INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC

Alimannao Hills, Peñablanca, Cagayan 3502

COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

DRILL No. 3
INSTITUTIONAL REVIEW BATCH 4
MANAGEMENT ADVISORY SERVICES
(Capital Budgeting, Cost of Capital, Project Feasibility Studies, Economics,Information Systems)

INSTRUCTIONS: Select the best answer for each of the following questions. Write only one answer
for each item on the answer sheet provided. Strictly NO ERASURES ALLOWED. Erasures will
render your examination answer sheet INVALID. Use PENCIL NO. 2 only. GOODLUCK!

1 11 21 31 41 51 61
2 12 22 32 42 52 62
3 13 23 33 43 53 63
4 14 24 34 44 54 64
5 15 25 35 45 55 65
6 16 26 36 46 56 66
7 17 27 37 47 57 67
8 18 28 38 48 58 68
9 19 29 39 49 59 69
10 20 30 40 50 60 70

1. The basic problem of economics arises when there are unlimited resources available to fulfill society's limited
wants.
a. True
b. False

2. Economics is the study of choice under conditions of

a. demand
b. supply
c. scarcity
d. opportunity
e. abundance

3. The study of economics would be superfluous if __________ did not exist.

a. demand
b. capital
c. corporations
d. profit
e. scarcity

4. Which of the following disciplines is not a social science?

a. psychology
b. mathematics
c. economics
d. political science
e. sociology

5. What does economics have in common with sociology?

a. Economics and sociology ask fundamentally the same questions.
b. Economics and sociology use the same tools to analyze issues.
c. Both are social sciences.
d. What and how economists study is very similar to what and how sociologists
study.
e. Explaining something about society is only a secondary purpose in both areas.

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6. Society's core economic problem is
a. the role of government in the economy
b. a scarcity of land, labor, and machinery to produce goods and services
c. the federal budget deficit
d. an unequal distribution of income

7. Due to a scarcity of resources,

a. governments should decide what should be produced
b. the government must decide how to allocate available resources
c. some members of each society must live in poverty
d. every society must choose among competing uses of available resources
e. resource availability exceeds the possible uses for available resources

8. In every economic system, scarcity imposes limitations on

a. households, business firms, governments, and the nation as a whole
b. households and business firms, but not the governments
c. local and state governments, but not the federal government
d. households and governments, but not business firms
e. business firms, governments, and the nation as a whole

9. Because of economic scarcity

a. there are not enough jobs for everyone
b. people are afraid to become entrepreneurs
c. the government interferes in the economy
d. businesses cannot obtain the resources they need
e. people and organizations have to allocate resources carefully

10.No society can provide its citizens with everything that they want because of
a. greedy politicians
b. lazy workers
c. an educational system that does not provide hands on experience
d. firms that strive to maximize profits
e. a scarcity of resources

11.Society has to establish priorities among its goals because of

a. lazy politicians
b. manipulative politicians
c. uneducated voters
d. a scarcity of resources
e. too many bosses and not enough workers

12. Because households have limited incomes, they must

a. rarely take vacations
b. live below the poverty line
c. allocate their spending carefully
d. gamble in casinos frequently
e. save for the future

13.Even though households may have unlimited wants, they have to allocate their spending carefully because
they
a. do not want their credit card bills to be too high
b. worry about their taxes
c. have limited intelligence
d. have limited incomes

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e. basically want to become wealthy

14. Opportunity costs exist because

a. there is a price attached to virtually every good or service
b. technology is not fixed in the economy
c. people have different tastes and preferences
d. limited resources cannot satisfy all of the wants in society
e. the production possibilities frontier is bowed in with respect to the origin

15. The opportunity cost of a particular activity

a. is the same for everyone pursuing this activity
b. may include both monetary costs and forgone income
c. always decreases as more of that activity is pursued
d. usually is known with certainty
e. measures the direct benefits of that activity

16.After graduating from high school, Steve had the following three choices for his immediate future, listed in
order of preference: (1) attend our campus, (2) work in a printed circuit board factory, or (3) attend a rival
college. His opportunity cost of going to college here includes which of the following?
a. The cost of books and supplies at the rival college
b. The income he could have earned at the printed circuit board factory plus the
direct cost of attending college here (tuition, textbooks, etc.)
c. The benefits he could have received from going to the rival college
d. Only the tuition and fees paid for taking classes here
e. Cannot be determined from the information given

17. A professional basketball players' union negotiates a contract that dramatically increases all players'
salaries. How would this influence the opportunity cost for a player who was considering giving up
basketball to pursue a career in broadcasting?
a. It would not affect the opportunity cost of playing basketball or of broadcasting.
b. It would increase the opportunity cost of continuing to play professional
basketball.
c. It would cause the production possibilities frontier to become convex.
d. It would increase the opportunity cost of becoming a broadcaster.
e. It should have no bearing on the player's decision from an economic standpoint.

18. A particular music store, Discs-R-Us, sells over 3,000 different compact disks. Pat's opportunity cost of
choosing to purchase a compact disk by Pearl Jam
a. is zero if he does not like any other compact disk
b. is how much he would have enjoyed his second-favorite compact disk
c. depends on the compact disks not sold by the store
d. is negative
e. is how much he would have enjoyed a compact disk by Vanilla Ice

19. For an individual, opportunity costs

a. decrease as consumption increases.
b. include only the monetary costs of goods and services.
c. reflect resource scarcity.
d. reflect the fact that wants are unlimited.
e. reflect the fundamental assumption that "more is better."

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20. The process of learning how the current system, functions, determining the needs of users, and developing
the logical requirements of a proposed system is referred to as
A. systems maintenance C. systems feasibility study
B. systems analysis D. systems design

21. Which of the following is not a characteristic of a batch processing system?

A. The collection of like transactions which are sorted and processed sequentially against a master file.
B. Keypunching of transactions, followed by machine processing.
C. The production of numerous printouts.
D. The posting of a transaction, as it occurs, to several files without intermediate printouts.

22. All activity related to a particular application in a manual system is recorded in a journal. The name of
the corresponding item in a computerized system is a
A. master file C. transaction file
B. year-to-date file D. current balance file

23. One of the first steps in the creation of a data base is to

A. define common variables and fields used throughout the firm*
B. increase the secondary storage capacity.
C. obtain software that will facilitate data retrieval.
D. integrate the accounting system into the data base.

24. A system with several computers that are connected for communication and data transmission purposes
but that permits each computer to process its own data is a
A. distributed data processing network C. decentralized network
B. centralized network D. multidrop network

25. The process of developing specifications for hardware, software, personnel hours, data resources, and
information products required to develop a system is referred to as
A. systems analysis C. systems design
B. systems feasibility D. systems maintenance

26. An integrated set of computer programs that facilitates the creation, manipulation, and querying of
integrated files is called a(n)
A. translator C. operating system
B. database management system D. flat file system

27. Turnaround documents

A. generally circulate only within the computer center.
B. can be read and processed only by the computer.
C. are generated by the computer and eventually return to it.
D. are only used internally in an organization.

28. Which of the following is not an activity covered by feasibility study?

a. Activity based accounting of the endeavor leading to a conclusion

b. Collection of data
c. Evaluation and analysis of data collected
d. Formulation of recommendation

29. Among the following major parts of a project feasibility study, which grouping is considered critical?

a. Management, financial and social returns

b. Technical. Financial and environmental aspects
c. Economic benefits, management, financial
d. Marketing, engineering or technical and financial

30. The statements below about project feasibility studies are the true except:

a. Any change which can materially alter the assumptions used in the preparation of the forecast will
render it useless
b. It is important for government agencies in order to determine entitlement to government incentives
c. It also covers the social desirability aspects of a proposed undertaking

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 d. Since data gathering is a basic step in its preparation, all the necessary and required information will
always be available.

31. In a project feasibility study, which of the following is true?

a. The study is not affected by any significant change in actual business conditions as compared to the
assumptions used in making the forecast
b. The study is based on available information and opinions of the party involved in the preparation of
the study.
c. (a) and (b)
d. None of the above

32. Reviewing data base authority tables is a(n)

A. access control C. data resource control
B. organizational access control D. operating resource control

33. One of the first steps in the creation of a database is to

A. define common variables and fields used throughout the firm
B. increase the secondary dotage capacity.
C. obtain software that will facilitate data retrieval.
D. integrate the accounting system into the data base.

34. The primary responsibility of a database administrator is to

A. decide who is to use the database.
B. maintain the database software.
C. design, maintain, and enforce standards for the database.
D. hire and supervise the application programmers.

35. If a data base has integrity, the

A. software was implemented after extensive acceptance testing.
B. data base has only consistent data.
C. data base is secure form accidental entry.
D. data base and the system have been reviewed by an external auditor.

36. The installation of a data base management system is not likely to have any direct impact on
A. data redundancy within files.
B. sharing of common data
C. inconsistencies within common data fields.
D. the logic needed to solve a problem in an application program.

37. A fundamental purpose of a database management system is to

A. store all data or an organization in multiple files.
B. reduce data redundancy
C. use physical data organization concepts instead of logical data
D. change the manner in which application programs access individual data elements

38. The primary functions of a computerized information system include

A. input, processing, and output
B. input, processing, output, and storage
C. input, processing, output and control
D. input, processing, output, storage, and control

39. Microcomputer systems have enhanced use with systems software and application software. Which one of
the following statements concerning microcomputer systems is false?
A. Database management systems ate available for microcomputer systems.
B. An operating system program is a critical software package for microcomputers.
C. Language translator programs are applicable for microcomputers.
D. Integrated packages are examples of operating system s for microcomputers.

40. Which of the following is not an advantage of direct access files over sequential files?
A. shorter record access time
B. elimination of automatic file backup
C. less unnecessary rewriting of unchanged records
D. they are all advantages

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41. Cost of capital is (E)
a. The interest rate an entity must pay to borrow money.
b. The return an entity’s stockholders expect on their investment .
c. The rate of return the entity can earn from investing available cash.
d. A concept of managerial finance incorporating all of the above.

42. Cost of capital is

a. The amount the company must pay for its plant assets.
b. The dividends a company must pay on its equity securities.
c. The cost the company must incur to obtain its capital resources.
d. The cost the company is charged by investment bankers who handle the issuance of equity or long-
term debt securities.

43. The theory underlying the cost of capital is primarily concerned with the cost of
A. Long-term funds and old funds.
B. Short-term funds and new funds.
C. Long-term funds and new funds.
D. Any combination of old or new, short-term or long-term funds.

44. Gravy Company expects earnings of P30 million next year. Its dividend payout ratio is 40%, and its
debt/equity ratio is 1.50. Gravy uses no preferred stock.
At what amount of financing will there be a break point in Gravy’s marginal cost of capital?
A. P45 million. B. P30 million. C. P20 million. D. P18 million.

45. Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent
common equity. The current market price of the firm’s stock is P 0 = P28; its last dividend was D0 = P2.20,
and its expected dividend growth rate is 6 percent. What will Allison’s marginal cost of retained earnings,
ks, be?
a. 15.8% b. 13.9% c. 7.9% d. 14.3%

46. Doris Corporation's stock has a market price of P20.00 and pays a constant dividend of P2.50. What is the
required rate of return on its stock?
A. 13.0% B. 12.5% C. 12.0% D. 11.5%

47. Wiley’s new financing will be in proportion to the market value of its present financing, shown below.
Book Value (P000 Omitted)
Long-term debt P7,000
Preferred stock (100 shares) 1,000
Common stock (200 shares) 7,000
The firms’ bonds are currently selling at 80% of par, generating a current market yield of 9%, and the
corporation has a 40% tax rate. The preferred stock is selling at its par value and pays a 6% dividend.
The common stock has a current market value of P40 and is expected to pay a P1.20 per share dividend
this fiscal year. Dividend growth is expected to be 10% per year. Wiley’s weighted-average cost of
capital is (round your calculations to tenths of a percent)
a. 13.0% b. 8.3% c. 9.6% d. 9.0%

48. Company X is interested in calculating it weighted-average cost of capital. Company X has a current
financial structure that is composed of 50% debt, 40% common stock, and 10% preferred stock. Ignore
the effects of cost of retained earnings. The beta of Company X stock is 0.7, and the current risk-free rate
of return is 4%. The market risk premium is 6%. The preferred dividend on Company X preferred stock
is set at P2.25, and the net issuance price per share (which happens to be the same as the current price per
share) of preferred stock is P30. Debt issued by Company X yields an 11% stated interest rate to
investors. The marginal tax rate for Company X is 40%. What is the weighted-average cost of capital for
Company X?
a. 0.0743 b. 0.0820 c. 0.0660 d. 0.0733

49. Catherine & Co. has extra cash at the end of the year and is analyzing the best way to invest the funds. The
company should invest in a project only if
A. The expected return on the project exceeds the return on investments of comparable risk.
B. The return on investments of comparable risk exceeds the expected return on the project.
C. The expected return on the project is equal to the return on investments of comparable risk.
D. The return on investments of comparable risk equals the expected return on the project.

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50. Long-term government bonds have:
A. Interest rate risk C. Market risk
B. Default risk D. None of the above

51. The risk that securities cannot be sold at a reasonable price on short notice is called
A. Default risk. C. Purchasing-power risk.
B. Interest-rate risk. D. Liquidity risk.

52. Business risk is the risk inherent in a firm's operations that excludes financial risk. It depends on all of the
following factors except (E)
A. Amount of financial leverage. C. Demand variability.
B. Sales price variability. D. Input price variability.

53. Which of the following affects a firm’s business risk? (E)

a. The level of uncertainty about future sales.
b. The degree of operating leverage.
c. The degree of financial leverage.
d. Statements a and b are correct.
e. All of the statements above are correct.

54. Which of the following would increase risk? (M)

a. Increase the level of working capital.
b. Change the composition of working capital to include more liquid assets.
c. Increase the amount of short-term borrowing.
d. Increase the amount of equity financing.

55. As a capital budgeting technique, the payback period considers depreciation expenses (DE) and time
value of money (TVM) as follows:
a. b. c. d.
DE relevant irrelevant Irrelevant relevant
TVM relevant irrelevant Relevant irrelevant

56. The bailout payback period is

a. The payback period used by firms with government insured loans.
b. The length of time for payback using cash flows plus the salvage value to recover the original
investment
c. (a) and (b)
d. None of the above.

57. Which of the following methods measures the cash flows and outflows of a project as if they occurred at a
single point in time?
a. Cash flow based payback period. c. Payback method.
b. Capital budgeting. d. Discounted cash flow.

58. When using one of the discounted-cash-flow methods to evaluate the feasibility of a capital budgeting
project, which of the following factors generally is not important?
a. The method of financing the project under consideration.
b. The impact of the project on income taxes to be paid.
c. The timing of cash flows relating to the project.
d. The amount of cash flows relating to the project.

59. Capital budgeting methods are often divided into two classifications: project screening and project
ranking. Which one of the following is considered a ranking method rather than a screening method?
A. Net present value. C. Profitability index.
B. Time-adjusted rate of return. D. Accounting rate of return.

60. A company has analyzed seven new projects, each of which has its own internal rate of return. It should
consider each project whose internal rate of return is _____ its marginal cost of capital and accept those
projects in _____ order of their internal rate of return.
A. Below; decreasing. C. Above; increasing.
B. Above; decreasing. D. Below; increasing.

61. Hooker Oak Furniture Company is considering the purchase of wood cutting equipment. Data on the

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 equipment are as follows:
Original investment P30,000
Net annual cash inflow P12,000
Expected economic life in years 5
Salvage value at the end of five years P3,000
The company uses the straight-line method of depreciation with no mid-year convention.
What is the accounting rate of return on original investment rounded off to the nearest percent, assuming
no taxes are paid?
a. 40.0% b. 20.0% c. 24.0% d. 22.0%

62. A company is considering putting up P50,000 in a three-year project. The company’s expected rate
of return is 12%. The present value of P1.00 at 12% for one year is 0.893, for two years is 0.797, and for
three years is 0.712. The cash flow, net of income taxes will be P18,000 (present value of P16,074) for
the first year and P22,000 (present value of P17,534) for the second year. Assuming that the rate of return is
exactly 12%, the cash flow, net of income taxes, for the third year would be
a. P7,120 b. P10,000 c. P16,392 d. P23,022

63. Lor Industries is analyzing a capital investment proposal for new machinery to produce a new product
over the next ten years. At the end of the ten years, the machinery must be disposed of with a zero net
book value but with a scrap salvage value of P20,000. It will require some P30,000 to remove the
machinery. The applicable tax rate is 35%. The appropriate “end-of-life” cash flow based on the
foregoing information is
a. Inflow of P30,000. c. Outflow of P10,000.
b. Outflow of P6,500. d. Outflow of P17,000.

64. C Corp. faces a marginal tax rate of 35 percent. One project that is currently under evaluation has a cash
flow in the fourth year of its life that has a present value of P10,000 (after-tax). C Corp. assumes that all
cash flows occur at the end of the year and the company uses 11 percent as its discount rate. What is the
pre-tax amount of the cash flow in year 4? (Round to the nearest dollar.)
a. P15,181 b. P23,356 c. P9,868 d. P43,375

65. Maxwell Company has an opportunity to acquire a new machine to replace one of its present machines.
The new machine would cost P90,000, have a 5-year life, and no estimated salvage value. Variable
operating costs would be P100,000 per year. The present machine has a book value of P50,000 and a
remaining life of 5 years. Its disposal value now is P5,000, but it would be zero after 5 years. Variable
operating costs would be P125,000 per year. Ignore income taxes. Considering the 5 years in total, what
would be the difference in profit before income taxes by acquiring the new machine as opposed to
retaining the present one?
A. P10,000 decrease B. P15,000 decrease C. P35,000 increase D. P40,000 increase

66. A project under consideration by the White Corp. would require a working capital investment of
P200,000. The working capital would be liquidated at the end of the project's 10-year life. If White Corp.
has an after-tax cost of capital of 10 percent and a marginal tax rate of 30 percent, what is the present
value of the working capital cash flow expected to be received in year 10?
a. P36,868 b. P77,100 c. P53,970 d. P23,130

67. Lyben Inc. is planning to produce a new product. To do this, it is necessary to acquire a new equipment
that will cost the company P100,000. The estimated life of the new equipment is five years with no
salvage value. The estimated income and costs based on expected sales of P10,000 units per year are:
Sales @ P10.00 per unit P100,000
Costs @ P8.00 per unit 80,000
Net income P 20,000
The accounting rate of return based on initial investment is 20%
What will be the accounting rate of return based on initial investment of P100,000 if management
decrease its selling price of the new product by 10%?
a. 5% b. 10% c. 15% d. 20%

68. MLF Corporation is evaluating the purchase of a P500,000 die attach machine. The cash inflows
expected from the investment is P145,000 per year for five years with no equipment salvage value. The
cost of capital is 12%. The net present value factor for five (5) years at 12% is 3.6048 and at 14% is
3.4331. The internal rate of return for this investment is
a. 3.45% b. 2.04% c. 13.8% d. 15.48%

69. APJ, Inc. is planning to purchase a new machine that will take six years to recover the cost. The new
machine is expected to produce cash flow from operations, net of income taxes, of P4,500 a year for the first

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three years of the payback period and P3,500 a year of the last three years of the payback period.
Depreciation of P3,000 a year shall be charged to income of the six years of the payback period. How much
shall the machine cost?
a. P12,000 b. P18,000 c. P24,000 d. P36,000

70. Sweets, Etc., Inc. plans to undertake a capital expenditure requiring P2 million cash outlay. Below are the
projected after-tax cash inflow for the five year period covering the useful life. The company’s tax rate is
35%.
Year 1 2 3 4 5
P’000 600 700 480 400 400

The founder and president of the candy company believes that the best gauge for capital expenditure is
cash payback period and that the recovery period should not be more than 75% of the useful life of the
project or the asset. Should the company undertake the project?
a. No, since the payback period is 4 years or 80% of the useful life of the project.
b. Yes, since the payback period is 3.55 years or 71% of the useful life of the project.
c. No, since the payback period extends beyond the life of the project.
d. Yes, since the payback period is 4 years and still shorter than the useful life of the project.

----END OF EXAMINATION----

1 B 11 D 21 D 31 B 41 D 51 D 61 D
2 C 12 C 22 C 32 A 42 C 52 A 62 D
3 E 13 D 23 A 33 A 43 C 53 D 63 B
4 B 14 D 24 A 34 C 44 A 54 C 64 B
5 C 15 B 25 C 35 B 45 D 55 B 65 D
6 B 16 B 26 B 36 D 46 B 56 B 66 B
7 D 17 D 27 C 37 B 47 C 57 D 67 B
8 A 18 B 28 A 38 D 48 D 58 A 68 C
9 E 19 C 29 D 39 D 49 A 59 C 69 C
10 E 20 B 30 D 40 B 50 A 60 B 70 B

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