FINANCIAL MANAGEMENT

ACT1108

Name: _______________________________________________________

Instructions: ENCIRCLE the correct answer for each of the following questions. You may use pencil but use
PEN for FINAL answers

Part A: Theories (1 pt each)

1.The percent of sales method is based on which of the following assumptions?
a. All balance sheet accounts are tied directly to sales.
b. Most balance sheet accounts are tied directly to sales.
c. The current level of total assets is optimal for the current sales level.
d. Statements a and c above are correct.
e. Statements b and c above are correct.

2. Joloan company is forecasting an increase in sales and is using the AFN model to forecast the additional
capital that they need to raise. Which of the following factors are likely to increase the additional funds
needed (AFN)?
a. The company has a lot of excess capacity.
b. The company has a high dividend payout ratio.
c. The company has a lot of spontaneous liabilities
that increase as sales increase.
d. The company has a high profit margin.
e. All of the statements above are correct.

3. Which of the following is likely to increase the additional funds needed (AFN) in a given year?
a. The company reduces its dividend payout ratio.
b. The company's profit margin increases.
c. The company decides to reduce its reliance on
accounts payable as a form of financing.
d. The company is operating well below full
capacity.
e. All of the statements above are correct.

4. Additional funds needed are best defined as:

a. Funds that are obtained automatically from routine business transactions.
b. Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.
c. The amount of assets required per peso of sales.
d. The amount of cash generated in a given year minus the amount of cash needed to finance the additional
capital expenditures and working capital needed to support the firm's growth.
e. A forecasting approach in which the forecasted percentage of sales for each item is held constant.

5. Which of the following is likely to decrease the additional funds needed (AFN) in a given year?
a. The company increases its retention ratio.
b. The company's profit margin increases.
c. The company's sales growth is reduced.
d. Both statements b and c are correct.
e. All of the statements above is correct.

6. Spontaneously generated funds are best defined as:

Striving for success without hard work is like trying to harvest where you haven't planted. – David Bly
RLBA
 a. The amount of assets required per peso of sales.
b. A forecasting approach in which the forecasted percentage of sales for each item is held constant.
c. Funds that a firm must raise externally through borrowing or by selling new common or preferred
stock.
d. Funds that are obtained automatically from routine business transactions.
e. The amount of cash generated in a given year minus the amount of cash needed to finance the
additional capital expenditures and working capital needed to support the firm's growth.
7. The capital intensity ratio is:
a. The inverse of the total assets turnover ratio.
b. The percentage of liabilities that increase
spontaneously as a percentage of sales.
c. The amount of assets required per peso of sales.
d. Both statements a and c are correct.
e. None of the statements above is correct.

8. Considering each action independently and holding other things constant, which of the following actions
would reduce a firm's need for additional capital?
a. An increase in the dividend payout ratio.
b. A decrease in the profit margin.
c. A decrease in the days sales outstanding.
d. An increase in expected sales growth.
e. A decrease in the accrual accounts (accrued wages and taxes).
9. Which of the following statements is CORRECT?
a. A time line is not meaningful unless all cash flows occur annually.
b. Time lines are useful for visualizing complex problems prior to doing actual calculations.
c. Time lines cannot be constructed in situations where some of the cash flows occur annually but
others occur quarterly.
d. Time lines cannot be constructed for annuities where the payments occur at the beginning of the
periods.
e. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can
be uneven amounts.

10. Xyrelle Kate plan to analyze the value of a potential investment by calculating the sum of the present values
of its expected cash flows. Which of the following would lower the calculated value of the investment?
a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the
annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
b. The discount rate increases.
c. The riskiness of the investment's cash flows decreases.
d. The total amount of cash flows remains the same, but more of the cash flows are received in the
earlier years and less are received in the later years.
e. The discount rate decreases.

11. Celine Joy plan to analyze the value of a potential investment by calculating the sum of the present values of
its expected cash flows. Which of the following would increase the calculated value of the investment?
a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the
annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.
b. The discount rate decreases.
c. The riskiness of the investment's cash flows increases.
d. The total amount of cash flows remains the same, but more of the cash flows are received in the later
years and less are received in the earlier years.
e. The discount rate increases.

Striving for success without hard work is like trying to harvest where you haven't planted. – David Bly
RLBA
12. Which of the following statements is CORRECT?
a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
b. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by
definition an annuity.
c. The cash flows for an annuity due must all occur at the ends of the periods.
d. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as
once a year or once a month.
e. If some cash flows occur at the beginning of the periods while others occur at the ends, then we have
what the textbook defines as a variable annuity.
13. Which of the following statements is CORRECT?
a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
b. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by
definition an annuity.
c. The cash flows for an annuity due must all occur at the beginning of the periods.
d. The cash flows for an annuity may vary from period to period, but they must occur at regular
intervals, such as once a year or once a month.
e. If some cash flows occur at the beginning of the periods while others occur at the ends, then we have
what the textbook defines as a variable annuity.
14. Joera’s bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the
following statements is CORRECT?
a. The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
b. The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
c. The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
d. The periodic rate of interest is 3% and the effective rate of interest is 6%.
e. The periodic rate of interest is 6% and the effective rate of interest is also 6%.
15. R. Manjares bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which
of the following statements is CORRECT?
a. The periodic rate of interest is 2% and the effective rate of interest is 4%.
b. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
c. The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
d. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
e. The periodic rate of interest is 8% and the effective rate of interest is also 8%.
16. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these
statements is CORRECT?
a. The annual payments would be larger if the interest rate were lower.
b. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in
either case, the first payment would include more dollars of interest under the 7-year amortization plan.
c. The proportion of each payment that represents interest as opposed to repayment of principal would
be lower if the interest rate were lower.
d. The last payment would have a higher proportion of interest than the first payment.
e. The proportion of interest versus principal repayment would be the same for each of the 7 payments.
17. Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is
CORRECT? (Ignore taxes and transactions costs.)
a. The remaining balance after three years will be $125,000 less one third of the interest paid during the
first three years.
b. Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and
principal payments) are constant.
c. Interest payments on the mortgage will increase steadily over time, but the total amount of each
payment will remain constant.
d. The proportion of the monthly payment that goes towards repayment of principal will be lower 10
years from now than it will be the first year.
e. The outstanding balance declines at a slower rate in the later years of the loan's life.

Striving for success without hard work is like trying to harvest where you haven't planted. – David Bly
RLBA
18. Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is
CORRECT? (Ignore taxes and transactions costs.)
a. The remaining balance after three years will be $125,000 less one third of the interest paid during the
first three years.
b. Because the outstanding balance declines over time, the monthly payments will also decline over
time.
c. Interest payments on the mortgage will increase steadily over time, but the total amount of each
payment will remain constant.
d. The proportion of the monthly payment that goes towards repayment of principal will be lower 10
years from now than it will be the first year.
e. The outstanding balance declines at a faster rate in the later years of the loan's life.

19. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal
interest rate of 10% is CORRECT?
a. The monthly payments will decline over time.
b. A smaller proportion of the last monthly payment will be interest, and a larger proportion will be
principal, than for the first monthly payment.
c. The total dollar amount of principal being paid off each month gets smaller as the loan approaches
maturity.
d. The amount representing interest in the first payment would be higher if the nominal interest rate
were 7% rather than 10%.
e. Exactly 10% of the first monthly payment represents interest.

20. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal
interest rate of 10% is CORRECT?
a. The monthly payments will increase over time.
b. A larger proportion of the first monthly payment will be interest, and a smaller proportion will be
principal, than for the last monthly payment.
c. The total dollar amount of interest being paid off each month gets larger as the loan approaches
maturity.
d. The amount representing interest in the first payment would be higher if the nominal interest rate
were 7% rather than 10%.
e. Exactly 10% of the first monthly payment represents interest.

PART II: Multiple Choice Problems (2pts)

1. Last year M. Manalastas Corp. had $250 million of sales, and it had $75 million of fixed assets that were being
operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full
capacity?
a. $312.5
b. $328.1
c. $344.5
d. $361.8
e. $379.8

2. Last year P. Marasigan Technologies had $250 million of sales and $100 million of fixed assets, so its Fixed
Assets/Sales ratio was 40%. However, its fixed assets were used at only 75% of capacity. Now the company
is developing its financial forecast for the coming year. As part of that process, the company wants to set its
target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity. What
target Fixed Assets/Sales ratio should the company set?
a. 28.5%

Striving for success without hard work is like trying to harvest where you haven't planted. – David Bly
RLBA
 b. 30.0%
c. 31.5%
d. 33.1%
e. 34.7%

3. Pat Mendoza Industries is planning its operations for next year. Jewel Obsilla, the CEO, wants you to forecast
the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN
equation, what is the AFN for the coming year? Dollars are in millions.

Last year's sales = S0 $350 Last year's accounts payable $40

Sales growth rate = g 30% Last year's notes payable $50
Last year's total assets = A0* $500 Last year's accruals $30
Last year's profit margin = PM 5% Target payout ratio 60%

a. $102.8
b. $108.2
c. $113.9
d. $119.9
e. $125.9

4. John Osio is about to retire, and he wants to buy an annuity that will provide him with $75,000 of income a
year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%.
How much would it cost him to buy the annuity today?
a. $ 825,835
b. $ 869,300
c. $ 915,052
d. $ 963,213
e. $1,011,374

5. Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan
(principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the
$50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much
higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?
a. 0.52%
b. 0.44%
c. 0.36%
d. 0.30%
e. 0.24%

6. Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each
of the next 5 years. How much interest would you have to pay in the first year?
a. $1,200.33
b. $1,263.50
c. $1,330.00
d. $1,400.00
e. $1,470.00

Striving for success without hard work is like trying to harvest where you haven't planted. – David Bly
RLBA
 7. You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If
you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account
two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?
a. $15,234.08
b. $16,035.87
c. $16,837.67
d. $17,679.55
e. $18,563.53
8. .U. Ratuita Inc. had the following balance sheet last year:

Cash P 800 Accounts payable P 350

Accounts receivable 450 Accrued wages 150
Inventories 950 Notes payable 2,000
Net fixed assets 34,000 Mortgage 26,500
Common stock 3,200
Retained earnings 4,000
Total liabilities
Total assets P36,200 and equity P36,200

Uzzie has just invented a non-slip wig for men that she expects will cause sales to double from P10,000 to
P20,000, increasing net income to P1,000. She feels that she can handle the increase without adding any
fixed assets. (1) Will Uzzie need any outside capital if she pays no dividends? (2) If so, how much?
a. No; zero
b. Yes; P7,700
c. Yes; P1,700
d. Yes; P700
e. No; P700 surplus

9. Rod Regoris Corporation recently reported the following income statement for 2019 (numbers are in millions of
pesos):

Sales P7,000
Operating costs 3,000
EBIT P4,000
Interest 200
Earnings before taxes (EBT) P3,800
Taxes (40%) 1,520
Net income available to
common shareholders P2,280

The company forecasts that its sales will increase by 10 percent in 2020 and its operating costs will increase
in proportion to sales. The company's interest expense is expected to remain at P200 million, and the tax rate
will remain at 40 percent. The company plans to pay out 50 percent of its net income as dividends, the other
50 percent will be additions to retained earnings. What is the forecasted addition to retained earnings for
2020?
a. P1,140
b. P1,260
c. P1,440
d. P1,790
e. P1,810

Striving for success without hard work is like trying to harvest where you haven't planted. – David Bly
RLBA
10. Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of
the next 5 years. By how much would you reduce the amount you owe in the first year?
a. $2,404.91
b. $2,531.49
c. $2,658.06
d. $2,790.96
e. $2,930.51

Part Three: Straight Problems (5pts)

1. Mou Rivera firm has the following balance sheet:

Cash P 10 Accounts payable P 10

Accounts receivable 10 Notes payable 20
Inventories 10 Long-term debt 40
Fixed assets 90 Common stock 40
Retained earnings 10
Total liabilities
Total assets P120 and equity P120

Fixed assets are being used at 80 percent of capacity; sales for the year just ended were P200; sales will
increase P10 per year for the next 4 years; the profit margin is 5 percent; and the dividend payout ratio is 60
percent. Assume that underutilized fixed assets cannot be sold. What are the total external financing
requirements for the entire 4 years, that is, the total AFN for the 4-year period?

Striving for success without hard work is like trying to harvest where you haven't planted. – David Bly
RLBA
2. After graduation, you plan to work for Rachel Rivera Corporation for 12 years and then start your own
business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000
annually for the following 6 years (t = 7 through t = 12). The first deposit will be made a year from today. In
addition, your grandfather just gave you a $25,000 graduation gift which you will deposit immediately (t =
0). If the account earns 9% compounded annually, how much will you have when you start your business 12
years from now? (Hint: The sum of the compounded values of those three sets of cash flows is the final
amount.)

3. Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with
equal end-of-month payments. What percentage of the 4th monthly payment will go toward the repayment of
principal?

Striving for success without hard work is like trying to harvest where you haven't planted. – David Bly
RLBA