CA510120 FINANCIAL MANAGEMENT QUIZ 1 –

EXAMPLE OF APPLICATION TYPE QUESTIONS

1.If JFC stock’s actual market price is P136 while its intrinsic value is P125, JFC’s stock
is said to be undervalued and it is good to buy the stock.

ANS: FALSE

RATIONALE: The statement is false because JFC’s stock is overvalued, instead of

undervalued. The actual market price of P136 is higher than its intrinsic value of P125
meaning the stock is too expensive and it is not good to buy the stock.

2.If Mr. Green, the CFO, asked Ms. Patterson, the general ledger clerk, to deliberately
overstate its sales for the year (using inappropriate accounting practices) by 50% to
reflect a 30% increase in its profit to be shown in the financial statements, both Mr.
Green and Ms. Patterson can be sued for illegal acts.

ANS: TRUE

RATIONALE: Both the higher level officer and lower level individual or staff can be sued
for illegal actions related with FS manipulations and the related fraudulent/illegal
actions. Although this may not be an absolute thing, especially if the superior uses
threat or force to the staff, in general, both can be accused for the fraudulent action(s).

3.In 2019, Smith corporation paid a total of P2M of taxes from its 2019 profit.
Thereafter, it declared and paid dividends of P2 per share to its shareholders. The
shareholders paid the 10% tax on the dividend. This scenario shows the disadvantage
of corporation pertaining to:
a. more government control.
b. more costly to organize.
c. double taxation.
d. more people involved in decision making.

ANS: C

RATIONALE: C is correct since the scenario shows the disadvantage of the corporation
over the sole proprietorship and partnership on double taxation. The corporation is
taxed for its corporate profit and the shareholders are taxed for their profits in the form
of dividend income. For sole proprietorships and partnerships (especially the general
professional partnership), the one taxed are the sole proprietor and partners and not
the sole proprietorship and partnership.

4.McDonad’s Corporation decides to change the frequency of the purchase of its

inventory from weekly to twice a week. This is an example of an:
a. operating decision.
b. financing decision.
c. investing decision.
d. strategic decision.

ANS: A
RATIONALE: A is correct since operating decisions pertain to the day to day activities of
the firm such as those related with the purchase and sale of goods. B is incorrect since
financing decision pertains to raising money or funds wherein there are cash inflows
involved (e.g. borrowing money, receiving money from investors, etc.). C is incorrect
since investing decision relates to acquisitions of long-term assets e.g. (PPE,
investments) etc. and other related activities where there are cash outflows for long-
term purposes (e.g. plant expansions, etc.). D is incorrect since strategic decision means
long-term decisions generally involving BOD and top management for the whole
enterprise.

5. When Shamet Corp. a private company, undergoes an IPO, meaning it issues shares
of stocks to the public for the first time with the assistance of JP Morgan, an investment
bank (underwriter), the transaction occurs in the primary market.

ANS: TRUE

RATIONALE: When it is the company who sells or issues the shares of stock to the
individual or institutional investors, this happens in the primary market. If an existing
shareholder is the one who sells stocks to another investor, this occurs in the secondary
market.

6. When Ms. Zubac, a stock trader, analyzes the past movements of the prices of ABS-
CBN stocks, trades (buys and sells) the stocks, and earns high profits from the trade,
the market in this case is considered to be in the weak form efficiency.

ANS: FALSE

RATIONALE: The statement is incorrect since in a weak form of market efficiency, past
information (past stock price movements or past news) cannot be used to beat the
market and earn high returns. In the weak form of efficiency, publicly available
information (latest news) and inside information (known specifically to those inside the
company) can be used to beat the market and earn high returns.

7. Mr. Motley would to buy shares of stock of Mann Inc, a public company. He can buy
the stock from the
a. capital market.
b. physical asset market.
c. private market
d. futures market.

ANS: A

RATIONALE: A is correct since capital market is a market for long-term securities like a
share of stock. B is incorrect since physical asset market is market for real assets like
machines, commodities, etc. A share of stock is a financial asset. C is incorrect since
private market is market for securities negotiated directly between two parties. A share
of stock of a public company can be bought from the public market. D is incorrect since
futures market is a market for futures contract, a type of derivative. A share of stock
can be purchased from a spot market like a stock exchange (PSE), also a secondary
market, where in the actual purchasing and receiving of shares happen on the spot.

8. Mr. Coffey, a newly hired audit staff in SGV, would like to open a bank account for
his first salary. After 2 years and eventually being promoted as a senior, he wants to
own his own car and apply for a car loan. To achieve his needs, he can go to:
a. an investment bank
b. a commercial bank.
c. a pension fund.
d. a mutual fund.

ANS: B

RATIONALE: B is correct because a commercial bank accepts deposits and lend money.
A is incorrect because an investment bank helps companies to raise capital (e.g. assists
in IPOs for private companies). C is incorrect since pension fund is a retirement plan
funded by corporations and government agencies for their workers. D is incorrect
because mutual fund is a corporation that accepts money from savers and then uses
the funds to buy stocks, long-term bonds or short-term securities issued by the
businesses or government units.