UNIVERSITY OF ST.

LA SALLE
YAL- College of Business and Accountancy
Financial Management 1 - Final Examination

Part I - Short Problems (55 points) Show necessary computations and write your final
answers in the answer sheet.

1. Baldo Company is considering the replacement of a press. The one in service

can be sold for P40,000 with a loss of P20,000 on the sale. A new press
machine can be purchased at an invoice price of P260,000 with a two (2)
percent discount. The freight cost for the new press amounts to P14,300 and
the installation cost of P18,500, The income tax rate is 30%. What is the cost of
the new investment for capital decision?

2. Kiosk Corp. has current assets of P4.5 million and current liabilities of P3.75
million. The current ratio is 1.20 and the quick ratio is 0.70. How much does
Kiosk have invested in inventory?

3. What is the NPV of a P45,000 project that is expected to have an after tax cash
flow of P14,000 for the first two years; P10,000 for the next two years; and
P8,000 for the fifth year? The WACC is 12%.

4. A fire has destroyed a large percentage of the financial records of Sy Company.

You have the task of piecing together information in order to release a financial
report. You have found the return on equity to be 16 percent. If sales were P4.0
million, the debt ratio was 0.40 and total liabilities were P2.0 million, what would
be the return on assets (ROA)?

5. Mon Tiero is considering a P500,000 investment in a new equipment that is

anticipated to produce the following net cash inflows:
1st year P 120,000 4th year P 80,000
nd
2 year 250,000 5th year 160,000
rd
3 year 110,000
If cash flows occur throughout the year, what is the equipment’s exact discount
cash payback period?

6. Yong and Yang plan to settle down 5 years after they graduate. They decided to
save jointly immediately after graduation. In the first year, Yang will deposit
P50,000, 2nd year each will contribute P50,000 each, 3rd year each will deposit
P25,000 and in the 4th year Yong will deposit P100,000. Assuming all deposit
are made at the end of the the year with an interest of 7% p.a. How much is
their total funds for the wedding?

7. By replacing present machinery with more efficient machinery, Don Donay

estimates that a savings in operating cost of P65,000 a year can be realized. In
addition, volume of sales can be increase with a larger profit before tax and
depreciation of P40,000 a year resulting without even considering the cost
savings from improved efficiency. Depreciation per year estimated to be
P50,000 and the tax rate is 30 percent. What is the estimated annual cash flow
return on this investment decision?

8. Lazzy Manufacturing Company has P2.5 billion in sales and P0.80 billion in fixed
. Currently, the company’s fixed assets are operating at 80% of capacity. If
Lazzy’s sales increased by 35 percent, how large is the increase in fixed assets
will the company need to meet its target fixed asset to sales ratio?

9. Harry Dukee has been presented with an investment opportunity which will yield
end of year cash flows of P30,000 per year in years 1 through 4; P35,000 per
year in years 5 through 9; and P40,000 in year 10. This investment will have a
cost of P250,000 today and the cost of capital is 10%. What is the Net Present
Value?
10. Joy Corp. wants to calculate its weighted average cost of capital. The company
has no sufficient retained earnings to fund the equity portion of the capital
budget. Additional information revealed the following:
* Dividend paid recently …….P2.00 per share * Growth rate - 6%
* Stock price …………… P 32.00 per share * Flotation cost - 10%
* Bond YTM ……………. 9% * Tax rate - 40%
* Target capital structure: 75% Equity; 25% Debt
What is the company’s WACC?

11. Lin-ay sang Subay is considering a P600,000 investment in a new equipment

that is anticipated to produce the following net cash inflows: Year 1, P125,000;
Year 2. P245,000; Year 3, P185,000; Year 4, P105,000 and Year 5, P240,000. If
the cash flows occur throughout the year, what is the equipment discounted payback
period assuming cost of capital of 9% p.a.?

12. Lovely is now 19 years old asnd would want P2.5 million on her 45 th birthday.
She intends to make 11 annual deposits to earn 9 percent per annum and
subsequently rollover the amount she would have in her 30 th birthday until her
th
45 year. How much should be her annual deposit for the next 11 years?

13. An analyst has collected the following information regarding GoNa Grocers:
* Earnings before interest and taxes (EBIT) - P700 million
* Earnings before interest, taxes and depreciation (EBITDA) -P850 million
* Interest expense is P200 million
* Depreciation is the company’s only non-cash expense
What is the company’s net cash flow?

(Questions for number 14 & 15)

Project Diggy cost P15,000 and its expected to produce cash flows of P4,500
per year for 5 years. Project Leny costs P37,500 and is expected to produce
cash flows of P11,000 per year for 5 years. Both has cost of capital of 14%.
14. Calculate the Internal rate of return of Project Diggy
15. Calculate the Modified Internal rate of return of Project Leny

16. The Global Advertising Company has a tax rate of 40%. The company can raise
debt at a 12% interest rate and the last dividend paid by Global was P0.90.
Global’s common stock is selling for P8.59 per share, and its expected growth
rate in earnings and dividend is 5%. If Global issue new common stock, the
flotation cost incurred will be 10%. Global plans to finance all capital
expenditures with 30% debt and 70% equity.
a. What is Global’s weighed average cost of capital if the firm has
sufficient retained earnings to fund the equity portion of its capital
budget?
b. What is Global’s weighted average cost of capital if the firm raised
the equity portion by selling new shares of stock?

17 Pepito Catamco is excited to own a brand new Toyota car. Toyota is selling the
for P1.2million. The required down-payment is 25% of the selling price.
Banco de Coco is willing to finance the unit at 12% annual interest. Pepito
wants to pay on a quarterly basis good for three years only.
a. How much is the quarterly payment of the loan for three years?
b. How much is the outstanding balance of the loan after paying for one
year?
 ANSWER SHEET

1.
Net Cash Outlay
Cost of the Asset 260,000
Less: Discount (260,000 x 2%) 5,200
254,800
Freight 14,300
Installation Cost 18,510
287,610

Terminal Cash Flow

Proceeds from Sale of Equipment 40,000
Tax Effect on Loss of Sale (20,000 x 30%) 6,000
46,000
287,610 - 46,000 = 241,610

2.
4,500,000 – x / 3,750,000 = .70
X = 1,875,000
3.
Total 58,573.6
Net Cash Outlay 45,000
13,573.6
4.
ROE = ROA X Total Asset Turnover X Equity Multiplier
ROA = 16%

5.
TCF = 720,000/5 = 144,000
500,000 / 144,000 = 3.47 / 3 years and 5 months

6.
50,000 61,252.15
50,000 114,490
25,000 53,500
100,000 100,000
Total Funds Value 329,242.15

7.
65,000
40,000
50,000
55,000
16,000
38,500
50,000
88,500

8.
86,400,000 - 80,000,000 = 64,000,000

9.
-38,346.95?
10.
11.
12.
13.
500,000,000?
14.
15.238%
15.
7.96%
16a.
16b.
17a.
1,200,000 / 3 = 400,000
400,000 / 4 = 100,000
1,200,000 * .12 = 144,000
144,000 / 4 = 36,000
100,000 + 36,000 = 136,000
17b.
(136,000 * 4) + (1,200,000 * .25) = 844,000

Part 2 - Long Problems:Show necessary computations.

Problem 1 - Cost of Capital (20 points)

Bob-Bye, Inc. has asked its financial manager to measure the cost of each
specific type of capital as well as the weighted average cost of capital. The
WACC is to be measured by using the following weights:: 40% long term debt,
10% preferred stock, and 50% common stock equity (retained earnings,new
common stock or both). The firm’s tax is 30%.

Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying
annual interest at 13% coupon rate. A flotation cost of 3% of the par value is
required in addition to the discount of P20 per bond.
Preferred Stock: 8 percent (annual divided) preferred stock having a par value
of P100 can be sold for P65. An additional fee of P2 per share must be paid to
the underwriters.

Common Stock: The firm’s common stock is currently selling for P50 per share.
The dividend expected to be paid at the end of the coming year is P4 per share..
Its dividend payments which have been approximately 60% of earnings per
share in each of the past 5 years, shown below has an average growth rate of 7.5%
annually.
Year Dividend Year Dividend
2019 P 3.75 2016 P3.15
2018 3.50 2015 2.85
2017 3.30
It is expected that to attract buyers, new common stock must be under-priced
P5 per share, and the firm must also pay P3 per share in flotation costs.
Dividend payments are expected to continue at 60% earnings.

Required:
 a. Compute the weighted average cost of capital (WACC) assuming retained
earnings is sufficient to cover the equity portion of fund requirement.
b. Compute the average cost of capital (WACC) assuming retained earnings is
not sufficient to cover the equity portion, so new issue common stock should be
issued.

Problem 2 - Capital Budgeting - Replacement of Asset (45)

DeCablo, Inc. owns a machine costing P105,000. This has an estimated useful
life of 6 years with a scrap value of P15,000 depreciated using straight line method.
After using this for two (2) years the operating efficiency of the machine is
decreasing. A repair cost amounting to P30,000 is needed to restore the machine to
its normal capacity. The machine can be sold now to a ready buyer for P60,000.
The management is contemplating to purchase a new machine now at a cost of
P150,000 and can be depreciated over four (4) years with no salvage value using
sum of year’s digit (SYD) method. After its economic life of 4 years its market value is
P50,000. The company will incurs a shipping and installation of cost of P40,000 and
an increase in working capital of P25,000.
With this new machine, revenues is expected to increase by P125,000 and cash
expenses due to this replacement will also increase by P60,000. Cost of capital is
estimated to be 15% and corporate tax of 25%

Required:

1. Necessary computation to determine the following:

a. Net cash outlays (net investment cost)
Cost of new asset 150,000.00
Incidental Expenses 40,000.00
Increase in working capital 25,000.00
Proceeds from sale of old asset -60,000.00
Tax Savings due to, loss on sale of old asset -3,750.00
Avoidable Repair cost -30,000.00
Avoidable tax savings on repair 7,500.00
Net Cash Outlay 128,750.00

b. Net cash inflows (operating cash inflows)

Expected increase n revenue 125,000.00
Expected increase in cash expenses -60,000.00
Incremental Depreciation -62,500.00
Net Income before tax 2,500.00
Net Income after tax 1,875.00
Add back - Depreciation 62,500.00
Net Cash Inflows per year 64,375.00

c. Terminal cash flow

Proceeds from sale of new assets after 4 years 50,000.00
Tax on gain on sale of asset -12,500.00
Released of Working Capital 25,000.00
Terminal Cash Flow 62,500.00

2. Evaluate the project to determine its acceptability using the following budgeting
techniques or methods:
a. Cash payback period
b. Discounted payback period
c. Net present value method (NPV)
d. Internal rate of return (IRR)
e. Modified internal rate of return (MIRR)

3. Prepare your recommendation whether to buy a new asset.

 I think that in every business, when there is an option to purchase a new asset
that has higher chances of performing better than the current one, they should just
go for it. For older assets and/or machines that have entered the part of their lifetime
where they are to undergo repairs and maintenance have a higher chance of failing
again and once again need to be repaired, unlike the new and fresher ones that can
provide a business with consistency and reliability. So in terms of whether they
should or shouldn’t buy the new machine, I don’t see why not, for there is a bigger
upside than there is downside.

That’s all folks!

Good luck gid!

fdcena, cpa, phd.

15December2021