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FINANCE 202 & 203

1. For a given company, the cost of preferred stock is less than the cost
of common stock because:

a. Dividends paid on preferred stock are tax deductible expenses for
the company while dividends paid on common stock are paid out of
after-tax earnings.
b. Preferred stock represents a less risky source of funds from the
company’s viewpoint than common stock.
c. Investors expect cash flows from common stock have a higher degree
of uncertainty than the expected cash flows from preferred stock.
d. All of the above.

2. Elan Corporation is considering borrowing P100,000 from a bank for one
year at a stated interest rate of 9 percent. What is the effective
interest rate of Elan if this borrowing is in the form of a discounted
a. 8.10 percent c. 9.81 percent
b. 9.00 percent d. 9.89 percent

3. The master budget process usually begins with
a. Production budget c. Financial budget
b. Operating budget d. Sales budget

4. Which of the following is included in a firm’s financial budget?
a. Budgeted income statement
b. Capital Budget
c. Production schedule
d. Cost of goods sold budget

5. Using the Capital Asset Pricing Model (CAPM), the required rate of
return for a firm with a beta of 1.25 when the market return is 14
percent and the risk-free rate is 6 percent is

a. 14.0 percent c. 7.5 percent
b. 6.0 percent d. 16.0 percent

6. RMG Corporation is preparing to issue common stock. The Chief Financial
Officer is attempting to estimate RMG’s cost of new common stock. The
next dividend is expected to be P3.70 and will be paid one year from
now. Dividends are expected to grow at a constant 7% per year. Flotation
cost on the new issue will be P2.25 per share. RMG’s Beta coefficient is
1.5, the risk-free rate is 7.5%, and the expected return on the DJ
Industrial Average is 12.5%. Based on this information, RMG”s cost of
new common stock is nearest.

a. 8.4% c. 13.7%
b. 12.5% d. 15.4%

7. Kent Goods, Inc. has a total assets turnover of 0.30 and a profit margin
of 10 percent. The president is unhappy with the current return on
assets, and he thinks it could be doubled. This could be accomplished
(1) by increasing the profit margin to 15 percent and (2) by increasing
the total assets turnover. What new asset turnover ratio, along with 15
percent profit margin, is required to double the return on assets?

a. 35% c. 40%
b. 45% d. 50%

8. Which of the following will cause a decrease in a company’s accounts
receivable turnover ratio?
a. Tighten credit standards.
b. Enforce credit terms more aggressively.
c. Ease enforcement of credit terms.
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Commission expense in 19x5 is 10% greater than it was in 19x4 b.75 to 1 13.333 d. 500 d.400. OTW Corporation has current assets totaling P 15 million and a current ratio of 2. c. 2. 550 b.800. 4.333. Day’s sales in receivables. Sales to working capital. has a current ratio of 4:1. GRX Inc. Collecting on accounts receivable 12. Commission expense in 19x5 is 5% of sales 14. 500 in June. Component Analysis b. Revenue and Expense Analysis 15. A financial analyst made up the following schedule for Health Care Products: 19x8 19x7 19x6 19x5 Net Sales 134% 116% 107% 100% Net Income 123% 111% 110% 100% This analytical technique is termed: a. P4.000 August 750.000 c. including fixed cost of P800.75 to 1 b.000 16.75 to 1 c.266. Selling inventory on account d.25 to 1 d.000. Percentage of change analysis c. P4. vertical. Forecasted sales July P775. Operating asset turnover 11. Joemyr has projected cost of goods sold of P4.000. 3. Purchasing machinery on cash c. P6. P4. 30% is collected in the month of sale and the remainder the following month.000 2 | Page . Factor all accounts receivable. A program budget 10. P6.5 to 1.000. 000 in April. All sales are on credit. Data regarding the company’s monthly sales for the last 6 months of the year and its projected collection patterns are shown below. P1. A flexible budget d. 950 c. The sales budget is classified as a. Time interest earned. 100 (17-18) Operational budgets are used by a retail company for planning and controlling its business activities. d. 3. A financial budget c. P5. A firm forecasted sales of P3. and common size analyses are techniques that are used by analyst in understanding the financial statement of companies. What is OTW’s current ratio immediately after it has paid P2 million of its accounts payable? a. What will be the projected net sales? a. Which of the following transactions would normally increase its current ratio? a. A comparison of financial ratio form between two or more firms of the same industry c.667 b. 500 in May and P6. b.Variable costs are expected to be 75% of net sales. Which of the following is an example of vertical common-size analysis? a. d. P5. Ratios that measures firms ability to generate earnings is a. Horizontal. 9. Trend Analysis d. Purchasing inventory on account b. P4. A comparison in financial form between two or more firms in different industries d. What will be the balance in accounts receivable at the end of June? a. An operating budget b.

P318. 7.9 The dividend yield on Watson’s common stock is a. Question 1.000 October 800.000 and the ending inventory at 3 | Page . Assuming the company would normally maintain zero balance in its checking account.800. a.2% d.8% 20. 7.000 Types of sales Cash sales 20% Credit sales 80% Collection Pattern for Credit Sales In the month of sale 40% In the first month following the sale 57% Uncollectible 3% The cost of merchandise averages of 40% of its selling price.000 December 900. P793.5% b. In addition. the liquidity motive 22.4 percent c. price-earnings ratio is 4 times. P305.000 of inventory. P856.000 November 850. Ver Company purchased P1. P302. The least common motive for a firm to hold cash and marketable securities is a. The same as the cost of an equivalent fully subscribed issue of additional common stock. P771.750 Question 2. P757. None 21.920.The company’s total cash receipts from sales and collection on account that would be budgeted for the month of September would be a. Dividend yield is 10%.500 19. 60% d.000 d.000 d. the safety motive d. which is equal to common stock equity.500 c. 2. cost of preferred stock b. cost of retained earnings d. the transactions motive b. 5.000 as of June 30. P307. The inventory balance at cost is P80. 10. Plowback ratio is a. the effective interest rate on the loan is a. cost of long-term debt 23. cost of common stock c.0% b.5% c.500 b. Watson Corporation computed the following items from its financial records for the year: Price-earnings ratio 12 Payout ratio 0.6 percent b.800 b.6 Asset turnover ratio 0.0 percent d. The Gwaps Corporation has an outstanding one-year bank loan of P300. 9. 6. Gwaps is required to maintain a 20 percent compensating balance in its checking account. September 825. the speculative motive c. 40% c. The company’s policy is to maintain an inventory equal to 25% of the next month’s forecasted sales.0 percent 24. 10. During 2005. The cost of goods sold for 2005 was P1.500 c.The budgeted cost of the company’s purchases for the month of August would be a.000 at a stated interest rate of 8 percent. 8.

4 times d. Sales for 2007 have been projected to increase by 20%. P132. P60.000 b. 650.000 30. an average collection period of 30 days.055. Colorado Company desires an ending inventory of P60. 6. 5.000 dividend to its common stockholders. 000 Accounts Payable P900.0 b. P5. P1. 5. 70 days c. 000 Currents Assets 1. & Equity P2.000.3 d. 250. P46.000. P1. 000 Current Liabilities 1.000 Decrease in Accounts Payable for Inventories 120. 110 days 28. Given a year’s end net income of P 1. 000 Total Liab. Concon Company paid a P55. 000 A/R 900. In addition.175.000 shares of common stock were outstanding through the years and net income was P160.4 25. 000 Inventory 600.00 b. The company has an 8% return on sales and 70% is paid out as dividends. is operating below capacity. If 25. P92. 600 c. 000 b. the price-earning ratio is a. 000 Sales for 2006 were P3. 2005. 000 Accrued Expenses 75. 000 29.050. P935. Marvelous Inc. 000. then the earnings per share of common stock was a. It expects sales of P120.40 26. 2 times b. Concon Company paid a current dividend of P35. A growing company is assessing current working capital requirements. P72. 000 Notes payable 300. The amount of new funds required is a. was P360.000. Budgeted purchases are a. 250. 275.000 common shares outstanding throughout the year with the market price per share at year’s end being P 120.80 c. 50 days d. An average of 58 days is required to convert raw materials into finished 4 | Page . P4. What was the inventory turnover for 2005? a.000 31. The firm’s cash conversion cycle is a. and an average payment period of 60 days.25 d. and 50. December 31. A firm has an average age of inventory 20 days.000 b. 3 times c.000 to its preferred stockholders.0 c. 000 Total Assets P2. P48. 000 Retained Earnings 225. Cost of sales is 60% of sales. During 2005. 5 times 27.000 c. 000. P45.000 d.5 million.000 Gross profit rate 25% Decrease in inventories 70. P6.000 d. The following is the balance sheet for 2006 for Marvelous Inc. Marvelous Inc Balance Sheet 2006 Assets Liabilities & Equity Cash P150.000 and has a beginning inventory of P40. 6.000 For January 2010. P1. P50. Michigan Merchandising is preparing its cash budget for January 2010 and made the following projections: Sales P1.000 c. -10 days b. 000 Ordinary Shares 750.500.000. what were the estimated cash disbursements for inventories? a. P2. 000 Fixed Assets 600. 800 d.

38.200. When managing accounts receivable. A stock dividend is declared c. MAKURIMAN Company manufactures a single product. Accounts receivable turnover ratio. All of the above. d. June. c. Budgeted purchases= CGS+EI-BI 35.000 33. EI= Ending Inventory desired. Tighten the credit terms c. in units: May. The average annual rate of return an investor expects to receive from buying and holding the bond until maturity.Based on a 360-day year. b.000 c. b. Uncollectible accounts receivable are written off against the allowance account d.620. GHI estimates that a proposed relaxation of credit standards would increase credit sales by 20% and increase in the average collection period from 30 days to 40 days. a good strategy to employ without losing future sales is to a. Budgeted purchases= CGS+BI-EI b. Cost of money is 15%. P243. The discount rate in a present-value equation that equates the market price of a bond with present value of its future debt- service obligations. Total assets turnover ratio. Acid-test ratio. Budgeted purchases= CGS+EI+BI d. c. The yield to maturity of a bond is: a. Which of the following transactions would increase the current ratio and decrease net profit? a. Each unit of product requires three pounds of materials. P900. 5 | Page . Send the accounts to a collection agency b. 75 days d. Then an average of 32 days is required to collect on receivables.000 d.000 of which . CGS= Budgeted cost of goods sold) a. then the total cash conversion cycle for this company would be a. An income tax payment due from the previous year is paid. Vacant land is sold for less than the net book value 36. Assumes that balance sheet accounts maintain a constant relationship to sales d.000. GHI Company’s budgeted sales for the coming year are P40. A measure of profitability and not short-term liquidity is the a. P1. If the average time the company takes to pay for its raw materials were 15 days after they are received. how much opportunity cost is involved with the proposed relaxation of credit standards? a. 90 days 32. Make frequent personal visits to the customer 37. Budgeted purchases= CGS+BI c. 41 days c.000 b. Is more detailed than a cash budget approach b. Equal to the coupon rate if the bond sells at par value.500. Which of the following equations can be used to budget purchases? (BI= Beginning Inventory. 1. 80% are expected to be credit sales at terms of n/30. Provides a month-to-month breakdown of data 39.11 days b. 34. MAKURIMAN keeps inventory of raw materials at 50% of the coming month’s budgeted production needs. The percent-of-sales method of financial forecasting a. b. Sales to working capital ratio. d. The production budget is. P540. 1. goods and to sell them. Requires more time than a cash budget approach c. Offer cash discount d.

6% d.000 b. The tax rate is 40%. Current Ratio 46. what would be the Economic Order Quantity? a.600. P3. cost of capital d. Assume you are given the following relationships for the KEMPIT Company: Profit margin ratio 6.0% b. August. 11.600.0 a. internal rate of return b.000 41.15 Others 0.400. The debt consists of bonds with a before tax cost of 9%. 1.200. 100 44. stock price c. 17.5% 6 | Page . The equity consists of ordinary shares with a cost of 18%. Determine the raw materials purchases in July. KAYAKOPA Motor Company uses 4. A P4 annual dividend was just paid to current shareholders. Under these conditions. It is the rate that a firm must earn on the projects in which it invests to maintain the market value of its stock. 17.5 Acid test ratio 3. What is the WACC? a.0.1% c. a.400.06 TOTAL COSTS P0.9% d. Other cost associated with carrying Part S-10 in inventory are: Annual Cost per part Insurance P0. a. 50% c. the cost to carry an inventory jumps to P1. Based on the data presented below.300.0% Sales/total assets 1.7% 45. July.450 pounds c. 3. 12. The cost of placing one order for Part S-10 is estimated to be about P20. 80 c. 45% b. The current market price of Rex Company stock is P80 per share and its price-earnings ratio is 8 to 1. 1.50 Assume that the company has been able to reduce the cost of placing an order to only P1. 65% 42.000 d.000 c. The following ratios are used to measure the profitability and returns to the investors except: a.8% b. Also assume that when the waste and inefficiency caused by inventories is considered.09 Interest on funds invested 0. Gross profit margin c. 1.5 times Return on assets (ROA) 9% Return on equity (ROE) 20% The KEMPIT Company’s debt ratio is a.20 Property taxes 0.00.0 Year-end current liabilities P600. 2.900 pounds b. P6.000 Inventory turnover 8. 10. 8. P2. 75 b. 35% d. If dividends and earnings are expected to grow at a constant rate of 12%.500 units of Part S-10 each year. what is HULOGNA Corporation’s cost of sales for the year? Current ratio 3.400 pounds d. 9. Dividend yield b.60 per unit. net present value 43. 95 d. P1. A firm maintains a debt-equity ration of 1. 55% c. Some other number 40.000 Beginning Inventory P500. Operating profit margin d. Rex Company’s cost of retained earnings is a.

The expected market rate of return is 14%.53% b.4 times d.200.34% d.07% d.720. as follows: ● Issue P20. b.94% Question-2: Using the capital asset pricing model (CAPM). 9.000 For the Year Ended December 31 200B 200A Sales (20% cash.2% b. 5.200. and flotation cost of 3% of par.000 P 640. 200B: a. The company plans to finance the project by a combination of debt and equity.000 Land and buildings (net) 2. 7.000.240. what is the cost of equity capital for KLEM Corporation? a. 4.000 Accounts payable – trade 560.000 880.000 320.80% c. 7.5:1 c. 36.000 Notes and accounts receivable.000 Question-1: Current ration as of December 31. Question-1: What is the after-tax effective cost of bonds? a. The corporate income tax rate is 30%. 13. net 400.000 1.200. 0. 15.200.880. but a price that gives a yield to maturity of 9%.4 % d. ● Use P80. 2. 1:2. 6. 14.6 times Question-4: Merchandise inventory turnover for 200B: 7 | Page .000 80.000 of 10-year bonds at a price of 102. 0. 200B a. 6.9% (51-55) Following are selected financial and operating data taken from the financial statements of MARYLYNE Corporation: As of December 31 200B 200A Cash P 80. 2. The MNO Company believes that it can sell long-term bonds with a 6% coupon. 6. 0.000. 2. 23. 13. 10.000 2. 6. 22% d.6% c. 3.73% b. The current rate of Treasury bills is 8%.000 1.7 to 1 Question-3: Accounts receivable turnover for 200B: a.6% c.000 of funds generated from earnings retained in the business.000 11. The beta coefficient for KLEM Corporation is 1. 4.6 Question-2: Quick (acid test) ratio as of December 31. 18.000 Cost of goods sold 8.0% (48-50) KLEM Corporation is considering a project for the coming year that will require an investment cost of P100. which of the following should be used for bonds in their after tax (40% rate) cost of capital calculation? a.0:1 d.2% Question-3: Assume that the after-tax cost of debt is 7% and the cost of equity capital is 15%.000 Notes payable – short term 160. with an interest rate of 10%.5 to 1 d. what is the weighted average cost of capital for KLEM Corporation’s project? a.160.400.20% b.000 19.000. 1 to 1 b.0 to 1 c. If such bonds are part of next year’s financing plans.0 times c.40% c. 80% credit sales) 18.000 Bonds payable – long term 2.8 times b.000 2.000 Marketable securities – short term 240.000 Merchandise inventory 720.

and its order point is 1.20? a. klem 8 | Page .000 b. 10. 13.33 times c. 19.33 times Question-5: The average age of accounts receivable for 200B (use 360 days): a. P3. ABZ Corporation’s economic order quantity(EOQ) for Material RST is 5.500 pounds. 18. P1. 4.05 days b.57 months d.5 b. A firm has daily cash receipts of P100. P12. 3. P600 d.000 pounds. and a net profit after tax of P 56. If the company maintains a safety stock of RST at 500 pounds. 11. A firm has total interest expense of P 16. 19. P100 c.000 per year. P1.0 times b. 0.000 d. What is the firm’s times interest earned ratio? a. P 0 58.10 times d.000 c.000 b.100 **********END OF EXAMINATION********** THOT: Your attitude determines your altitude.000 per year.000. A bank has offered to reduce the collection time on the firm’s deposits by two days for a monthly fee of P500. P6. sales of P 600.000.40 days 56. the net annual benefit (loss) from having this service is a. 5 d.5 57. what would be the total annual carrying costs assuming the carrying cost per unit is P0.57 days c. If money market rate are expected to average 6% during the year. a tax rate of 30%. 6 c. a. 8.

The book value on December 31.60 months 62.200. What is the profit margin? a. P1.000 Estimated collections in May for credit sales in May 20% Estimated collections in May for credit sales in April 70% Estimated collections in May for credit sales prior to April 12. The dividend yield ratio for Ryan Company for 2005 was a.5% 60. 10. If Francis Company has working capital equal to P140. 200B P 16.0 times b. Current liabilities total P120. A company’s investment turnover is 1. 49% b.000 Cost of Goods Sold 80. 35% d. 87.000 Estimated write-offs in May for uncollectible credit sales 8. P142. 110 days c.000 d. These shares were originally issued at a price of P15 per share.000 61. The firm’s operating cycle is a. total assets must equal a.0 times d.000 d.000. all on credit 72. 35. 130 days d.000 c.0% c.5% d. Francis Company’s debt to equity ratio is 0. P1. 70 days 65. 10% 63.000 What are the estimated cash receipts from accounts receivable collection in May? a.000 Estimated provision for bad debts in May for credit sales in May 7. The Pennsylvania Company is preparing its cash budget for the month of May.280.000. 2005 was P25 per share and the market value on December 31.6 to 1. The dividend on common stock in total for 2005 was P45.7% 64. 3.000 b. 15% b.Ryan Company had 20.000 b. 4. an average collection period of 40 days.000 c. based on a 360-day year.3% b. A firm has an average age of inventory of 90 days. P600.4 and the return on invested capital is 35%. When a company offers credit terms of 2/10. 120 days b.000 Actual credit sales for April 150. net 30. P149.000 Purchases of merchandise. 25% c. 24. is a. P157.000. and an average payment period of 30 days.59. klem 9 | Page . The following information pertains to Batalla Company for 200B: Inventory at December 31. 36. 24. The following information is available concerning its accounts receivable: Estimated credit sales for May P200.000 and long term liabilities total P360. 4. P800. 2005 was P30 per share. the annual interest cost. P150.0 months c.000 The company’s merchandise inventory turnover for 200B was a.000 THOT: Your Attitude determines Your Altitude.000 shares of common stock outstanding through 2005. 7.5% d. 9% c.