QUEZON CITY POLYTECHNIC UNIVERSITY

BATASAN CAMPUS
FINANCIAL MANAGEMENT
FINALS EXAMINATION

Name:________________________________________ Section: ___________________Score: ______/ 100

MULTIPLE CHOICE (2 POINTS EACH) /40

_____1. Following are the ways of accelerating collection of accounts receivable, except:
a. shorten credit term
b. minimize negative float
c. age of accounts receivable
d. offer special discounts to those who pay promptly

_____2. A firm’s overall cost of equity is:

a. is generally less that the firm's WACC given a leveraged firm.
b. unaffected by changes in the market risk premium.
c. highly dependent upon the growth rate and risk level of the firm.
d. generally less than the firm's after tax cost of debt.

_____3. All of the following are valid reasons for a business to hold cash and marketable securities
except to:
a. Satisfy compensating balance requirements
b. Maintain adequate cash needed for transactions
c. Meet future needs
d. Earn maximum returns on investment assets

_____4. The amount of cash that the firm keeps on hand in order to take advantage of any bargain
purchases that may arise due to fluctuating currency rates is referred to as its
a. Transactions balances c. Precautionary balances
b. Compensating balance d. Speculative balance

_____5. A group of individuals got together and purchased all of the outstanding shares of common
stock of DL Smith, Inc. What is the return that these individuals require on this investment called?
a. Dividend yield c. capital gains yield
b. Cost of equity d. cost of capital

_____6. Starrs Company has current assets of P300,000 and current liabilities of P200,000. Starrs
could increase its working capital by the
a. Prepayment of P50,000 of next year’s rent
b. Refinancing of P50,000 of short term debt with long term debt
c. Purchase of P50,000of temporary investments
d. Collection of P50,000 accounts receivable

_____7. When a company analyzes credit applicants and increases the quality of the accounts
rejected, the company is attempting to
a. Maximize profits
b. Increase bad-debt losses
c. Increases the average collection period
d. Maximize profits

_____8. How are financial ratios used in decision making?

a. They can help identify the reasons for success and failure in the business, but
decision making requires information beyond the ratios.
b. They remove the uncertainty of the business environment.
c. They aren’t useful because decision making is too complex.
d. They give clear signals about appropriate action to take.

_____9. The ratio of analytical measurements which measures the productivity of assets regardless
of capital structure is
a. Current ratio c. Quick Ratio
b. Debt Ratio d. Return on Total Assets

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_____10. In 2017, Clark Corp.’s net income was P800,000 and in 2018 it was P200,000. What is the
percentage increase in net income must the company achieve in 2019 to offset the 2018 decline in
net income?
a. 60% c. 400%
b. 600% d. 300%

_____11. The pre-tax cost of debt:

a. is based on the current yield to maturity of the firm's outstanding bonds.
b. is equal to the coupon rate on the latest bonds issued by a firm.
c. is equivalent to the average current yield on all of a firm's outstanding bonds.
d. is based on the original yield to maturity on the latest bonds issued by a firm.

_____12. Which of the following is incorrect?

a. Profitability varies directly with liquidity.
b. The greater the risk, the greater is the potential for larger return.
c. Long-term financing has less liquidity risk than short term financing, but has higher
explicit costs, hence lower return.
d. More current assets lead to a greater liquidity, but yield lower returns.

_____13. Interest paid (earned) on both the original principal borrowed (lent) and previous interest
earned is often referred to as __________.
a. present value
b. simple interest
c. future value
d. compound interest

_____14. The primary objective of working capital management is to:

a. maximize company’s total assets
b. minimize company’s total liabilities
c. balance the amount of the current assets and the current liabilities
d. achieve a balance between risk and return both assets and liabilities

______15. A certified public accountant’s scope of management services is broad and covers all of the
following except:
a. Change management engagements
b. Computerization engagements
c. Audit engagements
d. Re-engineering jobs

______16. Which of the following could explain why a business might choose to organize as a
corporation rather than as a sole proprietorship or a partnership?
a. Corporations generally face fewer regulations.
b. Corporations generally face lower taxes.
c. Corporations generally find it easier to raise capital.
d. Corporations enjoy unlimited liability.

______17. At 12% interest compounded semi-annually for 5 years, what is the interest rate and the
number of periods that will be computed before a present or future value table can be used?
a. 12%, 5 periods
b. 6%, 10 periods
c. 3%, 20 periods
d. 4%, 15 periods

______18. Given the following information, calculate the market price per share of WAM Inc.
Net Income P200,000 Earnings per share P2.00
Shareholder’s equity P2,000,000 Market to Book Ratio 0.20
a. P20.00 b. P8.00 c. P4.00 d. P2.00

______19. An investor was expecting a 15% return on his portfolio with a beta of 1.25 before the
market risk premium increased from 6% to 9%. Based on the change, what return will now be
expected on the portfolio?
a. 18.75% b. 18.00%. c. 22.50%. d. 15.00%

______20. In EOQ model, the return on capital that is foregone when it is invested in inventory is a/n
a. order costs c. excluded in the EOQ computation
b. carrying costs d. irrelevant costs

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PROBLEMS (3 points per item)/60
Problem1.
IU Corporation is estimating its WACC using the following information below:
- Its capital structure consists of equity equally divided for preferred and common shares,
and the 20% portion is for the debt.
- The company has a 10-year outstanding bonds with 11% coupon rate trading at par.
- The market premium is at 5% and the market rate of return is 12.5%. Stocks beta is 1.25
- The preferred stocks are currently selling at P250 each with constant growth rate of 3%.
Last dividend paid 2 years ago was P5.00 and the cost of issuance is 20% of the price.
- The company’s after tax portion is 55%

6.05_________________a. What is the company’s Cost of Debt After Tax?

13.75_________________b. What is the company’s Cost of Retained earnings?
2.6523_________________c. What is the company’s Cost of Preferred Stock?
7.7709_________________d. What is the WACC?

Problem2.
You are to manage the P5 million portfolio of HOTEL DEL LUNA Inc. that has a beta of 1.2 and a
required rate of return of 21.7%. The current risk free rate is 5.5%.
13.5_________________a. What is the market risk premium?
1.375/ 1.38________________b. Assume that you have received another P1,000,000 and invest it in a
stock with a beta of 2.25. What is the new beta of the portfolio?
24.0625/ 24.13_________________c. Compute for the new required return after the additional
investment was made.

Problem3.
Use following data provided below:
Annual usage 43,800 units
Days in a year 365 days
Reorder Point 3,000 units

Assume that there is NO delay in the purchases made,

a. the normal lead time will be: _________________________25 d

Assume that there is a 9 days delay in the purchases made:

a. What is the new reorder point? __________________4080
b. How much should be placed as your safety stock? __________________1080

Problem4.
Consider the following information for the financial asset A.
State of the World State 1 State 2 State 3

Probability of occurrence 0.10 0.50 0.40

Rates of Return (%) 25.00 13.00 37.00

23.8____________________a. Find the expected return on this asset.

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Problem5.
The following data are taken from the records of TUPOYNTPAYB Corp. for the year ended Dec 31,
2019. (use 360-day year).

Cash Sales Gross P 375,000

Ave. Inventory 60,000
Ave. Accounts Receivable 12,000
Ave. Accounts Payable 10,000
Credit Purchases 90,000
Sales Returns on Credit Sales 5,000
Cost of Sales 300,000
Credit Sales portion 25%

68d_______________a. What is the company’s cash conversion cycle?

36d_______________b. What is the Accounts Receivable Collection Period?
40d_______________c. What is the Accounts Payable Deferral Period?
72d________ d. What is the Inventory Conversion Period?
108d_______________e. How long will it take for a complete cycle of normal operations?

Problem6.
Given the below were data for SANA ALL Corp. for inventory purchases made during Nov 2019.
Transportation Cost P 5,000
Storage Costs 7,000
Cost of Insurance 3,000
Administration Cost 1,000
Inspecting Cost 2,000
Number of units per order 800
Orders made during the year. 20

12.5______________a. How much is the Carrying Cost per unit?

1011.93/1012______________b. What is the Economic Order Unit if the Ordering Cost is P400/order?
6324.11______________c. Using EOQ, how much is the total ordering cost?
12649.1106____________d. Using EOQ, how much is the total inventory cost?