FINAL EXAM FINANCIAL MANAGEMENT

NAME:

1. Which of the following is not a major function in cash management?

a. Cash flow control c. Maximizing sales
b. Cash surplus investment d. Obtaining financing services

2. In inventory management, the problem of avoiding excessive investment in inventories and at the same
time avoiding inventory shortages can be solved by applying a quantitative technique known as
a. Payback analysis c. Economic order quantity
b. Probability analysis d. High-low point method

3. Bully Corporation purchases raw materials on July 1. It converts the raw materials into inventory by
September 30. However, Bully pays for the materials on July 20. On October 31, it sells the finished
goods inventory. Then, the firm collects cash from the sale 1 month later on November 30. If this
sequence accurately represents the average working capital cycle, what is the firm's cash conversion
cycle in days?
a. 92 days. b. 133 days. c. 123 days. d. 153 days.

4. Which of the following involves significant financial investments in projects to develop new products,
expand production capacity, or remodel current production facilities? (E)
a. Capital budgeting c. Master budgeting
b .Working capital d. Project-cost budgeting

5. The process of choosing among competing alternatives is called

a. controlling c. decision making
b. planning d. performance evaluation

Ricky Ironworks is considering a proposal to sell an existing lathe and purchase a new computer-operated lathe.
Information on the existing lathe and the computer-operated lathe follow:
Computer-
Existing Lathe operated
Lathe
Cost P100,000 P300,000
Accumulated depreciation   60,000        0
Salvage value now   20,000
Salvage value in 4 years        0   60,000
Annual depreciation   10,000   75,000
Annual cash operating costs  200,000   50,000
Remaining useful life  4 years  4 years
6. What is the payback period for the computer-operated lathe?
a. 1.87 years c. 3.53 years
b. 2.00 years d. 3.29 years

7. If the company uses 10 percent as its discount rate, what is the net present value of the proposed new
lathe purchase? (Round present value factors to four decimal places)
a. P236,465 c. P195,485
b. P256,465 d. P30,422
8. RPI Corporation bought a piece of machinery. Selected data is presented below:

Useful life 6 years

Yearly net cash inflow P45,000
Salvage value -0-
Internal rate of return 18%
Cost of capital 14%

The initial cost of the machinery was (round present value factor to four decimal places)
a. P157,392. c. P165,812.
b. P174,992. d. impossible to determine from the information given.

9. Tanya Corporation issued preferred stocks for P120 per share. The issue price is P20 more than the
stock’s par value. The company incurred underwriting fees of P10 per share. The stocks will earn
annual dividends of P12 per share. If the tax rate is 30%, the cost of capital (preferred stocks) is
a. 10% c. 7.42%
b. 12% d. 10.91%

10. At the beginning of the year, Djorn Corporation purchased a new equipment for P360,000. The machine
has an estimated useful life of four (4) years with no salvage value. It is expected to produce cash flows
from operations, net of income taxes of 32%, as follows:
Year 1 P128,000
2 112,000
3 144,000
4 96,000
5 80,000

Djorn Corporation uses the sum-of-the-years-digits method (SYD) in computing depreciation of its
depreciable assets. Using SYD, the new equipment will be depreciated as follows:
Year 1 (P360,000 x 4/10) P144,000
2 (P360,000 x 3/10) 108,000
3 (P360,000 x 2/10) 72,000
4 (P360,000 x 1/10) 36,000

The company’s cost of capital is 10%. The present value factors at 10% are as follows:
End of Year 1 0.909
2 0.826
3 0.751
4 0.683
Total, 4 years 3.170

If Djorn Corporation used the straight-line method of depreciation instead of the SYD method, the net present
value provided by the equipment would increase (decrease) by:
a. P13,464 c. (P4,308.48)
b. (P13,464) d. P4,308.48

11. Cost of capital is (E)

a. The interest rate an entity must pay to borrow money.
b. The return an entity’s stockholders expect on their investment .
c. The rate of return the entity can earn from investing available cash.
d. A concept of managerial finance incorporating all of the above.
 12. In computing the cost of capital, the cost of debt capital is determined by (E)
a. Annual interest payment divided by the proceeds from debt issuance.
b. Interest rate times (1 – the firm’s tax rate)
c. Annual interest payment divided by the book value of the debt.
d. he capital asset pricing model.

13. Harry owns a computer reselling business and is expanding his business. Harry is presented with one
proposal, Proposal P1, such that the estimated investment for the expansion project is P85,000 and it is
expected to produce cash flows after taxes of P25,000 for each of the next 6 years. An alternate
proposal, Proposal P2, involves an investment of P32,000 and after-tax cash flows of P10,000 for each
of the next 6 years. The present value factors for an annuity of P1 for 1 to 6 years are as follows:

n 10% 12% 14% 16% 18% 20%

1 0.909 0.893 0.877 0.862 0.847 0.833
2 1.736 1.690 1.647 1.605 1.566 1.528
3 2.487 2.402 2.322 2.246 2.174 2.106
4 3.170 3.037 2.914 2.798 2.690 2.589
5 3.791 3.605 3.433 3.274 3.127 2.991
6 4.355 4.111 3.889 3.685 3.498 3.326

The cost of capital that would make Harry indifferent between these two proposals lies between
a. 10% and 12% c. 16% and 18%
b. 14% and 16% d. 18% and 20%

14. Harold Co. is considering an investment in a capital project. The sole outlay will be P716,417.90 at the
outset of the project and the annual net after-tax cash inflow will be P216,309.75 for 6 years. The
present value factors at Harold’s 8% cost of capital are:
Year PV Factors
1 0.926
2 0.857
3 0.794
4 0.735
5 0.681
6 0.630

What is the break-even time (BET)?

a. 3.31 years c. 5.00 years
b. 4.00 years d. 6.00 years

15. The capital asset pricing model (CAPM) states that:

a. The expected risk premium on an investment is proportional to its beta
b. The expected rate of return on an investment is proportional to its beta
c. The expected rate of return on an investment depends on the risk-free rate and the market rate of
return
d. The expected rate of return on an investment is dependent on the risk-free rate
16. The management of Seymour Corporation asks you to prepare an analysis of the gross profit variance
based on their comparative income statements for 2015 and 2016:
2016 2015 Variance
Sales P990,000 P800,000 P190,000 F
Cost of goods sold 760,000 640,000 120,000 U
Gross profit P230,000 P160,000 P 70,000 F

The only known information given to you is that volume increased from 2015 to 2016 by 10%.

The variance in gross profit due to the change in volume is

a. P80,000 favorable. c. P16,000 favorable.
b. P64,000 unfavorable. d. P70,000 favorable.

17. In the Economic Order Quantity (EOQ) model, some of the underlying assumptions are
a. Unlimited production capacity, declining demand, decreasing ordering cost, decreasing carrying cost,
and unlimited inventory capacity.
b. Constant demand, constant ordering cost, constant carrying cost, unlimited production and inventory
capacity.
c. Limited production capacity, declining demand, constant ordering cost, constant carrying cost, and
unlimited inventory capacity.
d. Increasing demand, limited production capacity, increasing ordering cost, increasing carrying cost,
and limited inventory capacity.

18. The ______________ would not affect the economic order quantity.
a. company's weighted average cost of capital
b. cost of purchase requisition forms
c. cost of insuring inventory
d. cost of a stockout

19. What is the opportunity cost of keeping a cash balance of $2 million, if the daily interest rate is 0.02%
and the average transaction cost of investing money overnight is $50?
A. $50 B. $350 C. $400 D. $40,000

20. Hakuna Inc. sells on terms of 3/10, net 30 days. Gross sales for the year are P2,400,000 and the
collections department estimates that 30% of the customers pay on the 10th day and take discounts; 40%
pay on the 30th day; and the remaining 30% pay, on the average, 40 days after the purchase. Assuming
360 days per year, what is the average collection period.
a. 40 days. b. 15 days. c. 20 days d. 27 days.

21. Sixty percent of Baco's annual sales of $900,000 is on credit. If its year-end receivables turnover is 4.5,
what is the average collection period and the year-end receivables, respectively (assume a 365-day
year)?
A. 81 days and $120,000. C. 73 days and $108,000.
B. 73 days and $120,000. D. 81 days and $200,000.

22. The detailed plan for the acquisition and replacement of major portions of property, plant, and
equipment is known as the
a. capital budget. c. commitments budget.
b. purchases budget. d. treasury budget.
23. The Sales Director of Can Can Co. suggests that certain credit terms be modified. He estimates the
following effects:
 Sales will increase by at least 20%.
 Accounts receivable turnover will be reduced to 8 times from the present turnover of 10 times.
 Bad debts, now at 1% of sales will increase to 1.5%. Sales before the proposed changes is at
P900,000. Variable cost ratio is 55% and desired rate of return is 20%. Fixed expenses amount to
P150,000.
Should the company allow the revision of its credit terms?
a. Yes, because income will increase by P68,850.
b. Yes, because losses will be reduced by P78,800.
c. No, because income will be reduced by P13,000.
d. No, because losses will increase by P28,000.

24. RODENSTOCK, INC. currently places orders for a particular stock item at quarterly intervals.
Information concerning this item is as follows:
Cost of placing an order P10
Annual demand 20,000 units
Purchasing price per unit P0.50
The cost of holding the stock items amounts to 20% of the stock value per annum.
What annual cost saving would result if RODENSTOCK used the economic order quantity for order sizes
instead of their current policy?
a. P 80 b. P 90 c. P150 d. P240

25. Inventory data for a certain raw material is as follows:

Annual usage in units 25,000
Working days per year 250
Normal lead time in working days 30
Maximum lead time in working days 50
Assuming that this raw material will be required evenly throughout the year, the order point will be
a. 3,000 b. 4,000 c. 5,000 d. 8,000

26. The following data are taken from the records of Belle Corporation for the year ended Dec. 31, 2015:
Net credit sales P576,000
Average materials inventory 8,000
Average finished goods inventory 12,000
Average accounts receivable 80,000
Average accounts payable 5,000
Net credit purchases 120,000
Raw materials used 96,000
Gross profit rate 25%
Number of days in a year 360 days

What is the average number of days in the company’s operating cash conversion cycle?

a. 50 days c. 105 days

b. 75 days d. 45 days
27. What is the effective annual interest rate on a 9% annual percentage rate automobile loan that has
monthly payments?
A. 9% B. 9.38% C. 9.81% D. 10.94%

28. A company annually consumes 10,000 units of Part C. The carrying cost of this part is $2 per year and
the ordering costs are $100. The company uses an order quantity of 500 units. By how much could the
company reduce its total costs if it purchased the economic order quantity instead of 500 units?
a. $500 b. $2,000 c. $2,500 d. $0

29. Scholas Co. uses 840,000 units of component R4 in manufacturing R444 over a 300-day work year. The
usual lead time for the part is six days. However, at times, the lead time has gone as high as eight days.
Scholas now desires to adjust its safety stock policy. The increase in safety stock size is
a. 16,800 units.b. 2,800 units. c. 7,200 units. d. 5,600 units.

30. On cash discounts, all of the following statements do not apply except
a . If a firm buys P10,000 of goods on terms of 1/10, net 30 and pays within the discount period, the
amount paid would be P9,000.
b. The cost of not taking a cash discount is always higher than the cost of a bank loan.
c. With trade terms of 2/15, net 60, if the discount is taken the buyer receive 45 days of credit.
d. The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30.