Financial Management
Reviewer Finals Examination (Prelim-Finals) / Ms. Judy Ann Principe
Reviewer in Financial Management
(Finals Examination)
PRELIMS
QUIZ 1
Finance Within Finance is generally divided into 3
an Organization areas, which does not belong?
A. Finance Within an Organization
B. Capital Market
C. Investment
D. Corporate finance
Corporation A ____ is a legal entity created by a
state, and it is separate and distinct from
its owners and manager.
Chief Financial It is in charge of accounting, financing,
Officer credit policy, and decisions regarding
asset acquisition.
TRUE The intrinsic value can be estimated but
not measured precisely.
TRUE The management's primary goal should
be to maximize the long-run value of
the stock, which means the intrinsic
value as measured by stock's price
overtime.
PRELIM EXAMINATION
1. The assets of XYZ Co. consist of current assets
and net property and equipment.
The company has total assets of 3.8 million and net
property and equipment equals 3 million. It has
notes payable of 200,000, long-term debt of
950,000, and total common equity of 2.5 million.
The firm does have accounts payable and accruals
on its balance sheet. The firm only finances with
debt and common equity, so it has no preferred
stock on its balance sheet.
a. What is the company’s total debt?
b. What is the amount of total liabilities and equity
that appears on the firm’s balance sheet?
c. What is the balance of current assets on the
firm’s balance sheet?
d. What is the balance of current liabilities on the
firm’s balance sheet?
e. What is the amount of accounts payable and
accruals on its balance sheet? (Hint: Consider this
as a single line item on the firm’s balance sheet.)
f. What is the firm’s net working capital?
g. What is the firm’s net operating working
capital?
h. What is the explanation for the difference in
your answers to parts f and g?
ANS ● A. Total Debt
.
Total Debt = Short term + Long term debt
= 200,000 + 950,000
= 1,150,000
● B. Total Liabilities and Equity
Total Liabilities and Equity = Total Liabilities +
total equity
= 1,300,000 + 2,500,000
= 3,800,000
● C. Total Current Asset
CA = Total Asset - Long Term asset
= 3,800,000 + 3,000,000
= 800,000
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Financial Management
Reviewer Finals Examination (Prelim-Finals) / Ms. Judy Ann Principe

equipment. ABC Co had no other current

liabilities. Assume that ABC Co.’s only noncash
● D. Total Current Liabilities item was depreciated.

CL = AP and accruals + Notes payable a. What was the company’s net income?

= 150,000 + 200,000 b. What was the net operating working capital?

= 350,000 c. What was its net working capital?

d. ABC Co had 12 million in net plant and

equipment the prior year. Its net operating working
● E. Account Payable and Accruals
capital has remained constant over time. What is
= 150, 000 the company’s free cash flow for the year that

just ended?

● F. Net Working Capital e. ABC Co has 500,000 common shares

outstanding and the common stock amount on the
NWC = Current asset - Current Liabilities balance sheet is 5 million. The company has not
issued or Repurchased common stock during the
= 800,000 + 350,000 year. Last year’s balance in retained earnings was
11.2 million and the firm paid out dividends of 1.2
= 450,000 million during the year. Develop ABC’s end of
year statement of stockholders’ equity.

ANS ● A. Net Income

● G. Net Operating Working Capital .
Operating income or EBIT 5,000,000
NOWC = Operating Current asset - Operating
Current Liabilities less: Interest. (1,000,000)

= (current asset - excess cash) - (Current Earning before taxes (EBT) 4,000,000
Liabilities - Notes payable)
Less: Taxes (4M x 40%.) (1,600,000)
= 800,000 + 150,000
Net Income. 2,400,000
= 650,000

● B. Net Operating Working Capital

● H. To make a distinction between cash
held for operation and excess for other Current Liab. = AP + Accruals + NP
purposes and interest bearing liabilities
that are treated as financing cost rather . = 3,000,000 + 1,000,000 + 2,000,000
than operating cost.
. = 6,000,000

NOWC= (Current Asset - Excess cash) - (Current

2.) Last year ABC Co. had 5 million in operating Liabilities - Notes Payable)
income (EBIT). Its depreciation expense was 1
million, interest expense was 1 million and its = (14,000,000 - 0) - (6,000,000 - 2,000,000)
corporate tax was 40 %. At the year-end it had 14
million in current assets, 3 million in accounts = 14,000,000 - 4,000,000
payable, 1 million in accruals, 2 million in notes
payable, and 15 million in net plant and

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Financial Management
Reviewer Finals Examination (Prelim-Finals) / Ms. Judy Ann Principe

= 10,000,000 = 8,300,000 / 50

= 16,600,000

● C. Net Working Capital

NWC= Current Assset - Current Liabiliies

= 14,000,000 - 6,000,000
MIDTERM
= 8,000,000

ASSIGNMENT

● D. Free cash flow ? Angelo invested a large sum of Money in AA

corporation. The company pays a ₱4 dividend per
FCF= [EBIT (I-T) +Depreciation] - [Capital share. The dividends are expected to increase by
Expenditure + Increase in Net operating working 15% per year for the next 5 years. Angelo wants to
capital] project the dividends from years 1 to 5.

. = [5,000,000 (0.6) + 1,000,000)] - [4,000,00p ANS.

+ 0]
Dividends Increase in Total
= 4,000,000 - 4,000,000 per share dividends Dividends

Year 1 4 0.60 4.60

=0
Year 2 4.60 0.69 5.29

Year 3 5.29 0.7935 6.0895

● E.
Year 4 6.0835 0.9125 6.996

Year 5 6.996 1 0494 8.0454

Common Stock Retained Total FV of 1 = (1 + i) n

Earnings Shareholders’ . .
= (1 + 15%) 5
Equity FV of dividend = 4 ( 1 + 15%) 5
Shares Amount
=8.0454

Beg, Bal 500,000 5M 11.2 M 16.2 M

MIDTERM EXAM
Net 2.4 M
Income 1. The following Data apply to DEF Company (in
millions):
- Cash (1.2 M)
Dividend
s Cash and equivalents 100.00

+ RE 1.2 M Fixed Assets. 283.50

Bal. End 500,000 5M 12.4 M 17.4 M
Sale. . 1000.00
3. Wellington Corporation has $650 million of
common equity; its stock price is $50 per share; Net Income. 50.00
and its MVA is $180 million. How many common
shares are currently outstanding? Current Liabilities . 105.05

ANS 1,800,000 = X - 650,000,000 Current Ratio . 3.00x

.
8,300,000 = X DSO. (based on 365-days) 40.55 days.

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Financial Management
Reviewer Finals Examination (Prelim-Finals) / Ms. Judy Ann Principe

ROE 12.00% ● D. ROA

ROA= Profit Margin x Total Asset turnover

DEF has no preferred stock – only common equity, (Net income/Sales) x (Sales/Total asset)
current liabilities, and long term debt. Find DEF’s
=(50/1000) x (1000/600)
(a) accounts receivable,
= (0.05) (1.667)
(b) current assets,
= 0.083 or 8.33%
(c) total assets,

(d) ROA,
● E. ROE
(e) common equity,
ROE= ROA x (Asset/Equity)
(f) quick ratio, and
12% = 8.33 x (600/Equity)
(g) long-term debt.
Equity = (8.33%)(600) / 12%
ANS
. =416.67
● A. accounts Receivable

AR= (Day sales outstanding) (AnnualSale/365)

● F. Quick Ratio
= (40.55) (1000/365)
QR= (Current asset - Inventories) / (Current
=(40.55) (2.740) Liabilities)

= 111.11 = Current Asset = Cash and Equivalents + AR +

inventory / Inventories

= 316.5 = 100.00 + 111.11 + inventories

● B. Current Asset
Inventories = 105.4
CA= (Current Ratio) (Current Liabilities)
QR = 316.5 - 105.4 / 105.05
= (3.00) (105.50)
= 2.00.
= 316.5
(*doublecheck)

● G. Long term debt

● C. Total Asset
Total asset =Total claims =600
TA= Current Asset + Fixed Asset
Current Liab.+ Long-term debt +Equity = 600
=316.50 + 283.50
105.5 + Long term debt+ 416.67 = 600
= 600
Long-term debt = 600- 105.5- 416.67

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Financial Management
Reviewer Finals Examination (Prelim-Finals) / Ms. Judy Ann Principe

= 77.83
4 10,700 0.636 6,805.2
2. 2. Mr. Uy inherited ₱25,000 from Roxas. He wants
5 12,300 0.567 6,974.1
to use the money to buy his wife a new washing
machine (which cost ₱30,000) for their 5th
44,775.5
wedding anniversary which will take place 3 years
from now. Will Mr. Uy have enough money to buy 4. Assume that XYZ Corporation invested in two
the gift if he deposits his money in an account stocks, namely Stock A and Stock B. The future
paying 8% compounded semi-annually? returns depend on the state of the economy with
their corresponding probability distribution.
ANS Yes, Mr uy have enough money to buy gift if he
. deposits his money in an account paying 8% State of Stock A Stock B
the
compounded semi-annual. econom
y
Return(R Profitabilit Retur Profitabilit
i) y (Pi) n y
Weak -15.00 0.15 - 20.00
10.00
FV= PV(1+i/m)(t x m) Normal 25.00 0.90 20.00 60.00
Strong 50.00 0.15 45.00 20.00
= 25,000 (1+.08/2) (3 x 2)
a. Calculate the Standard deviation of Stock A and
Stock B.
= 25,000 (1.265)
b. Which of the following investments is riskier?
= 31,625 and the cost of the washing machine is
30,000. ANS
.
3. Angel was offered the opportunity to receive the STOCK A
following unequal cash flows over the next 5 years:
Rate of Ri Pi (Ri)
Economy (Pi) ( Ri−r ()2Ri−r )2
Pi
Weak -15% .15 -2.25 1,827.563 274.134

Year. Revenue
Normal 25% .90 22.5 7.563 6.807

1. ₱15,200 Strong 50% .15 7.5 495.063 74.259

R= Variace=
2 ₱9,800 27.75 355.20

3 ₱13,500 δ =√ 355.20
4 ₱10,700 = 18.85

5 ₱12,300

STOCK B

If she must earn a minimum of 12% on her Rate of Ri Pi (Ri)

investment, what amount should she pay today?

Economy (Pi) ( Ri−r ()2Ri−r )2
Pi
Weak -10% .20 -2 841 168.2
ANS
Normal 20% .60 12 1 0.6
.

YEAR Revenue (1+i)-n Present Value Strong 45% .20 9 676 135.2

R= 19 Variace=
1 15,200 0.893 13,573.6 304

2 9,800 0.797 7,810.6

δ =√ 304

3 13,500 0.712 9,612 = 17.44

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Financial Management
Reviewer Finals Examination (Prelim-Finals) / Ms. Judy Ann Principe

The amount of invested is equal and the

correlation coefficient between stock A and B is +1
 B. and that between Stocks B and C is -1.

STOCK A STOCK B ANS ● A.

.
STOCK A AND B
18.85 17 . 44
= 0.679 or 67.9% = 0.918
27.72 19 Rp= W A R A +W B R B
or 91.8%
= (0.50)(-14.09%) + (0.50)(-14.09%)

= -0.14 OR -14%
Stock B is riskier.

5. JAP Corporation provided the following

information:
STOCK B AND C

Rp= W B R B +W B R C

Yea Stock A Stock B Stock C

r
= (0.50)(-14.09%) + (0.50)(14.09 %)2
50 Return 50 Return 50 Return
% s % s % s
= -0
200 50 50 20
5

200 45 -10.00 45 -10.00 22 -10.00

6  B.

200 40 -11.11 40 -11.11 24 -11.11

7 Sp= √ w 2 A δ 2 A + w2 B δ 2 B + 2 wAw
200
8
35 -12.50 35 -12.50 27 -12.50
B ∗P AB δ A δ B
200 30 -14.29 30 -14.29 31 -14.29 =
9

201 25 -16.67 25 -16.67 37 -16.67

√(0.50)2 (0.0373)2 +(0.50)2 +(0.0373)2 +2
0

201 20 -20.00 20 -20.00 44 -20.00

=
√ 0.00139129
1
= 0.037 OR 3.73% Portfolio Risk Stock A and B

Average return. -14.09% -14.09% 14.09%

Portfolio Risk Stock A and B = 0
Standard deviation. 3.73% 3.73% 3.73%

Compute the following:

a. Portfolio return of Stock A and B, and B and C.

b.Portfolio risk of Stock A and B, and B and C PRE- FINALS

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Financial Management
Reviewer Finals Examination (Prelim-Finals) / Ms. Judy Ann Principe

Capital It is the process involved in long-term

QUIZ Budgeting investment decision-making.

? Yet Corporation has issued ₱1,000,000, 15%, 5- Accounting Sometimes called the average rate of
year bond whose net proceeds are ₱960,000. The Rate of Return return, it shows the percentage of net
tax rate applicable to the firm is 35%. Compute income generated per peso investment.
the cost of equity using bond plus approach with
the assumption that the risk premium is at 5%. Net Present It is the difference between the present
Value value of all cash inflows less the initial
ANS.  DEBT BEFORE TAX investment.

Accounting Which among the following tools in

( FV −IP)
i+ Rate of Return the capital budgeting does not
n recognize the time value of money?
K i= =
( FV + IP) FALSE In framework of capital budgeting , if
2 the benefits of an investment proposal
are greater than the cost of investment,
(1,000,000−960,000) the proposal in not acceptable.
150,000+
5
(1,000,000+ 960,000) PRE-FINAL EXAMINATION

2 1. M2M recently hired Lu as an accountant to

estimate the company’s WACC. Lu obtained the
150,000+ 8,000
= following information:
980,000
= 16.12%
a) The firm’s has 1,500,000, 8-year, 12% bond
with semi-annually payments, whose net proceeds
are 1,020,000.
 DEBT AFTER TAX
b) M2M tax rate is 30%
K d =K i (1−t)
c) The risk-free rate is 5%; the expected return on
the market is 8%; and the stocks beta is 1.20.
= 16.12% (1 – 0.35)
d) The target capital structure consists of 40% debt
= 10.48%
and 60% common equity. The firm uses the

CAPM to estimate the cost of equity, and it does

not expect to issue any new common stock.
 BOND PLUS APPROACH
What is WACC?
K e =K i ( 1−t ) + Risk Premium

= 16.12% (1 – 0.35) + 5%
ANS DEBT BEFORE TAX
= 10.48% + 5% .
=
= 15.48%

QUIZ 1

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Financial Management
Reviewer Finals Examination (Prelim-Finals) / Ms. Judy Ann Principe

Earnings
(1,500,000−1,020,000)
90,000+ 30,000,000
K A=
10 14.80%
(1,200,000+ 1,020,000) B) WACC using the market value weights

2 Book Per X No. of

sec.
MV
Value unit
shar
90,000+30,000 Mortgag 8,000,000
e
1075 7,272.73 7,818,184.7
= = 9.52%
1,260,000 e Bonds
Preferre
/ 1,100
4,000,000 95 33,333.3
5
3,166,666.6
d Stock / 120 3 7
Commo 12, 70 200,000 9,333,800
DEBT AFTER TAX n Stock 000,000 /
60
Retained 6, 4,666,2000
= 9.52% (1 – 0.30) Earnings 000,000

= 6.66%
Market Value Weights Cost Weighted
Cost
Mortgage 7,818,184.75 31.29 5% 1.56
Bonds
CAPM APPROACH Preferred 3,166,666.67 12.67 14 1.77
Stock
Common 9,333,800 37.36 20 7.47
K e = 5% + 1.2 (8%-5%) Stock
Retained 4,666,2000 18.68 18 3.36
Earnings

= 8.6%
24,984,851.42
K A=
14.16%
3. The Boulevard Holdings, Inc. has been presented
with an investment opportunity which has an
Weights Cost Weighted
Cost annual cash inflow of 30,000 per year in Years 1
Debt 6.66% 40% 2.66 and 2; 40,000 per year in Years 3 and 4; and
Common Stock 8.6% 60% 5.16
K A = 7.82% 60,000 in Year 5. This investment cost the firm
120,000 today, and the firms cost of capital is
2. BB Corporation has gathered the following
financial data: 10%.

Book Value Per Unit/ Cost

Share
Mortgage Bonds 8,000,000 1,075 5%
(1,100 par) a. What is the payback period for this investment?
Preferred Stock 4,000,000 95 14
(120 par)
Common Stock (60 12,000,000 70 20
b. What is the discounted payback period for this
par) investment?
Retained Earnings 6, 000,000 18
Compute the following:
c. What is the net present value of the investment?

a) WACC using the book value weights ANS  What is the payback period for this
. investment?
b) WACC using the market value weights
Cash flow Balance Years
ANS A. WACC using the book value weights 120,000
. Year 1 30,000 90,000 1
Book Value Weights Cost Weighted Year 2 30,000 60,000 1
Cost Year 3 40,000 20,000 1
Mortgage 8,000,000 26.67 5% 1.33
Bonds Year 4 40,000 2 0,000/ .50
Preferred 4,000,000 13.33 14 1.87 40,000
Stock Year 5 60,000 0 Payback
Common 12, 000,000 40 20 8 Period = 3.5
Stock years.
Retained 6, 000,000 20 18 3.6

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Financial Management
Reviewer Finals Examination (Prelim-Finals) / Ms. Judy Ann Principe

 What is the discounted payback period  How much is the maximum cash
for this investment? dividend that it can declare?

Annual PV Discounted Balance Years Retained Earnings                          2,000,000

Cash Amount
Return
120,000 ASSIGNMENT
Y 30,000 27,273 92,927 1
1 (1.10)−1 1 Problem 1
Y 30,000 24,793 67, 934 1
2 (1.10)−2 To expand its business, the Wonderland Factory
Y 40,000 30,053 37,881 1 plans to issue a bond with a par value of 1,000.00,
3 (1.10)−3 coupon rate of 10%, and maturity of 10 years from
Y 40,000 27,321 10,560 1 now. What is the value of the bond if the required
4 (1.10)−4 rate of return is :
Y 60,000 37,255 10,560/ 0.28 a. 8%
5 (1.10)−5 37,255
b. 10%
Discounted payback period= 4.28 yrs.
c. 12%
ANS.  A. 8%
= 1,000 (1.08)−10 +100 ¿)
 What is the net present value of the
investment? = 1,000 (.0.463) + 100 (6.710)

Cash flow Present Value = 463 + 671

(1. i)−n
Year 1 30,000 0.909 27,270 = 1, 134
Year 2 30,000 0.826 24,780
Year 3 40,000 0.751 30,040
Year 4 40,000 0.683 27,320
Year 5 60,000 0.621 37,260
Total 146,670  10%
Less: Investment (120,000) = 1,000
Net Present Value 26,670

1−( 1+.10 )−10

FINALS (1.10)−10 +100( )
.10
ASSIGNMENT
= 1,000 (.0.386) + 100 (6.144)
? The shareholders’ equity of BRB Corporation
revealed the following information on December = 386 + 614.45
31, 2019.
= 1, 000.45 or 1,000
Preferred stocks, ₱50 par   ₱1,150,000
Additional paid-in capital – PS      115,000
Common Stocks, ₱20 par  7,000,000
Additional paid-in capital – CS       10%
1,750,000
Subscribed Common Stock              200,000 = 1,000 (1.12)−10 + 100¿ )
Retained Earnings                          2,000,000
 How much is the legal capital of BRB = 1,000 (.0.322) + 100 (5.650)
Corporation?
 How much is the maximum cash
= 322 + 565
dividend that it can declare?
ANS.  How much is the legal capital of BRB
Corporation? = 887
Preferred stocks, ₱50 par   ₱1,150,000
AdCommon Stocks, ₱20 par  7,000,000 2. On January 1, 2020 CGO Business INc. Sold Face
Subscribed Common Stock             200,000 Value bonds worth 1,250,000.00 with a required
Legal Capital 8,350,000 rate of return of 12%. The bond will mature in 15
years with a 15%-interest payable semi annually
every January 1 and July 1. Determine the value of

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Financial Management
Reviewer Finals Examination (Prelim-Finals) / Ms. Judy Ann Principe

the bond.
ANS. = 1,250,000

−30 1−( 1+.06 )−30

(1.06) +93,750( )
.06

= 1,250,000 (.0.174) + 93,750 (13.767)

= 217,500 + 1,290,656.25

= 1, 508,156.25 OR 1, 508,156

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