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    Toaz - Info Mas Module 4pdf PR

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    Patricia

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    of 26
    MANAGEMENT ADVISORY SERVICES ReSth The Review School of Mecoustancy, #@ 7359807 / 7343989 & 09104391320 / 09239124121 / 09164383834! resareview@hotmail.com A. Lee + E. Arafias MAS Module No.4. MAS ~ 10, 11, 12 Multiple-Choice Questions (MCQs) Sources. CMAICINRPCPAVAICP A Various test banks MAS ~ 10: CAPITAL BUDGETING (84 MCQs| Capital budgeting is concerned with ', Decisions affecting only capita-intensive industries b. Analysis of shar-range decisions Analysis of long-range decisions 4, Scheduling of office personnal in ofice butdings 2. Naga Company, is considering the sale of a machine with a book value of P 60,000 and 3 years remaining in its Useful lfe. Strdight-ine deoreciation of P 25,000 annually is availabe. The machine has a current market value of P'100,000. What is the cash flow Irom seling the machine f the tax rate is 40%? a.” P 80,000 92,000 b.P88,000 dP 190,C00 3. A.company is consdering replacing @ machine with one that wil save P 50,000 per year in cash operating costs and has P 20,000 more depreciation expense por year than the exisirg machine. The tax rte is 40%. Buying the new machine i increase annual net cash flows of the company by ‘2. P 38,000 20,000 b. 30,000 dP 42,000 4, Old equipment with a book vaive of P 15,000 wil be placed by new equipment with a purchase price of P 50,000, ‘exclusive of freight charges of P 2,000, the market value ofthe old equipment is P 11,000. Repaie costs of P 2,000 Gan be avoided ithe new eauioment is acquired. Assume a tax rate of 35%. Wht i the initial (net) investment of the project? ‘a. P3300 «39,700 b. P 38,300 dd. P52,000 souuTion Costs (Cash cutiones): $0,000 + 2,000 = P 52,000 Savings (Cah inflows): 14,000 + 0.35 (15,000 ~ 11,000) + 2,000 (1 ~ 0.35) = P 13,700 5. The most convenient way fo handle procecds from the disposal ofan old asset is to ‘2. Treat t asa cash fow _OffSt the amount agoins the cash outlay b, Treat t a5 a reduction in salvage valued, Add tothe wvestmant 6 Legaspi Company is considering repiacing @ machine with a book value of P 400,000, 2 remaining useful life of 5 Yeats, and annual straight-line depreciation of P 80,000, The axsting machine has a current market value of P 400,000. The replacement machine vould cost P 550,000, have a S-year life, and save P 75,000 per year in cash ‘operating costs. Ifthe replacement machine would be deprecated using the straight-line method and the tax rate 13-40%, what would be the net investment required to replace the existing machine? 3." P 90,000 320,000 bP 150,000 dP 550,00) 7. Indeciding wheter to replace a machine, which ofthe folowing is NOT o sunk cost? '2. The expected resale price ofthe exiting maciine b. The book value of the existing machine ©, Theosignal cost of the exitina machine 4. The depreciated cost ofthe eesting machine 8 Incomputing the intial investment for decision-making, taxes would be relevant for all of the following, EXCEPT: 2. Avoidable repairs of old azsot B. Profit onsale of old assot replaced by a new one Increase in working capital required to support nev capital investment Loss on write-off of other assets disposed because of new capital investment 19. A-company is considering a project that requires a P 50,000 working capital investment. The compariy’s tax rate is 40%. In a capital budgeting analyss, the intial investment in working capital should be: ‘a. Multiplied by (1-0.40) and shown as a net P 30,000 cash outflow By Multipied by the rate (0.40) and shown as.a nat ® 20,000 cash outiow & Shown as.a cash outflow of P 50,000 3. Ignored 40. To approximate annual cash inflow, depreciation is 3. Added back to net income because its an inflow of cosh 1. Subtracted from net income because it s an outflow of cash ¢. Suberacted from net income because i's an expense 4. Added! back to net income because itis not an outflow of cash 11. Daet Inc's depreciation deduction last year vas P 0,000 and is tax rate was 30%. The company’s tax savings from the depreciation tax shied forthe year was a. 15,000 «80,000 . -P 35,000 a P3000 Page 1 of 26 pages RS. The Review School of Gecowrttomeg MAS Module 4 MCQs: MAS ~ 10, 11 & 12 12. A project costing P 180,000 will produce the fetlowing annual cash benefits and salvage value: OLG.equipmant NEW aquipmant Revenue. P 150,000, P 180,000, Cash operating costs 70,000 69,000 ‘Annual depreciation 76.200 50,000 Income tax, 46% What isthe incremental annual cash income aiter exes? B 2. P 30,000 cP 40,000 b. 30,800 a P38,000 13, Nabua Company is considering replacing 0 machine with 2 book volue of P 200,000, 2 remaining useful ite of S years, and annual straight-line depreciation of P 40,000. the existing machine has 2 current market value of P 200,000. The replacement machine would cost P 300,090, have a S-year life, and save P, 100,000 per year in cash operating costs. The replacement machine would bs dayyeciated using the straight-line method and the tax rate is 40%. What would be the increase in annual net cash flow f the company replaces the machine? 8 2. 60,000 ¢ b P68,000 6 84,000 14, Which statement describes the relevance of depreciation in calrulating cash flows? A 2, Depreciation is relevant only when income: taxes exist b. Depreciation is always relevant €. Depreciation 1s never relevant 4. Depreciation is relevant only with disccamted cash flow methods 15. Ligao Company is analyzing a capita investment proposal fer a nevi machinery to produce a new product over the ext 10 years. At the end of ten years, the machinery must be disposed of with a zaro net book value but with 2 scrap salvage value of P 20,000. It will require some P 30,000 to remove the machinery. The applicable tax rate is 35%. What is the approximate “end-of-life” cash flow based an the foregoing information? 8 a. Inflow of P 30,000 Outflow of P 19,090 b._ Outflow of P 6,500 d, Cutfiow: of P 17,000 16. Cost of captal is, c ‘a. The amount the company must pay fers plaot assets b. The dividends a company must pay on its cquity securities c. The cost the compeny must incur to obtain ts cepital resources, 4d. The cost the company 1s charged by investment tankors who handle the issuance of equity or long- term debt securities. 17, For a certain project, the return that investors demand for investing 19 a fim is known as: D a. OCF rate of return Payback b._Net present value d. Cost of capital 18. In an investment in plant asset, the return that keeps the market price of the firm stock unchanged is 8 ‘a. Net present value © Asjusted rate of return b. Cost of capital d._ Unadjusted rate of roturn 19. Tabaco Co. has 5% preferred stock with a par valur of P 100, Selling price is 123.50 per share and flotation costs are P'0.50 per share. If tax rate :s 20%, tren what isthe cost of preferred stock? 8 a. 4.03% 47% bd. 4.07% a 5% SOLUTION: dividend yield = dividend per share + market price per share (net) = 5% (100) + (123.50 - 0.50) -20. Pili Company is attempting to compute the cost of internal ard external equity. ‘The company’s common stock is currently selling at P 62.50 per share with flotation cost of P S per share. The next dividend per share is P 5.42. Eomings and dividends are expected to grow at a constant rate of 5%, What is the cost of new common stock (C/S) and retained eamings (R/E)? 8 a. C/S: 13.67%; R/E! 13.67% ©. CYS: 13.67%; RIE: 19.43% b. C/S: 14.43%, B/E: 13.67% CPS" 14.43%) RYE: 14.43% NOTE: ‘Flotation cost’ is deducted from market price in computing cost of common and preferred stock; itis ignored in computing cost of retained earning. 2L. The market value of Bato Company's Common stock (book value: 65I¥).is estimated at P 60 M and the market value ofits interest bearing debt (book value: P 35} is estimated at P-40M. The average before tax yield on these liabilities is 15% per year. Income taxes are 40% The comipany is expacted to pay a cividend of P 10 per share and the stock is seling at @ price of P 100 per shart. The growth rate of dividend is projected to be 2.5% per year What is the weighted average cost of capital (WACC) of the company as 0 whole? 8 a 9% 215% 11.2% 25% 22, The weighted average cast of capital approach ta decision makina is natdirectly affected by the 8 'a. Value of commion stock b. Current budget for expansion Cost of debt outstanding d. Proposed mix of debt, equity, and exrding funds u 23. Acompany with cost of capital of 15% plans te finance ar {t should use to discount the cash flows is 8 a. 10% 25% b 15% 150% Page 2 of 26 pages © to implement the project /estment sath debt that bears 10% interest. The rate. ReSla. The Review School of Gccousctaney, MAS Module 4 MCQs: MAS ~ 10, 11 & 12 ‘Supplemental Notes on Costs of Capital: DIVIDEND GROWTH MODEL and CAPITAL ASSET PRICING MODEL According to the Dividend Growth Model (also regarded as Gordon Mode!), eamings and dvvidends are assumed to increase ‘over time at a constant growth rate (G). The cost of captal is computed based on the following: ve] Cost of equity cost of equity represents the return that equity investors require on their investment inthe fm. This ¢ the same i that may be computed based on the Capital Asset Pricing Model (CAPM). Using the CAPM approach of computing cost of Common equity and retained earnings, the formula must be used based onthe Security Markct Line (SHL) approa = Re Tr Where: Rafe] Kc > Expected rate of return (investor's required rate of return) Ker Risk-free rate (rate of return an investor receives from investment in a riskless asset like BSP T-bills) Ky. 3 Market return (required return on the average stock in the market) Ku ~ Kas Market risk promium (additional return over the risi-free rate that investors demand in order to move investments into the stock market in general) > Beta coefficient (sensitivity of a stock to market movement, » measure of a security's systematic risk) NOTE: See atscussion on concopts and measures of RISKS en pages 17 t0 18. 21> Dividend in period 1 (Expected dividend per share The dividend to be used n the cost of captal calculation must be a prospectiveone. Assuming the growth rate (G) is 2% and the most recently declared dividend is P 2:00 (D, the amount of dvidend to be used és P 2.08 (0). Ths is arrived at through the following: P 2.00 (1 + 02) ‘The growth rate may also be computed bases! on G = Return on Equity (RoE) x Retention Ratio NOTE: See MAS — 12 notes and exercises om retum an equity’ and retention 3b.’ Py Price in period 0 (Current market price) “The current market share price must be computed net of Notation costs. A flotation cost is simply defined as the cost of issuing or ‘floating’ securities in the market. Tis is normaly Incured hy issuing Intial Public fering (IPO) shares in the exchange market. The typical costs of seling stock are (1) undenmrite’s spreed (2) other direct expenses (3) indirect expanses (4) abnormal returns, and (5) underpricng 24. The length of time required to recover the inital cash outlay fora proj: is datormined by using the: 8 '@. Discounted cash flow method Tho net present value method b. The payback method The simple rate of return method 25. An advantage of using the payback method is that the method is: A 2. Simple to compute Precise in estimates of profitability b.__ Not based on cash flow data Insensitive to the life of the project 26. Iriga Company is considering a certain project with the following projected cash encome after taxes for 4 years, the Ife of the project: yeer 1, P 11,000; year 2, P 9,000; year 3, 8,000; year 4, P 7,000. Ifthe project requires an investment of P 25,000 with a salvage value of P 5,000, what isthe payback period? ° a. 2.265 years 2.526 yeors b. 2.562 years a. 2628 yoors 27. Albay, Inc. recently acquired a machine at a cost of P 64,000. It wil be depreciated on a straight-line basis over § years, with no salvage value. Albay expects that this machine wit produce P 18,000 annual net cash fw fore income tax. Assuming an income tax rate of 50%, the appropriate payback pericd on this investment is: (Hint compute cash flow aftertax) 8 a. 3.6 years PA years b. 49 years d. 32 Bycars 28. A company is planning to buy 9 machine that costs P 12,000 and! has an annual depreciation for tax purposes of F 2,400 for 5 years. The machine is expected to result in cash savings from operatons of P 4,000 per year. If the tax rate is 50%, then what is the payback period for the new machine? 8 ‘a. 3 years G Syaars b. 3.75 years dB years 29. Bulan Company is planning to purchase 2 new machine. The payback period is estimated to be 6 years project's after tax cash flow is estimated to be P 2,000 yearly forthe first three years and P 3,000 yeoriy fo. next three years of the payback period. Annual depreciation of P 1,300 wil be charged to income for cach of tae § years of the payback period. The machine wil cost: A a. P15,000 < P9,000 b. P 12,000 @ 96,000 30, Cos Company is planning to purchase a new machine for P 38,000. The payback period is expacted to Ye fvo years. The new machine is expected to produce cash flows from operations, net of income taxes, of P 7,000 per Year in each of the next three years and P 5,500 in the feurth yeas. Depreciation of P 5,000 a year will be charged to income for each of the five yaars of the payback period. Wat i the amount of cash flow from operations, net Of income taxes, that the new machine is expected to produce in the last (Fith) year of the payback penod? e a. P 1,000 P5000 b. P3500 4. PSS00 RBA. The Review School of lecourttones MAS Module 4 MCQs: MAS — 10, 11 & 12 31. The payback period considers depreciation expense {DI:) and lime value of money (TMV) as follows: 8 a. DE, relevant and TVM, relevant ©. DE, ietevant and TVM, relevant b. DE, relevant and TVS, irrelevant d._ DE, relevant and TV, irrelevant 32. The payback method assumes that all cash inflows are reinvested to yield a return equal to > ‘a. The discount rate c The internal rete of return b._ The hurdle rate Zero 33. Buhi Company is studying a project that would have a ten-yeas fife and would require 2 P 800,000 investment equipment that has no salvage value, The project would provice net operating income each year as follows for the le ofthe project: Sales 500,000 Less: cash vara expenses 00,000 Contribution margin 400,000 Less: fixed expenses Fixed cash expenses P 200,000 Depreciabon expenses “—-#0,000 _ 280,000 Net operating income 2 420,000 ‘The company’s required rate cf return 1s 8%, What isthe payback pried fr ths project? > a. 3years < 2yeais b. 6.67 years © 4a 34. Sabang Company purchased new machine on Janus 1 of this year Fer P 90,000, with an estimated useful if of 5S years and a salvage value of P 10,000, The machine wil be depreciated using the straightine method. |The machine is expected to produce cash flow from operations, net of tax, of P 36,000 @ year in each of the next S Years. The new machine's salvage value Is ? 70,006 in years 1 and! 2, and P 15,000 in years 3 and 4. What will be the beilout payback period for this machine? é a La years 19 years b. 2.2 years 3 $4 years 35. Tigaon Co. Is considering the purchase of @ P 100,000 machine that 15 expected to reduce operating cash expenses by P 25,000 per year. This machine, which has eo savage value, has 2 useful life of 10 ycars and will be depreciated on a straight-line basis, what would be the simple rate of retum? 8 a. 10% cI b. 15% a, 3% 36. Son Jose Company is considering the acquisition of 2 personal consrter that costs P 120,000 with an economic te Of 12 years and 2 terminal salvage value of P 12,000. It i egimatad that the increase in net income before taxos 35 a result from this investment vall amount (9 F 7,000 annually. Income taxes are 35%. The company uses the Straight-line method of depreciation, What is tne accounting rate of return on the average cost of investment? € 2 3.79% c 6.3% b. 5.83% d 698% 37, Lagonoy ine. purchased a nev machine for P 60,000 on January 1. The machine is being depreciated on the straight-line basis over five years with no salvage valu2. The simple rate of retumn is expected to be 18% on the inital investment. Assuming a uniform cagh ficw, this investments expected to provide annual cash flow from operations of: > ‘a. P 7,200

    . 1.200 6 2200 57. Which of these methods measure cash flows and cistflows of a prcject as i they occurred at a single point in time? c ‘a. Payback and bailout payback period ‘E.__ Not present value and internal rate of return b. Accounting and intemal rate of return 4. Return on onginal and average investment 558, The prasent value and discounted cash Now rate of return methods of evaluating capital expenditure proposals are superior to the payback method in that they: 8 a. Are easier to mnplement 'b. Consider the time value of money & Raquires less input J. Reflects the effects of depreciation and income tax 59, The internal rate of return (IRR) isthe D 2. Hurdle rate bb. Rate of interest at which the net present value is greater thar: 1.0, Cc. Rate of return generated from the operational cash flows G. Rate of imerest at which the net present value is equal to 20r0 60. The discount rate that equetes the PY of expected cash flows with the cost of investments is the 8 2. Net present value Accounting rate of return b._Tatemnal rate of return dd. Payback period G1. Which of the following is a basic ciference between IRR and ARR criteria for evaluating investments? ° 2. _ IRR emphasizes expenses; ARR emphasizes expenditures Bb. IRR emphasizes revenues; ARR emphasizes recenpts c._IRR is used for internal investments; ARR is used for external investments GL IRR concentrates on receipts & payments; ARR cancentrates on revenues & expenses. 62. Virae, Inc. 15 planning to invest P 120,000 in a 10-year craject. Virac estimates that the annual cash inflow, net of income taves, fram this project will be P 20,000. Vrac's desired rate for return on investments of this type 1S 10%, Information on present value factors 1 as follows: @10% = @RX Present value of PI for 10 periods 0386 = 0322 Present value of an annuity of P 1 for {0 perinds 6.145 5.650 ‘What is Virec’s internal rate of return on this investment? 6 a Less than 10%, but more than 0% €._Less than 1286, but more than 10% b. 10% 12% 63. Bula Corporation is planning to invest P 80,000 in a three-year project. Bul's expected rate of return is 10%. The present value of Pl at 10% for 1 year 13 0.999, for wo years i €.826 and! forthe three years fs 0.751. The cash ows, net of income taxes, will be P 30,000 forthe Fist year (oresent value: P27,276) and P 36,000 for the second year (present value: P 29,736). Assuming Une 34¢ of Arn 16 exact; 10%, wal wil be the net cash flow, net of income taxes, forthe third year? ° a. P17,260 P2290 b._ P22,000 J. P0618 64. Lion Company is planning to invest in a machine with a useful ife of five years and no salvage value. The machine ig expected to produce cash flow From operations of P 20,000 in cach of the five years. Libon’s required rate of return is 10%, What would be the maximum price that the company wouk! pay for the machine? a. P32,220 5 975,820 : b. P62,100 di P2210 Page 6 af 73 pag) © RSW. the Review School of Uecourtoney, MAS Module 4 MCQs: MAS ~ 10, 11 & 12 65. A company is considering a capital investment for which the initial cash outay is P 20,000. Net cash flows from ‘operations, not of income taxes, are predicted to be P 4,000 fer 10 years. Assume a cost of capital of 12%. The Present value of an annuity of P't for 10 years at various rates are as follows: Discount Rate PY Factor 14% 5.216 15% 5.018 15% 4833 17% 4658 ‘What is the company’s internal rate of return? a a 15.1% © 153% b. 15.2% d. 15.4% 66. If an investment of P 14,760 now is to yield P 18,000 al the end of one year, then wiat is the internal rate of Fetur for ths investment to the nearost whole percentago? c a 14% c 22% b. 18% 28% 67. The payback reciprocal can be used to approximate a project's ° ‘2. Profitability index by Net present value ‘c. Accounting rate of return if the cash lve paltern is atively stable 44. _ Internal rate of return the casi flow pattern is relatively table 668. 1 company has computed the proftabity index of an westaent project as 1.15, then: 8 2. The projec’s internat rate of return is less than the discount rate b. The project’ internal rate of return is crcater than tne dscount rate {The project's internal rate of return is equal tothe discount rate 4. The teationship of rate of return ane dscourt rate is impossible to determine from the data given 69. if an investment project has a profitability index of 1.15, the D 2. Projects inernal rate oF vetun ke 158% b. Project's cost of captalis greater than its intemal rate of return _Projeet’s internal rate of return exceeds its net present value .__Net present value ofthe project postive 70. Labo Co, uses a 12% hurdle rate for all capital expenditures. 1 has ned up four projects In Thousand Pesos Project 3 Project 4 Initial cash outflow 496 S44 ‘Annual net cash inflows Year 1 p 130 200 160 190 Year2 140 270 190 250 Year 3 160 180 180 180 Year 4 0 130 160 160 ‘Net present value 7,598) 8,552 28,128 (29,324 Profitability index (9%) 98% 101% 105% = 105% Internal rate of return 11% 13% 14% 1595 If the company has no budgstary imitations, which projects shou't be pursued? ic a. Projects 3 and 4 (Projects 2, 3 and 4 b. Project 4 dA the four projects 71. Del Gallego Company is considering several investment proposals, as shown below: A a c o Investment required 0,000 110,000 80,000 140,000 Present value of future cash inflows 165,000 120,000 190,000 170,000 Using the profitability index, whet wou'd be the ranking? c a D,BAC c CDA bd DCA a CAD 72. Sta. Elena Co. is considering two projects, A and B. The fetloving information has been gathered on these projects Project A Project 8 Initial investment needed 40,000 P 60,000 Present value of future cash flows 60,000 85,000, Useful life ‘years 4 years ‘Based on this information, which of the following statements 1s (are) true? [Project A has the higher ranking according to the profitabilty index criterion 1, Project B has the higher ranking according to the net present value criterion, c 2. Only] Both Tend Il b. Only It 4. Neither I nor t 73. The NPV and IRR methods give A 2. The same decision (i.e., accept or reject) for any single investment project b. The same choice from among mutually exclusive investments cc. The same rankings of projects with unequal lives d. The same rankings of projects with different required investments Page 7 of 26 pages © RGU The Review School of Cacowtarrcy, MAS Module 4 MCQs: MAS ~ 10, 11 & 12 74, Milaor Corporation is conternplating four projects, (, M,N, ard O. The eapital costs for the mntiation of each project and its estimated after-tax, net cash flows are Isted below The conipany’s desired after-tax opportunty costs is 12%, It has P 900,000 capital budget for the year. Ide funds canixt br reinvested at greater than 12% fn Doosan! Pesos Initial cash outflow - ‘Annual net cash inflows: Year 1 113 1e0 20 80 Year 2 13 170 110 100 Year 3 13 150 330 120 Year4 13 no 140 130 Year S 13 100 150 150 Net present value P7540 P§9,651 754,665 (P 15,708) Profitability index 1.02 12 La 0.96 Internal rate of return 127% 178% «= 172% = 10.6% ‘The company will choose 8 a. Projects, M,N, and O Projects (and NV b. Projects M and N dd. Projects Land M 75. If the present value of the future cash flows for an mvestment equals the raquired investment, the IRR 1S 8 a. Equal to zero Equal to cost of borrowed capital b._ Equal to cutoff rate 4d. Lower thar: the cutoff rate of return 76. A profttabilty index greater than one for 3 project indicates that: A a. The discount rate is less than the internal cats of ecture b. There has been a calculation error & The project is unattractive and strauld not be pursued 4d. The company should reevaluate its cost of capi 77, Which is 3 baste difference between the IRR and book rate of retumn (BRR) criteria for evaluating investments? D ‘a. IRR emphasizes expenses and BRR emphases evvendstures b. IRR emphasizes revenues and BRR eraghasices reco IRR is used for internal investments and SRR is. used for external investments d._IRR concentrates on receipts and expenditures and BRR concentrates on revenues and expenses ‘7B. Ifthe IRR on an investment is z¢r0, D 2. Its NPV is postive b. Teis generally a wise investment Its cash flows decrease over its ite Its annual cash flows equal its required investment 79. tf applied in capital budgeting evaluation, sensitivity anaiysis 8 2, Is used extensively when cash flows are known wath certainty. bh. Is.a “what i technique that asks how 2 g-ven outcome wit change ifthe original estimates of the capital budgeting model are changed. c. Measures the amount of te it vill take fora project ta recover i d._ Isa technique used! to rank vanous captai projects. £80. The relationship between payback penod and IRR 5 trat 8 "a. Apayback period of less than cne-half the Ife of a project will eld an IRR lower than the target rate b. The payback period is the present value factor for the IRR. ¢_ Approject whose payback periad does not meat the company’s cutoff rate for payback will nol meet the ‘company’s criterion for IRR d. Both methods are discounted t ‘ems 81 to 84 are hased on the folowing information Tsarog Company has gathered the following data on a proposed rwvestment project: Investment required equipment? 442,500 initia capital outflow. ‘nwa cash inflow 30,000 Life of the investment 8 years Required rote of retun 10% 81. The payback period for the investment is closest to: € 8.00 years 425 years b. 1.42 years 0.21 years £82. The simple rate of return on the investment is closest to: A 2. 8.55% C205 b. 10.00% 4 33.55% 83. The net present value on this investment 15 losast to D a, P 300,000 < P58.800 b. P76,024 d, PA7,556 £84, The internal rate of return on the investment is closest 10: a 2. 13% © 14% b. 15% 4. 12% MAS Module 4 RSA. The Review School of Aecountorer MCQs: MAS ~ 10, 11 & 12 8 MAS ~ 14: WORKING CAPITAL MANAGEMENT {100 MCQs) 1. Net working capital is the difference between ‘a. Total assets and total abies Fixed assets and current abilities 1b. Current assets and current abitties 4 Shareholders" investment and cash 2. feurrent asscts go up by P 120,000, current labilties go down by P 50,009, then net working capital a. Did not change _Incseased by P 170,000 b. Increased by P 70,000 Decreased by P 170,000 3. Which of the following is strictly nota use of working capital? a. Repurchase of common stock ‘Purchase of equipment on account b. Purchase of inventory on account d._ Repayment ofiong-term debt 4, The net working capital of Pilippines Company at December 31, 2018 was P 10,000,000. Selected information for ‘the year 2019 for Philippines Company is as follows: "Working capital provides fromm operators F 1,700,000 Capital expencitures 3,000,000 Process from shost-term borrowings 3,000,000 Proceeds from long-term borrowiigs 2,000,000 Payments on shor term borrowings '500,000 Payments on long term borrowings 600,000 Proceeds from issuance of common stock 1, £00,000 Dividends paid on common stock ‘300,000 ‘What isthe net working capital at December 31, 2019° ‘a. 10,700,000 c. P11,500,000 b._P 11,200,000 é_P 12,000,000 5. China Corporation had income before taxes of P 60,000 forthe year. Included in this amount was depreciation Of F 5,000, a charge of P 6,000 for the amortization of bond dksununts, and P 4,000 for interest expense, What 15 the estimated cash flow for the period? a. P49,000 965.000 b._ P60,000 771.000 6. USA Co. has an acid test ratio of 1.5 to 1.0. Which ofthe following will cause this ratio to deteriorate? ‘a. Payment of cash dividends previously declared b._Borrowing short-term loan from a hank Sale of inventory on account a 4d. Sale of equipment at a loss 2. Ikis the policy of a company that the current ratio cannot fall below 1.5 t0 1.0. Its current lablties are P 400,000 ‘and the present current ratio 2 t0 1. How much isthe maxenum level of navy short-term loans i can secure ‘without violating the policy? a. 400,000 2286667 bP 300,000 800,000 & A fm's current ratio iS currently 2.2 0 1. Management knows it cannot violate a working capital restriction ntained in 1 bond indenture. Ifthe firm's current rato falls below 2 to 1, technicaly it will have defaulted. If CGirent labiities are P' 200,000,000, what is the maximum new commercial paner that can be issued to finance inventory expansion? a. P20millon cP 180 millon >. P40 millon 4d. P240 milton 6. Which oneof the following transactions would increase the current ratio and decrease net profit? "a. Am income tax payment due from the previous year is psld Bb. Astock dividend is declared . €._ Uncollectie accounts receivable ao written off against the allowance account ‘é, Vacant land is nente a fonds vested im secures 13. The firm's financing requirement can be separated ito A 2. Seesona and permanent Garren nities and lng: term funds b. Current assets and fixed assots Current inbes and long-term debts 14. The working capital financing poly that subjets tne frm te the greatest risk of being unable to mect the Fer’s ratuting obligations isthe policy that finances (where: CA = curent sets) D ‘a. Temporary CA with long-term debts c. Permanent CA wath long-term debis bb. luctuating CA vrth short-term debts Permanent CA with short-term debts 15. Which of the following actions would not be consietent vith good working capital management? 8 2. Increased synchronization of cash flows, Db. Minimize the use of float cc. Maintaining an average cash balance equal t 4d. Use of checks and drafts in aisbirsing funds 16. Determining the appropriate level of working capital for » firm resures . 2. Evaluating the risks assoriated wth vanous iov"ts of feed assats and the types of debt used to finance these assets b. Changing the capital structure and dividend goirry of the firm . Maintaining short-term deot at the lowest possible lev Le-ause itis generally more expensive than Whgh minimizes total cost tong-term debt . d. Offsetting the benefit of current assets and current tables agains: the probability of technical insolvency 17. A compensating balance A ‘2. Compensates a financial institution for se b. Is used to compensate for pussibie losses on 9 marketeiin secunties portfolio Isa level of inventory held to compensate for variations usage. rate and leed time d._ Is the amount of prepaid interest on a loan 3 18, The most dicect way to prepate a cash budget for 3 thanutacturing fais to include o 2, Projected sales, credit terms, anid net cowie b. Projected net itcome, depreciation ar Gooswut! amortization Projected purchases, percentages oF purchases paid, and net income 4. Projected sales and purchases, percentages of co¥ections, and terms of payments : 419, shown below is a forecast of sales for Eurone Inc. for the first four months of the year (all amounts are in thousands of pesos). Jaovay — febrvery Hatch, «Act cash sales 15 14 PIs PIs Sales on credit “109 ae x 70 (On average, 50% of credit sales are paid for in the meat of saie, 30% in the month follawing the sale, end the remainder ig paid 2 months after the rronth of saly As;uinine there are ne bad debts, what is the expected cash inflow for Europe in Warch? c ‘a. P 138,000 ch 119,000 b. P122,000 dP 108,000 20. Asia Inc. has 9 p0O! of cash that it uses to pay bill. When the cash is exhausted, it replenishes its pool by selling Toblls, The firm disburses P 600,000 in cach every yaar, and every sale of T-bills costs P 60. The current risk-free rate is 89%. What isthe optimal cash hatance for c a. P27,932 © P 20,000) bd. P48,530 d. PI7,545 21. Afirm needs a total of P 30,000,000 in new cash for transaction ywiposes. The annual interest rate on marketable aumities t 10% and the brokerage fee cos: per trancircion cf saving secures to replenish cash ts P 1,000. hich of the following is closest to the finn’s optimal sweranecash balance? 8 a. P 353,432 nP774,597 b. 387,298 d. 790,223 22, africa, Inc. has P 2 milion invested in T-bills yiiding 8% per annum. Ths investment will satisfy the fiem's need for funds during the coming year. It costs P 0 to sell these bis. if Arica nceds P 166,667 2 month, how frequently should the company sell off T-bils? 8 ‘a, About every 3 days cAbcut every 15 days b. About every 9 days d,_ About avery 18 days 23. A fim has an average age in inventory of 6O days, an average collection period of 45 days, and an average payment period of 30 days. What is the number of days in the css Row cycle? D ‘a, 135 days & Odays b. 105 days 73 aay . 24, The company’s cash flow cycle extends up to $0 -lays. Heceivadles age is for 20 days. Average age in inventory is ‘twice as lang as days’ receivable. For how long isthe sompany’s payable dererral ponod? A 2. 10 days. c Sdays b. 20 cays 15 days Page 10 af 26 pases . RSQ. The Review School of Gecorntarner, MAS Module 4 MCOs: MAS ~ 10, 11 & 12 25, Assume that each day a company writes and receives checks totaling P 10,000. If it takes § days for the checks to ‘lear and be deducted from the company's account, atid oniy 4 days for the deposts to clear, what 1s the float? c a. (P 10,000) cP 10,600 b. PO .P-50,000 26. Arctic is retail mailorder fern that currently uses a central collection system. An average of & doys i required for mailed checks to be received, 3 days for Arctic to process them, and 2 days for the checks to clear through is bank. A proposed lockbox system would reduce the maiing and processing time to 2 days and the check cleaving time to 1 day. Arctic has an average daily calection of F 150,000. If Arctic adopts the lockbox system, is averacre ‘ash balance wll ncrease by A ‘@ P 1,200,000 < P600,080 b.P-750,000 d. P-450,000 27. Amerca Company is considering implementing a lockbox system at a cost of P 20,000 per quarter. Annual sales are P 90,000,000, and the lockbox system will reduce collection time by 3 days. If America can invest funds at 8%, should implement lockbox system? (Assume a 360-day year) c a. Yes, Savings of P 140,000 per year ‘L_No, oss of P 20,000 per year b. Yes, savingsof P 60,000 per year ‘4. No, loss of P 60,000 per year 28. A firm has dally cash receipts of P 100,000 and collection time of 2 days. A bank has offercd to reduce the Collection time on the firm's deposit by 2 days for a manthly fee of P SOO. If money market rates are expected to average 6% during the year. the net annual benefit (loss) fram nuving this service 15, c a PO c P.6,000 7 b._ 3,000 a P2090 28. Peru Company is a newly established jantorial firm and the owner ws decding what type of checking account to open. Peru is planning to keep a P 500 minimum balance in the account for emergencies and plans to write roughly 80 checks per month, The bank charges 10 per month and P 0.10 per check charge for @ standard business checking account vith no ranimum balance. Peru also hes te option of a premium business balance that requires 2 P 2,500 minimum balance but has no monthly fees or wer check charges. if Peru's cost of funds is 10%, hich account should Pens choose? D a. Standard account, because the savings is P34 per year b. Premium account, because the savings is P 34 per year Standard account, because the savings is P 16 per year d. Premium account, because the savings is P 36 per year 30, When managing cash and short-term investrients, a corrrate treasurer is primarily concerned with > ‘a. Maximizing rate of return 1. Minimizing taxes c_Investing in treasury bonds since they have no default nk Liquidity and safety 31. China Ine. has a majority of its customers located in Welt Mana. Tibetan, a major retail bank, has agreed to provide a lockbox system to China at 2 fixed fee of P $0,000 per year and a variable fee of PO.50 for each payment processed by the tank, On average, China receives £0 payments per day, each averaging P 20,000. With the fockbox system, the company’s collection float will decrease hy 2 days. The annual interest rate on money market securities fs 6%. If China makes use of the lockbox system, svhat would be the net benefit to the company? (Use 365 days per year) c 3. 50,000 P6ONTS b P59,125 J. 120,000 SOLUTION: Benefit: (P 20,000 x 50 payments per day) x2 cays x G8 P 120,000 ‘Costs: P 50,000 + (50 payments per day x 365 days x P0.50) = P 59,125 32. The average collection period for a firm measures the number of days A '2._ After a typical crect sale is made unil the fn recewes the payment b. Fora typical check to ‘ear’ through the baniang system Beyond the end ofthe credt period before atypical customer payment is received 4. Before a typical account becomes deinauent 33. Russia, Inc. sells with terms 3/10, net 30 days. Gross sales for the year are P 2,400,000 and the colle: department estimates that 30% of the customers pay on the tenth day and take discounts; 40% pay 09 thirteth day; and the remaining 30% pay, on the average, 40 days after the purchase. Assutning 360 days ps year, what is the average collection period? 8 2. 0 days & Wdeys b. 27 days 0. 15 cays 34. England Company has an inventory conversion pariod of 60 divs, a recewvable conversion period of 35 dy permanent cycle of 26 days. If ts sales for the period just ended amounted to P 972,000, what i wvessinot accounts receivable? (Assume 360 days in a year) > a. 972,450 985,200 b. 79,600 a. P4500 35. Italy sells to retail stores on credit terms of 2/10, 0/30. Daily sales average 150 units at a price of P 300 cach. ‘Assuming that all sales are on credit and 60% of ts customers take the discount and pay an day LD while the res of the customers pay on day 30, what is the amount of Ilaiys accoum*s recenable? > 3. P 1,350,000 «.P900,000 b. 990,000 a Par0.006 Page 14 of 26 pages « @) RSQ The Review School of lero rnctineog MAS Module 4 MCQs: MAS ~ 10, 11 & 12 36. 37. 39. 40. a. 2. 43. 45, Mexico Company hes the opportunity to inereaca anvivat sales ty P-L millon ty soling to new riskier customers has boen estimated that uncollecbie erpanses wand hee “Shh and collection corts, 5%, The marufactunng ane ther selling costs are 70% of sales and corporate tx rate 1s 35% If they pursue this opportunity, what wil be the after-tax promt? ‘2. Increase by P 35,000 <_ increase by P 65,000 ._ Increase by P 97,500 4. Remar the same ‘A company’s budgeted sales for the coming year ars P95 milion, of which 80% are expected to be credit sales 2 terms of 1/30. The company estimates that a pronase’ relnction of credit standards would increage cred sales by 30% and increase the average collection vetiod fon: 30 to 4 days. Based on a 360-day year, the proposed raxation of credit standards would resu te an inssease nA nalaace Sy a. P6,880,000 289,000 b. 6,080,000 4 9 11920,000 Singapore Corporation plans to tighten as crac puey. Balser ss the summery of changes: OLO.prlcy — NEW policy ‘Average numbar of days clletion 3 50 Ratio of erect sales to total sales 10% 60% Projected sales for the coming year are P 30 milion ard i i estimated that the company’s eredt sales to be SY lip the new poly implemented Asuming 9 2606ay yur, hat Ue eof te ew poicy on sears receivable? a. P 3,333,333 decrease 76,800,000 decrease b._ P3/817,495 decrease dP 18,745,779 increase Iran Computers believes that is collection costs could be racuced tcegh modification of collection procedures. ‘This action is expected to result in a leagtherang of ‘ke average criccton pewied from 2B days to 34 C2ys; however, there will be no change in uncollacucle 2¢counts The coninariys budgeted credit sales for the comng ‘year are P 27,000,000, and shortcrm interest ices axe esprcies tw averege 8%. To make the changes i= Collection procedures cost henetical, what worsd be tae mirwmsin savings in collection costs (using 2 350-day yee) for the coming year? a. P 30,000 cP 180,050 b. 36,000 4» 360,000 Ak company with P 4.8 million in credit sales per year plans to relax its credit stendards, projecting that this wi increase credit sales by P 720,000, The company’s average coiccten period for new customers is expected to be 75 days, and the payment behavior of the existing customers t not expected to change. Vanable costs are E06 of ales, The firm's opportunity Cost is 26% before taxes. Rssunung 9 360-day year, what is the company’s benef (loss) on the planned change in credit terms? a. PO P20, 300 b.P28,800 a. P1eho00 ‘A computerized Inventory system that simulates nczdes news for the finished product, and then compares production need to available inventory balance to doterming when orders shoud be placed. ‘a. EOQ system cc Justn-Time system Electronic Data Interchange SL Waterist Requirements Planning System “The economic order quantity formula indicates that Annual quantty of nvantory to be cared B._Annual usage of materials during the year c._ Safety stock plus estimated mvantory fer the year &. Quantity of each indwidual order curing the year ‘An example of carrying cost. 2. Disruption of production schedules 5 Bb. Quantity ciscount tose & Spelage “The ordering costs associeted with inventory management nciuse 2. Insurance costs, purchasing costs, Shipping casts, end soalage B. Obsolescence, setup costs, quantity discounts lost, anc storage costs Purchasing costs, shipping costs, setup costs, and quantity discounts fost G. Shipping costs, cbsolescence, selup costs, and captal vested Inde operates 9 chain of hardvare stores 2crose Manila. The controler wants to determine the optimum safety stock levels for an at punfir unt. The inventory manager coimpied the Foloswng data: 2 The annual carrying cost of inventory approximates 20% oF = jvestznent in inventory. The inventory investment per unit averages P 59. + The stock-out cost is estimated to be 9 5 per tit +The company orders inventory or the averagr of £0 tees per year. 2 The probebilties of @ stock-out per orctor cyct» wath varyiny ‘evels of safety stock are as follows: Seley Stork — Stoxk-out Prete 200 units 0 100 units 100 units 0 100 urits 0 200s ‘What is the total cost of safety stock on an annual hasis wrth a safaty scock level of 100 units? 2 PS50 « b. P1,750 e P2,0¥0 Page 12 of 26 pages RSA - The Review School of Aeccowrtomey MAS Module 4 MCQs: MAS — 10, 11 & 12 46, The amount of inventory that a company would tend to held in stock would increase as the 8 ‘a. Variability of sales decreases b. Cost of carrying inventory decreases Cost of running out of stock decreases 4. Sales level fails to a permanently Iewer lavet 47. In iewentory management, the safety stock will tend to increase if the c ‘2. Carrying cost increases ‘c, Variability of the lead time increases b. Cost of running out of stock decreases d,_ Variability of the usage rate decreases 48, Based on 2 360-day year, what is the current price of P 190 Treasury bill in 180 days on 2 6% discount bests? 8 a. 100.00 94.00 b. 97.00 . a P9300 49. Commercial paper c ‘2, Has a matunty date greater than 1 year bb. Is usvally sold only through investment banking dealers ‘c. Ordinarily does not have an active secondary rarket 4d. Has an interest rate lower than Treasury bills 50. The forms of shor’-term borrowing that are unsecured credit are . 'a, Floating lion, revolving credit, chattel mortgage, and cominercial paper b. Factoring, chattel mortgage, bankers’ acceptances, and tine of credit Floating lien, chattel mortgage, bankers’ acceptences, und line of credit d. Revolving credit, bankers’ acceptances, line of credit, and commercial paper 51. A firm often factors its accounts receivable. Its finance company requires 2 6% reserve and charges @ 1.4% ‘commission on the amount of the receivables, The remaining amount to be advanced is further reduced by an ‘annual interest charge of 15%. What proceeds will the firm receive from the finance company at the time a P 100,000 account due in 60 days is factored? 8 ‘a. P-85,000 < P92,600 b. P90,285 6 P96.135 52. Greece, Inc. plans to factor its receivable and has callacted data on the following finance companies: Reauiredreserves Cammrssions Annual interest charge Company A 6% 14% 15% Company 8 7% 5.2% 12% Company C 5% 17% 20% Company D 8% 1.0% 5% Which company will give Graece the highest procaess from a P 100,000 account due in 60 days? A ‘a. Company A Company C >. Company B 4d, Company D 53. A company enters into an agreement with a fr that vel factor the company’s accounts receivable. The factor agrees to buy the receivables, which everage P 190,000 per month and have an average collacton period of 30 ays, The factor wil advance Up to 80% of the face vatue af the recelvables at an annual rate of 10% and charge Bec of 2% on all recewables purchased. The company controler estimates that the company would save P $6,000 in collection expenses over the year. Fees and interest are nct deducted in advance. Based on a 360-dey ‘year, what is the annual cost of financing? D 2 10.0% © 140% b. 12.0% 4 175% ‘sweden Company, 2 retail store, is considering foregoing sales discounts in order to delay using ts cach. Supp rosie terms are 3/10, 0/30, Assuming 2 360-day year, what 1 the annual cost of credit ifthe cash discount is not taken and Sweden pays net 30? D 2. 24.0% 36.0% b. 245% 4. 36.7% 55. Norway buys on terms of 2/10, nel/30, but generally does not pay until 40 days after the invoice date. | purchates total P 1,080,000 per year. How much non-free trade cred does the firm use cach year? 8 a. P.120,000

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