasurer wants to find out
what possibility there is for achieving above-market returns. He has often heard of the efficient
markets hypothesis, but does not understand it. You must explain it to him.

A. Describe the efficient markets hypothesis and the reason why it is

generally accepted.

A. Differentiate fundamental analysis and technical analysis.

A. Describe, and give the implications of, the three forms of the efficient
markets hypothesis.
Essay 2 - Financing Daily Operations

This study unit contains 2 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-3 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

Choco Delites, Inc. is a manufacturer of gourmet chocolates, made from imported

chocolate, pure butter, fresh fruit, and other natural ingredients. The company sells its
products primarily to a select number of large department store chains. Because of the
immense popularity of chocolate and the high regard for the quality of its products,
Choco Delites has experienced significant growth in its initial years of existence.

The expansion experienced by Choco Delites has forced management to more closely
monitor the company’s financial position. The need for greater liquidity to fulfill working
capital requirements has necessitated the hiring of Doreen James as an analyst in the
Finance Department. James’ first assignment is to analyze the status of the company’s
current assets, which include cash, marketable securities, receivables, and inventories,
as well as recommend ways to better use current liabilities as a financing alternative.
Determining the appropriate level of working capital involves fundamental decisions
regarding the firm’s liquidity and the maturity composition of its debt portfolio. In turn,
these decisions are influenced by a balance between profitability and risk.

A. Define each of the following external factors that influence the financing
environment, and explain how each factor might affect Choco Delites,
Inc.
a. Lines of credit with commitment fees
b. Compensating balances
c. Zero-balance accounts
d. Loan covenants
A. Explain how each of the following factors may affect Choco Delites,
Inc.’s ability to obtain financing.
a. Operating leverage
b. Financial leverage

A. Describe four methods of financing current assets that would contribute

to Choco Delites, Inc.’s goal of achieving greater liquidity.