1

PART 1: MULTIPLE CHOICE

2 points each /140 points
5 points deduction for every 5 items answered incorectly
1.

A company is conducting a risk analysis on a project. One task has a risk probability estimated to be 0.15. The task
has a budget of Php.35,000. If the risk occurs, it will cost Php.6,000 to correct the problem caused by the risk event. What
is the expected monetary value of the risk event?
Php.900
Php.4,350
Php.5,250
Php.6,150

2.
A corporation has 4 autonomous projects available:
Capital needed at time 0 NPV
Project A 10,000 30,000
Project B 8,000 25,000
Project C 12,000 30,000
Project D 16,000 36,000
If the corporation has Php. 32,000 to capitalize at time 0, and each project is infinitely divisibl e, but
none can be delayed, what is the highest NPV that can be earned?
Php. 89,000
Php. 89,500
Php. 100,250
Php. 101,000

3.
Which of the following statements are correct?
Tax allowable depreciation is relevant when assessing borrowing to buy compared to rental as a f inancing choice
Asset replacement decisions involve relevant cash f lows to be discounted by the af ter-tax cost of debt
If capital is rationed, investment which are divisible can be ranked by the perf ormance index when def ining th e optimum
investment schedule
Government limits on bank lending are related with hard capital rationing

4.
1.Working capital should increase as sales increase
2.An increase in the cash operating cycle will decrease prof itability
3.Overtrading is also known as under-capitalization

True, False, False

False True, true

True, True, True

5.
In a lean accounting, a company takes a special order to make 200 units of a product each month f or the next two months
f or Php.130 per unit. The company usually sells the unit f or Php.170 per unit with variable costs per unit at Php.80. The
company plans to use surplus capacity. By what amount would this special order increase prof it?
Php.16,800
Php.20,000
Php.46,000
Php.52,

6.
Which of the f ollowing is NOT a result of rapid business expansion?
An rise in the current ratio
A rapid growth in revenue
A rapid upsurge in the volume of current assets

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Increase in current assets being f inanced by credit

7
Which of the following is least likely to be a motive for stock market listing?
Improvement of the company’s image
Transmission of capital to other users
Improvement of existing owners’ control over the business
Entry to a broader pool of f inance

8.
An increase in ABC Corp’s cash conversion cycle and a decrease in ABC’s operating cycle could result f rom:
Cash conversion cycle increase Operating cycle decrease
Decreased receivables turnover Increased payables turnover
Decreased receivables turnover Decrease in days of inventory
Increased inventory turnover Increased payables turnover

9.

ABC Co. is considering a shif t in its capital structure, which comprises only debt and equity. The company has decided to
expand the proportion of debt f inancing in order to move the capital structure toward what the company identif ies
as the optimal structure. ABC has also lately experienced a decline in its marginal tax rate. If the costs of debt and
equity capital remain unchanged, what impact will the change in capital structure and tax rate have on ABC Co.’s
weighted average cost of capital?

Capital structure / Tax

Rise Rise
Decline Rise
Decline Decline
Rise Decline

10.

If inventory has a high risk of obsolescence. which of

the f ollowing f eatures would be most?
A high quick ratio
A high debt ratio
A high number of days sales outstanding in ending trade receivables
A low inventory turnover ratio

11.

The main objectives of macroeconomic policy include which of the following?

Full employment of resources, Price stability, Economic growth, Balancing the budget
1 and 2 only
1 and 3 only
1, 2 and 3 only
1, 2, 3 and 4

12.

The f ollowing is an excerpt f rom the balance sheet of ABC Co. at 30 September 2019:
Ordinary shares of .25 each 250,000
Reserves 350,000
7% P1 pref erence shares 250,000
15% bonds unsecured 1, 150,000
The ordinary shares are currently quoted at 1.25, the bonds are quoted at P85 per
P100 nominal and the non-redeemable pref erence shares at .65 each.
Calculate the gearing ratios based on Book value market value
10% , 8.0%
15% , 8.3%

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15% , 9.6%
10% , 12.75

13.

Choose which government moves relate principally to fiscal policy?

1 Reducing interest rates to stimulate consumer spending
2 Reducing taxation while maintaining public spending
3 Using f oreign currency reserves to buy the domestic currency
4 Borrowing f rom the capital markets and spending it on public works

1 only
1 and 3
2 and 4 only
2, 3 and 4

14.
Which is not a f actor in valuing a call option?
Exercise price.
Expiration date.
Forward contract price.
Interest rate.

15.
. ABC bought goods costing Php. 2,500. The terms of trade is that payment
must be received in three months time. However, a discount of 1.5% will be if paid within one month.
Compute the annual percentage cost of paying within three months?
6.23%
9.54%
6.10%
9.49%

16
Statements:
Value f or money usually means ef f iciency, economy, and engagement
Cum dividend means the buyer of the share has the right to receive the dividend soon to be paid.
Dividend payout ratio compares the dividend per share with the market price per share
Agency problem leads to shareholder wealth not being maximized

False, true, False False

False True False True
True True False True
False True True True

17.
A call option is more valuable when there is lesser
Market value of the underlying share.
Strike price on the option.
Time to maturity on the option.
Changes in market price on the underlying share.

18

A company buys an apparatus f or Php. 10,000 and vends it f or Php. 2,000 at time 3. operating costs of
the machine is time 1 = Php. 3,000; time 2 = Php. 5,000; time 3 = Php. 7,000.
If a series of apparatuses are bought, run, and traded on an endless cycle of replacements, what
is the corresponding annual cost of the machine if the discount rate is 10%?

Php. 20,114
Php. 8,992
Php. 8,288
Php. 7,471

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19
ABC Corp. is looking at two mutually exclusive projects with the f ollowing af ter-tax cash f lows:
TIME 0 1 2 3 4 5 6
Project 1 –10,000 2,000 2,000 2,000 4,000 4,000 4,000
Project 2 –12,000 2,000 2,000 2,000 5,000 5,000 5,000
Given that ABC’s cost of capital is 7.5%, the IRR of the project that should select is closest to:
13%.
15%.
17%.
11%

20.

Below are accounts of a company as at 31 December 2019( in hundreds):

Non-current assets 1,000 ; Inventories 200 ; Receivables 150;Cash 100 ; Current liabilities 200
The company doubled its sales and there is no plan to invest in any new non-current assets, inventories, receivables and
payables however all move in line with sales.

21.

What cash balance after a year will result if the non-current assets were all land, no new capital was raised and
all profits were paid out as dividends?
Php. 100,000 cash available on hand
Php. 200,000 cash available on hand
Php. 50,000 overdraf ts
Php. 100,000 overdraf ts

22.

Yearly credit sales of Php. 27 million , cost of sales of Php. 15 million.

Targets f or the next year are as f ollows: Trade receivables days 50 days ; Inventory days 60 days
Trade payables 45 days. There are 360 days in the year.
What net investment in working capital is required for the next year?
Php. 8,125,000
Php. 4,375,000
Php. 2,875,000
Php. 6,375,000

23

Proposed cash budget is as f ollows:

1 2 3
Credit Sales 20,000 11,000 14,500
Cash Sales 10,000 4,500 6,000
Suppliers 13,000 4,200 7,800
Wages 4,600 2,300 3,000
Overheads 3,000 1,750 1,900
Beginning cash 500
What is the budgeted ending cash balance ?

Php. 20,550 def icit

Php. 21,050 def icit
Php. 22,450 deposit
Php. 24,950 deposit

24.

Assume Cost of capital is 15% per year, compute the closest present value of the tax savings from the tax -
allowable depreciation at 1 January 2019?
Php. 391,000
Php. 268,000
Php. 243,500
Php. 719,000

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25.
A shorter operating cycle will most likely result to which of the f ollowing changes in a company’s working capital
management ?
Decreasing stock-outs by carrying greater quantities of inventory.
Extending its payables by paying on the last allowed date.
Changing its credit terms f rom 2/10, net 60 to 2/10, net 30.
Increasing short term investments.

26.

Which is not an advantage of having a centralized treasury

department in a large international group of companies?
No need f or treasury skills to be duplicated throughout the group
Necessary borrowings can be arranged in bulk, at keener interest rates than f or smaller amounts
The group’s f oreign currency risk can be managed much more ef f ectively since they can appreciate the t otal exposure
situation
Divisional managers will be motivated by having less responsibility f or cash management

27.

Which statement does not belong to the group?

A prospective merger will need to result in a company having a market share greater than 80%
bef ore it can be described as a monopoly
A government may intervene to weaken its country’s exchange rate in order to eliminate a balance of
payments def icit
A relatively high rate of domestic inf lation will lead to a strengthening currency
Government f iscal policy involves the management of interest rates

28.

Which actions will be appropriate to make use of the surplus?

Pay supplier earlier to take advantage of any prompt payment discounts
Buy back the company’s shares
Increase payables by delaying payment to suppliers
Invest in a long term deposit bank account

29
A company’s specialist is assessing a plant expansion project that is likely to be f inanced in part by issuing new common
equity. Flotation costs are likely to be 4% of the amount of new equity capital raised. The most suitable way f or the
specialist to treat the f lotation costs is to:
ignore because f lotation costs f or common equity are likely to be not relevant.
approximate the cost of equity capital based on a share price 4% less than the current price.
establish the f lotation cost attributable to this project and consider it as part of the project’s initial cash outf low.
depends on the type of equity

30
Which of the f ollowing is least likely included when calculating the appropriate cash f lows f or analysis of whether to add a
new product to the product line?
Estimated depreciation on the new f acility and equipment f or tax purposes.
Costs of a survey done last month to decide
Reduced sales that resulted f rom the introduction of new product
Increase in Working Capital requirement

31

Which of the following are disadvantages of executive share option schemes?

When directors exercise their options, they tend to sell the shares almost immediately to realize prof its.
they cannot act as an incentive since If the share price f alls when options are awarded, and the options have zero value,
Directors may distort prof its to protect the share price and the value of their share options

Only one statement is a criticism

All three are criticism
Only two are criticism

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32.
The usage of secondary sources of liquidity would most likely be studied:
a routine part of daily business f or a company.
a sign that a company’s f inancial position is weakening.
a lower-cost source of short-term f inancing compared to primary sources of liquidity.
an investment decision is done and long term sources are possible

33.

ABC Co share values during the year ended 31 December 2019:

At start of 2019 Php. 2.50 and went as high as Php. 3.15 and as low as 2.40
It closed at Php. 3.00 year end ABC Co paid a total dividend of Php. 0.15 per share.
What is the total shareholder return for 2017?
26%
21%
22%
36%

34

ABC is an all equity f inanced company. It paid dividend of Php. 50m; Earnings retained and invested 70% Return on
investments 15% Cost of equity 35%
What is the market value of the company?
Php. 481m
Php. 250m
Php. 221m
Php. 218m
Some other answer
35.

Which of the following statements is correct?

Miller and Modigliani claimed that the f inancing decision is more important than the dividend decision
A bonus issue can be used to increase new equity f inance
A share repurchase arrangement can increase both earnings per share and gearing
Shareholders generally have the power to increase dividends at annual general meetings of a company

36.

A security’s required return is projected using the CAPM using the f ormula:
Security 1 has a beta value of 1.6 with a return of 12.0%
Security 2 has a beta value of 0.9 with a return of 13.0%
Security 3 has a beta value of 1.2 with a return of 13.2%
Security 3 is correctly priced.
The risk-f ree return is 6%.
The security which is underpriced is 1.

True
False
Cannot be determined
Both are underpriced

37.
ABC Co. has a beta of 1.1, a marginal tax rate of 35%, and a debt -to-assets ratio of 40%. ABC Co. management is
weighing an entry into the restaurant business. They have identif ied a publicly traded company in the industry that has an
equity beta of 1.3, a marginal tax rate of 28%, and a debt-to-equity ratio of 40%. The correct beta f or ABC Co. to use in
calculating the cost of equity capital f or the analysis of the prospective entry into the restaurant business is closest to:
1.15.
1.30.
1.45.
none of the above

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38.
The main reason f or accepting TQM is to achieve
Better customer satisf action.
Less delivery time.
Less delivery charges.
Better employee participation.

39.
With respect to the internal rate of return , which of the f ollowing assertions is most correct?
The IRR is the discount rate that maximizes a project’s net present value.
A suitable decision rule is to accept the project if IRR is less than the requisite rate of return.
IRR is the discount rate at which the present value of expected f uture af ter tax cash f lows is the same as the investment
outlay.
IRR is supreme over other capital budgeting calculations

40.
At the start of its f iscal year, a company anticipated producing 300,000 units throughout t he year. The annual
budgeted manuf acturing overhead was Php.150,000 f or variable costs and Php.600,000 f or f ixed costs. In April, when
there was a beginning inventory f or f inished goods of 5,000 units, the company showed an income of Php.40,000 using
absorption costing. That same month, ending inventory f or f inished goods was 7,000 units. What amount would the
company recognize as income f or April using variable costing?
Php.35,000
Php.36,000
Php.44,000
Php.45,000

41.
Which of the f ollowing is not a monitoring device f or ef fective corporate governance?
The audit committee.
The chief f inancial of f icer.
The SEC.
External auditors.

42.
In which of the f ollowing situations would there be inelastic demand?
A 5% price increase results in a 3% decrease in the quantity demanded.
A 4% price increase results in a 6% decrease in the quantity demanded.
A 4% price increase results in a 4% decrease in the quantity demanded.
A 3% decrease results in a 5% increase in the quantity demanded.

43.
Cloud computing can best be def ined as a model that
Streamlines business processes onto a well-secured and highly available in-house e-commerce platf orm to optimize
customers’ online experience.
Is designed f or rapid application deployment by making several virtual servers run on one physical host.
Allows users to access network resources f rom remote locations through a virtual private network.
Allows organizations to use the Internet to access and use services and applications that run on remote thirdparty
technology inf rastructure.

44.
Deviations in monetary policy will impact which factors?
1 Level of exchange rates
2 Cost of f inance
3 Level of consumer demand
4 Level of inf lation
1 and 2 only
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2 and 3 only
2, 3 and 4 only
1, 2 and 3 and 4

45.
Which is/are usually forms of market failure which may be solved by regulation?
1 Imperf ect competition 2 Social costs or externalities 3 Imperf ection in inf ormation
1 only
1 and 2 only
2 and 3 only
1, 2 and 3

46.
If projected cash f lows are less certain than the overall cash f lows , the net present values of projects should use:
marginal cost of capital.
a lesser marginal cost of capital
a greater marginal cost of capital
additional data is needed

47
Which of the following statements are incorrect?
Securitization is the conversion of illiquid assets into marketable securities
Disintermediation arises where borrowers contract directly with lending individuals
Demand-pull inf lation will happen when there are upsurges in production costs

48.
A company is using the net present value (NPV) and internal rate of return (IRR) methods to evaluate a project f or his
company. Af ter its initial cash outf low, the project will produce several years of cash inf lows, but will require a net cash
outf low in the last year. The dif ficulty of the company is most likely to meet when using the NPV or IRR methods f or this
analysis is:
A. numerous IRRs.
B. negative NPV.
C. contradictory NPV and IRR project rankings.
D. no problem will be encountered
49.

Financial management division will normally carry out which of the following

Assessing planned expansion plans

Evaluation of overtime expenditure
Depreciation of non-current assets
Allocating overheads to cost units

50.

A plan involves of a successions of cash outf lows in the f irst f ew years f ollowed by a succession of
positive cash inf lows. The total cash inf lows is higher than total cash outf lows. Assuming a zero rate of inf lation If the plan
were re-assessed on the supposition that the cash flows were subject to a
positive rate of inflation, which between payback period and the internal rate of return will increase?

Payback period
Internal rate of return
Both
Both will decrease

51.
An investor purchases 1,000 shares of a stock on margin at a price of P50 per share. The initial margin prerequisite is
40% and the margin lending rate is 3%. The broker charges a commission of P0.01 per share on purchases and sales.
The stock pays a yearly dividend of P0.30 per share. A year later, the investor unloads the 1,000 shares at a price of P56
per share. The investor’s rate of return is nearest to:
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12%.
72%
36%.
Some other answer

52.

The following are features of a good remuneration package for managers except ?

Linking of rewards to shareholder wealth changes

Matching of managers’ time f rame to shareholders’ time f rame
Motivate managers to implement the same outlooks to risk as shareholders
Motivation to principally achieve short-term goals

53.

ABC Co. has P1.2 million in assets that are currently f inanced with 100% equity. ABC Co.’s EBIT is P300,000, and its tax
rate is 30%. If ABC Co. changes its capital structure (recapitalizes) to include 40% debt, what is ABC Co.’s ROE bef ore
and af ter the change? Assume that the interest rate on debt is 5%. ROE at 100% equity ROE at 60% equity
17.5% 26.8%
25.0% 26.8%
25.0% 37.5%

54.

When considering standard deviation as a statistical measure, which of the following

statements is true?

It is a measure of the variability of a distribution around its mean

The tighter the distribution, the higher it will be
The wider the dispersion, the less risky the situation
It is the weighted average of all the possible outcomes
55.

An analyst calculates the f ollowing leverage ratios f or ABC Company and DEF Company:
DOL/DOF
ABC 1.6 /3.0
DEF 1.2 /4.0
If both companies’ sales increase by 5%, what are the most likely ef f ects on the companies’ earnings bef ore interest and
taxes and earnings per share.
EBIT will increase by the same percentage in both companies
DEF’s EPS will increase by a larger rate than ABC’s EPS.
ABC’s EBIT will increase by a larger rate than DEF’s EBIT.
Incomplete data

56.

ABC plans to buy a contraption costing Php. 18,000 to save on labor costs. Php. 9,000 in labor cost will be saved in the
f irst year and labor rates in the second year will rise by 10%. The assessed average annual rate of inf lation is 8% and the
real cost of capital is estimated at 12%. The contraption has a two -year lif e with salvage value of Php 5,000 receivable at
the end of year 2. All cash f lows arise at the year end.

What is the negative NPV of the investment?

Php. 600
Php. 360
Php. 376
Php. 600

57
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Which of the following is/are elements of fiscal policy?

1 Governments increase or decrease taxes
2 Governments increase or decrease the size of the money supply
3 Governments increase or decrease the amount it spends

1 only
1 and 3 only
2 and 3 only
1, 2 and 3

58.

ABC Co. just suf f ered a decrease in revenue of 10%. In response, operating income and net income both declined by
25%. Which of the f ollowing is TRUE about ABC Co.?

The company has high operating leverage but no f inancial leverage.

The company has no operating leverage but high f inancial leverage.
The company has high operating leverage and high f inancial leverage.
The company has no operating leverage and no f inancial leverage.

59.

Which of the f ollowing statements accurately describes leverage and capital structure?
If a company does not depend heavily on operating leverage, then the company’s f ixed costs are a relatively small
proportion of total costs.
An rise in the corporate tax rate will not change the way a corporation raises capital.
A company exposed to substantial business risk is more likely to use f inancial leverage than a company with little
business risk.
If a company increases its f inancial leverage, the operating leverage will increase in a comparable proportion.

60.

A manager made the f ollowing statements to a group of investors about agency costs. Which of the statements does NOT
correctly describe a f acet of agency costs?

arise as a consequence of management’s desire to use company assets f or its personal gain and the owners’ desire to
maximize the value of the company.
minimized when the owners of a company and the management of a company are the same.
occur as a result of stockholders’ desire to increase the price of the common stock and debtholders’ desire to secure interes t
payments.
do not have any bearing on the overall value of the company.

61.
Short-term f inancing with trade credit will pay a higher percentage f inancing cost, everything else being equal, when
The discount percentage is lesser.
products have a higher price.
products have a lesser price.
The supplier of f ers a longer discount period.

62.
In year 1, a company’s cash is 15% of sales, accounts receivable is 10% of sales, inventory is 20% of sales, accounts
payable is 30% of sales, and long -term debt is 5% of sales. The company is preparing its f orecasts and anticipates that
sales will increase f rom Php.50,000 in year 1 to Php.55,000 in year 2. The company uses the percentage -of -sales
method. What amount would be the required net working capital in year 2?
(Php.5,750)

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Php.5,500
Php.7,600
Php.8,250

63
AAA

Projects, 1, 2, 3 and 4, are existing but the company which is f acing def iciencies of capital
over the next year but hopes capital to be f reely available thereaf ter.
1 2 3 4
Capital required over lif e of project 20 30 40 50
Capital required in f ollowing year 20 10 30 40
Net present value of project at company’s cost of capital 60 40 80 80
To maximize net present values in what sequence should the projects be selected.

1, 3, 4, 2
2, 1, 3, 4
2, 3, 1, 4
3, 4, 1, 2

64

050A company has the f ollowing cash f low f or a project:

Year Cash flow
0 (100,000)
1 40,000
2 20,000
3 30,000
4 5,000
5 40,000

The company uses a discount rate of 10%. what year will discounted payback occur?

1
2
3
4

65
ABC' accounting year ends on 12/31. On 1 January 2019 a new machine costing Php. 2,000,000 is bought. It expects to
sell the machine at the end 2020 f or Php. 350,000.
Tax rate is 30%. Tax-allowable depreciation is allowed at 25% on the diminishing balance basis, and a balancing
allowance is available on removal of the asset.

66
Which of the regarding the valuation of bonds is correct?
When interest rates rise so that the required rate of return increases, the market value of the bond wi ll rise.
For a given change in the required return, the shorter a bond’s maturity, the greater the change in the market
value of the bond.
The market value of a discount bond is greater than its f ace value during a period of increasing interest rates.
When the market rate of return is less than the stated coupon rate, the market value of the bond will be more
than its f ace value, and the bond will be selling at a premium.

67
A company has budgeted sales f or January and February
of 20,000 and 25,000 units, respectively. The selling price is
Php.5 per unit, and the purchase price is Php.3 per unit. Budgeted
ending inventory is 10% of the next month’s sales. What is the
budgeted cost of purchases f or January?

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Php.54,600
Php.60,000
Php.61,500
Php.85,000

68

A strategy map in the balanced scorecard f ramework is

A statement of what the strategy must achieve and what is critical to its success.
Key action programs required to achieve strategic objectives.
Diagrams of the cause-and-ef f ect relationships between strategic objectives.
The level of perf ormance or rate of improvement needed in the perf ormance measure.

69

If a company pays its labor force on a piece rate were to mechanize its manufacture line, which of the fo llowing
answers will it expect of operating leverage?
Decrease
Increase
Remain the same
Depends

70.

Recently, management of a company declared its intention to f inance a new investment project without changing the
current capital structure of the company. Which of the f ollowing correctly explains the announcement?
The company intends to maintain the ratio of current liabilities to total liabilities as it begins the new investment project .
Any equity necessary to f inance the new investment project will only come f rom retained earnings.
Company intends to maintain the ratio of current assets to total assets as it starts the new investment
The assets required to initiate the project will be acquired without altering the proportions of current debt and equity capital

PART 2: MULTIPLE CHOICE(TRUE OR FALSE)

2 POINTS EACH/ 42 POINTS
5 points deduction for every 5 items answered incorrectly
1.

1. Starts under the BCG Growth matrix means products that generate high income but requires
low cash requirement. A star becomes a cash cow of a market leader when the market's overall
growth rate declines.

2. A 50% increase in units sold will increase the cash f low available to owners by more than 50%
given a degree of total leverage of 1.

3. An Investment that provides the same expected return as another, but with a higher standard
deviation should be rejected as it is riskier.

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4. ABC Company must maintain a minimum cash balance of P8,000, the std deviation in daily
cash f low is P2,000). Trading cost is is P50 & the daily interest rate is 0.025 %, the maximum
amount of cash needed is P33,300.

2.

1. Shares of Jollibee Foods Corporation , a Philippine company , listed with an American bourse
is called an American depository receipt .

2. When the rate of interest is equal to the cost of capital , the value of your investment at
present is zero.

3. If the Internal rate of return is 100% , you can double your money in 1 year.

4. A goal in long term f inancing is to issue bonds when interest rates are low and i ssue equity
when the stock price is low.

3.

1. Assume ABC Co. has P500,000 in debt at a bef ore-tax rate of 6%, P2,000,000 in equity at a
cost of 10%, and a marginal tax rate of 40%. The company’s WACC is 9.2%.

2. Investors are generally considered to be risk averse.

3. ABC Co. has a portf olio with the f ollowing three assets and expected returns:
Asset A P2,000,000 6%

Asset B P2,000,000 9%

Asset C P4,000,000 12%

The expected return of the portf olio is equal to 9%.

4. A balanced portf olio can be used to diversif y away unsystematic risk.

4.

1. The unsystematic risk of a particular investment is measured by the investment’s beta.

2. The risk that a bond will decline in value due to an increase in interest rates is ref erred to as
market risk.

3. Liquidity pref erence theory would predict the yield curve to be normal.

4. To hedge an increase in short-term interest rates, ABC Co. may use the strategy of selling
Treasury bills on the f utures market.

5.

1. A consideration of risk may be incorporated into capital budgeting techniques in a number of

ways. One way is through the use of scenario analysis.

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2. A conclusion that the percent of change a person’s grade on the CPA Exam will increase as the
number of hours studied f or the exam increases is a result of regression analysis.

3. In a period of recession, actual GDP exceeds potential GDP.

4. ABC Co. is considering the purchase of equipment f or P40,000. This investment will generate
annual cash inf lows of P10,000 per year f or the next 6 years. The company desires a rate of
return of 12%. At that rate, the present value of P1 in six years is .507. At that rate, the present
value of an ordinary annuity of P1 over six years is 4.111. The investment has a positive net
present value of P1,110.

6.

1. The company will pay a nominal rate of interest If ABC Co. goes to a reputable f inancial
institution,

2. If ABC Co. is of f ered credit terms of 2/10, net/30, the cost of not taking the discount is 26%.

3. In a warehousing arrangement, inventory is maintained in the warehouse of the borrower under

control of the borrower’s warehouse employee.

4. Eurobonds may be a lower-cost option to other debt f inancing because they have a lower cost
of issuance.

7.

Which of the f ollowing is not a limitation of EOQ f ormula ?

1. Demand is assumed to be the same throughout the year.

2. It is assumed that the lead-time is constant and that the suppliers are both

completely dependable.

3. It is assumed that purchase costs are constant

4. Quality must be consistent and reliable f rom both suppliers.

1. None of the above.

8.

1. Economic value added (EVA) is a usually used as nonf inancial measure. It measures the
qualitative increase in the value of the goods produced by the company.

2. The Markov technique involves f orecasting sales by examining consumer behavior.

3. The “y” variable in a regression equation to f orecast sales would be the variable that has f ound
to be usef ul in predicting sales.

4. ABC Co. has a contribution margin of 30% and f ixed costs of P250,000. If the company has
revenues of P900,000, it will produce net income of P20,000.

9.

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1. Consider that the risk-f ree interest rate is 3%, the market rate is 9% and ABC Co.’s beta is 2,
the estimated cost of capital using the CAPM approach is 15%.

2. Monopolistic competition is characterized by a large number of company’s producing a

dif f erentiated product.

3. Free cash flow is the excess cash flow of the firm af ter deducting capital expenditures required
to operate and grow the business at the expected rate.

4. The dif ference between APR and EAR is that one considers compounding and the other
ignores it.

10.

1. A zero-balance account is designed to reduce the f loat in cash receipts.

1. Cyclical unemployment can be reduced by training employees in new skills.

2. ABC Co. is considering establishing a concentration banking system that will speed up receipts f rom
customers by 2 days. Assuming that the company’s average daily collections are P50,000, maintenance
and transf er f ees are P6,000 per year and the company’s short- term cost of f unds is equal to 4%, the
company should not establish the concentration banking system.

3. Demand-pull inf lation occurs at high-levels of economic activity.

11.

1. the only dif f erence between the calculation of the Cost of Commo n Stock and the Cost of
Retained Earnings are the cost of selling the shares.

2. The shorter the net operating cycle the less cash on hand is needed as cash is generated
f airly quickly.

3. A rule in capital budgeting is that If capital rationing is crucial, then the NPV or PI are
inappropriate. And if projects are independent and capital rationing is not a problem and
projects are independent , then NPV and PI are appropriate.

4. Def ault risk is a result of combines sales risk and operating risk, but not financial risk.

12.

1. Assume that ABC Co. has a receivable collectible in ninety days in euros. To hedge the risk of a
decline in the value of the euro, the company could sell euros in the currency f utures market.

2. The law of diminishing utility indicates that as a consumer gets more of a product, total utility
decreases.

3. CAPM may be used to measure cost of capital of a private non listed company.

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4. An increase in the number of orders placed f or inventory and a decrease in the quantity of
goods on hand are characteristics of a just-in-time inventory system.

13

1. ABC Co. is trying to decide whether to spend P30,000 f or a new piece of equipment.
The payback method suggests that this investment is a wise course of action. The
internal rate of return method indicates that the investment should not be made. The
company will likely acquire the equipment f or P30,000.

2. Futures are used to manage asymmetric risk and options to manage symmetric risk.

3. The cost of capital and the required rate of return are similar.

4. If the marginal propensity to consume is .80 and the government increases spending by
P10 million, the increase in equilibrium GDP is P50,000,000.

14

1. According to the MM theory of capital structure , leverage should b e kept company cash f low is
f luctuating and if the tax benef it is more than cost of bankruptcy.

2. When investing in projects with dif ferent business risk a marginal cost of capital using the WACC
should be used.

3. Discounted cash f low techniques can be used to value irredeemable debt, redeemable debt,
convertible debt and pref erence shares.

4. Under the Weak f orm of market ef f iciency Share prices ref lect all historical inf ormation including
past share price movements hence prof its cannot be made using technical analysis.

15

1. The DuPont system breaks return on investment into the two components of return on
sales and asset turnover.

2. Residual income is a commonly used value-based measure, which is equal to net

income af ter deducting pref erred dividends.

3. A CPA Exam candidate is predicted to have a 40% chance of making a 90 on a

particular part of the exam, a 30% chance of making a 75, and a 30% chance of
making a 60. The best estimation of this person’s score is 76.5.

4. The f inancial budget includes the budgeted income statement f or ABC Co

16

1. ABC Co. is considering the purchase of equipment f or P80,000. The company would like to
make a return on its investment of 10%. On the 1stl year, the equipment will increase net
income by P11,000. The residual income is P3,000.

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2. A country will produce a product as long as it has a comparative advantage with respect to
production of the product.

3. One of Porter’s f ive f orces f or an industry is the bargaining ABC Co.er of input suppliers

4. Commercial paper pays a higher interest rate than Treasury bills

17

1. In January, ABC Co. spends P14,000 to manuf acture 8,000 units of a product. The f ollowing
month the company produces 5,000 more units at a cost of P9,500. Using the high-low method,
the f ixed cost f or manuf acturing this item is P2,000.

2. The balanced scorecard is best characterized as a f inancial report card f or ABC Co..

3. A demand curve shif t occurs when the price of the product changes.

4. The strategic objectives component of the balanced scorecard is a statement of what the
strategy must achieve and what is critical to its success.

18.

1. A major advantage of the issuance of debt is the tax deductibility of interest payments.

2. ABC Co. with a high degree of operating leverage has less earnings f lexibility than ABC Co.
with a lower degree of operating leverage.

3. If ABC Co. issues 1,000 shares of P7.00 pref erred stock at P98,000, the cost of the pref erred
stock is 7%.

4. Asset-backed public of ferings are debt of ferings collateralized by inv entory

19

1. To f ind the post-tax cost of redeemable debentures, it is necessary to f ind the discount rate
(IRR) which will give the f uture post-tax cash f lows a present value.

2. A limitation of P/E ratios is that the ratio depends on the expected f uture growth of the f irm so
that it is dif ficult to compare two companies even if they are similar in some respects.

3. Higher inventory & higher receivables mean more cash tied up in the short term which may
lead to illiquidity.

4. A counterparty company can borrow now at 1.5% above base rate. It will receives 0.5% net
cash f low as a result of a 3-9 f orward rate agreement of fered at 5% in the event that the base
rate in 3 months time is 5.0% . Current LIBOR rate is 4.75

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20

1. If a product has a price elasticity coef f icient of 1.5, the demand f or the product is elastic.

2. ABC Co. is considering the purchase of equipment f or P65,000. This investment will generate
annual cash inf lows of P10,000 per year f or 10 years. The present value of an ordinary annuit y
of P1 over ten years at a 9% rate of return is 6.42. The present value of an ordinary annuity of
P1 over ten years at a 10% rate of return is 6.14. This investment is expected to generate an
internal rate of return of less than 9%.

3. An oligopolistic market is characterized by low barriers to entry.

4. If the price of a product increases, demand f or goods that are substitutes f or the product will
decrease.

21.

1. ABC Co. has a contribution margin of 40% and f ixed costs of P300,000. If the company
generates revenues of P900,000, it has a margin of saf ety of P60,000.

2. ABC Co. in a competitive market should produce and sell goods until marginal cost of the
product is equal to its marginal revenue.

3. To stimulate the economy, the government could decide to sell Treasury securities.

4. In the short run costs are f ixed and variable, but in the long run all costs are variable.

PART 3: TRUE OR FALSE:

3POINTS EACH ( 60 POINTS)
(5 points deduction for every 5 items answered
incorrectly)
1.
Five years ago a f irm entered into a, ten-year noncallable debt agreement. With a variable interest payment tied to LIBOR.
LIBOR is 4.5% and management is concerned about the volatility of current rates. It wants to lock in a f ixed rate f or this
debt. To hedge interest rate risk, It enters into an interest rate swap to pay 7% f ixed interest f or the balance of the term of
the loan instead of the variable rate. Instead of having a variable interest expense over the lif e of the loan, the f irm will
have a f ixed rate of 7%. The f inancial statement ef f ects of this transaction would be recognition of a 7% f ixed rate of
interest over the lif e of the loan as opposed to the variable rate.
2.
Assuming a ten thousand , eight-year lif e ,no salvage value investment with a 30% tax rate, the af ter-tax payback period
would be 5 years.
3.
A company decided to transport 20,000 units of product in six months to a Japanese company who will pay f or the product
in yen. To lessen the risk of losses f rom devaluation of the yen, the company may enter into a f orward contract to sell the
yen f or delivery in six months. This agreement in ef f ect locks in the price f or the sale in terms of US dollars. Company may
however opt to buy a call option allowing them to put the yen up f or sale at a spec if ic price in six months.

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4.
An investor approximation that the probability of the f irm getting a contract is 60%, It is awarded the contract, this will
increase the stock price to 20%. If not the stock price is predictable to decline by 10%. Today’s expec ted return on the
stock investment would be computed as f ollows: The investor can make a good decision whether to invest in the stock
knowing that the expected return is 8.50% with a standard deviation of 14.70%.
5.
Investment 1 , low risk ,cost of capital, 10%. Investment 2, high risk with a 15% discount rate. Investment 1 needs an
investment of Php.30,000, and Investment B would requires P28,000.
Investment 1 : accept because it has a positive net present value.
Investment 2 : reject because its net present value is negative.
6.
Relaxing credit standards will increase sales by Php.240,000. Average collection period f or new sales will be 60 days.
Increase in bad debt is 5%. Variable costs - 75% of sales, and cost of f inancing accounts receivable is 10%, management
should relax credit policy because it will result to an net increase in revenue of P44,000.
7.
Yield curves has in the past a good predictor of a f inancial crisis. This global pandemic hastened what experts had been
saying about the impending f inancial crisis as shown by the abnormal bond yield curve . This was my basis when I told
you in class bef ore that your batch will f ace a very challenging time ahead. Be prepared .)

Normal yield curve—Curve sloping upward in which short-term rates are more than intermediate-term rates which are
more than long-term rates.
Inverted (abnormal) yield curve—Curve downward-sloping in which short-term rates are less than intermediate-term rates
which are less than long-term rates.
Flat yield curve—Curve which is short-term, intermediate-term and long-term rates are all the same.
Humped yield curve—Intermediate-term rates are higher than both short-term and long-term rates.
All of the statements above are correct.
Pa Segway lng po : The world of f inancial markets is a very exciting and challenging world but one that can provide you
the most satisf ying f inancial results . To appreciate it you must a love f or economics , corporate f inance and a little of
accounting. You are blessed with a curriculum that introduced you to all these. Lets not use it only f or purposes of the
board exam. Practical application of these in our personal lives is highly encouraged. I pray one day I get to meet you
again and hear about your exciting participation in the f inancial markets.

8.
Are all the relationships below correct?
Sales is equal to Production (no change in inventory) No dif ference in income
Sales is more than Production (inventory decreases) VC income greater than AC income
Sales is less than Production (inventory increases) VC income less than AC income
9.
A f irm has Php.20,000 in short-term f inancing at variable interest rates. To lock in the current rate f or a year, it will sell on
the f utures market Php.20,000 in Treasury notes to be delivered one year f rom today. Towards the end of the year, the
f irm will obtain Treasury note contracts to close its position. If the Treasury note contracts can be purchased f or
Php.18,000 at the end of the year, the f irm’s gain on the contract would be P2,000.From an accounting standpoint, t he
gain on the contracts would be used to reduce interest expense in operating income.

10.
Bond - par value of Php.10,000 and pays 12% interest, per year f or 10 more years. Current selling is Php.9000.
nominal yield is 12% ; The current yield is 13.33% and the yield to maturity is 13.83%

11.
Consider these data:
Selling price /Variable costs /Contribution margin
A Php.60/ Php.20/ Php.40
B Php.40/ Php.15 /Php.25
Company has a sales mix ratio of 3:2 in f avor of B ; Fixed cost is Php.34,000.
Company will produce 20,000 more units than B.

12.
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The price elasticity of demand f or a productis 1.5, price increased by 10%. The ef f ects of the price increase on demand is
15%

13.
Is the summary below all correct?
NPV > 0 IRR > hurdle rate
NPV = 0 IRR = hurdle rate
NPV < 0 IRR < hurdle rate
14
Possible outcomes and probabilities of a project:
Php.100,000 /20%Pessimistic
Php.150,000 /60% Most likely
Php.200,000 /20% Optimistic
Expected return is P175,000.

15
An investor has two types of assets in his or her investment portf olio. Asset 1 is 60% of the portf olio, with an expected
return of 10%. Asset 2 is 40% of the portf olio, with an expected return of 5%. The expected return of the portf olio is
calculated 8%.

16.
*it will take 91 days to clear inventories if a company has an average inventory of Php.10,000,000; cost of goods sold ,
Php.40,000,000;
**It will take 29 days to collect if a company has an average receivables balance of Php.5,000,000 and credit sales of
Php.40,000,000.
***It will take 30 days to def er payment of payables if the average payables is Php.2,500,000 and cost of goods sold is
Php.40,000,000

17
A company is evaluating a loan that has a stated interest rate of 8% with compounding of interest quarterly. The ef f ective
annual rate is 8.42%.

18
Php.10,000 of bonds, semiannual interest of 6.1% rate, matures in six years, and market rate of 5%.Bond value is
Php.10,514.

19.
A company sells products payable in 60 days in the amount of 10,000 euros. The exchange rate is 1.25 US dollars to the
euro at the time of sale.If the euro depreciates by 2% verusu the US dollar in the 60-day period between the sale and
collection, the f i rm has experienced a loss. The 2% depreciation would mean that the new exchange rate is 1.225 (1.25 ×
98%) euros to the US dollar. Hence, the f irm has lost Php.225.

20.
It is a correct decision to reject a project if the f ollowing are the f acts: cost of capital is 10% ; new investment will gen erate
Php.45,000 of net income per year f or eight years with only P300,000 investment. The current income is Php.250,000
generated f rom assets of Php.1,000,000.

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PART 4: Basic Variances Problem/Ratio Analysis

Problems:

20 POINTS , 10 points each

Problem 1:

The Dream Come True, produces toys . A standard costing system will be used.
The standards set for the month of May were as follows:

Production and sales 16,000 units

Selling price (per unit) Php.140

Materials:
Material 1 6 kilos per unit at Php.12.25 per kilo
Material 2 3 kilos per unit at Php.3.20 per kilo

Labor 4.5 hours per unit at Php.8.40 per hour

Overheads Php.86,400 per month.

The actual data for the month of May

Produced 15,400 units

Selling price Php.138.25 each

Materials: Used 98,560 kilos of material 1 at a total cost of Php.1,256,640 and

used 42,350 kilos of material 2 at a total cost of Php.132,979.

Labor: Paid an actual rate of Php.8.65 per hour to the labor force. The total
amount paid out, amounted to Php.612,766.

Overheads): Php.96,840

Additional Information:
• Not all overheads are absorbed in the production cost
• All overheads are fixed.
Required:
Compute for the following:
1. Material variances
2. Labor variance
3. Overhead variance

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Problem 2:

Compute the following using the data on the table below:

1. P/E Ratio
2. Return on Equity
3. Gross Margin
4. Net Margin
5. Operating Margin
6. Revenue Growth
7. Leverage
8. Interest Cover
9. Dividend Cover
10. Dividend Yield
11. Return on Capital Employed

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